SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[Mark One]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________.
Commission file no.: 0-22848
U.S. WIRELESS DATA, INC.
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(Name of small business issuer in its charter)
Colorado 84 -1178691
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
750 Lexington Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 750-7766
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Exchange Act:
No Par Value Class A Common Stock
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended June 30, 2000 were $597,000.
The aggregate market value of the issuer's voting common equity held as of
August 31, 2000 by non-affiliates of the Registrant was approximately
$29,545,000 based on an average price of $2.00 as of August 31, 2000.
As of August 31, 2000, the issuer had 32,396,748 shares of its no par value
common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for 2000 Annual Meeting of the Registrant which will be
filed with the Commission within 120 days after the close of the fiscal year and
is incorporated by reference into Part III.
PART I
Special Note Regarding Forward-Looking Statements
We may, in discussions of our future plans, objectives and expected
performance in periodic reports filed by us with the Securities and Exchange
Commission (or documents incorporated by reference therein) and in written and
oral presentations made by us, include projections or other forward-looking
statements within the meaning of Section 27A of the Securities Exchange Act of
1933 or Section 21E of the Securities Act of 1934, as amended. Such projections
and forward-looking statements are based on assumptions, which we believe 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 us
under the Securities Exchange Act of 1934. Risks and uncertainties relating to
forward-looking statements are set forth in Item 6 under the caption "Risk
Factors," below.
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Overview
Our goal is to be the premier provider of wireless transaction services.
Our new business strategy is focused on our recently developed proprietary
technology that brings together three large, rapidly growing industries -
transaction processing, wireless data transport and the Internet - to enable
wireless transaction processing. Our Synapse service ("SYNAPSE") (formerly
Wireless Express Payment Service or WEPS) provides a gateway between all of the
parties to a wireless point of sale ("POS") transaction. By providing a seamless
interface between a merchant's POS terminals, wireless carriers and card
processors, credit, debit and other card transactions can be processed in most
instances as fast as cash, without the cost and inconvenience of being tethered
to a telephone line. In addition, SYNAPSE's Internet-based tools offer on-line,
real-time transaction monitoring, remote diagnostics and automated terminal
activation.
Recent Developments
Fiscal 2000 was a year in which we accomplished a complete overhaul of our
business and was a year of substantial accomplishments, including:
o A complete change in our executive management, including Dean
M. Leavitt, our new Chairman of the Board and Chief Executive
Officer; Charles I. Leone, our new Chief Financial and Chief
Operating Officer; John H. Perveiler, our new Vice
President/National Sales Manager; and Marc Shultz, our new Vice
President of Business Development.
o The addition of four new Board members with substantial
expertise and helpful relationships, including Edwin M.
Cooperman, who was a high level executive at the Travelers Bank
Group, Primerica Financial Services Group and American Express;
Michael S. Falk, the co-founder and Chief Executive Officer of
Commonwealth Associates, L.P., a merchant bank; Barry A.
Kaplan, a managing director at Goldman Sachs & Co. in the
Investment Research Department, where he co-heads the firm's
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U.S. Communications, Media and Entertainment efforts, and
covers the wireless communications and cable television
industries; and Amy L. Newmark, a private investor in the
technology, Internet and telecommunications fields and the
former Executive Vice President/Strategic Planning of Winstar
Communications, Inc.
o A revision of and the commencement of the implementation of our
business strategy to become a device neutral, wireless carrier
neutral, transaction processor neutral provider of wireless
processing services. Our new strategy is to enable wireless
transactions, such as credit card transactions. Our merchant
aquirer business and sales of wireless terminal Tranz Enablers
have been deemphasisized and replaced by our SYNAPSE service.
o We raised the funds necessary to implement our new strategy. Net
proceeds of approximately $49 million were raised in a private
placement in the spring of 2000 and, as of June 30, 2000, we had
unrestricted cash in excess of $39 million with which to
implement our business plan.
o We simplified and improved our balance sheet and capital
structure. In connection with the private placement, we paid off
all of our debt and redeemed the remaining Series B Preferred
Stock, eliminating securities that were potentially dilutive
since they had conversion prices that decreased if our stock
price decreased.
o We established the infrastructure to carry out our new business
plan by entering into agreements with most major U.S. wireless
carriers to carry SYNAPSE and entering into agreements with
credit card processors, including five of the top six processors.
We also entered agreements with over 90 resellers to distribute
the SYNAPSE system and established a 10 person internal sales
force and two person business development team.
General
The transaction processing industry in the United States is large and
growing. In 1999, Americans used their credit and debit cards nearly 27 billion
times, generating over $1.9 trillion in purchases. However, there are currently
three weaknesses in the electronic transaction processing industry - slow
transaction speed, lack of mobility and inadequate reporting. Until the
mid-1980s, all credit card processing was essentially paper-based. As
improvements in electronic terminal technologies evolved, landline transmission
became the prevailing means for processing credit card transactions. Electronic
Draft Capture, the electronic authorization and settlement of credit card
transactions, has since become the standard for processing POS transactions.
Merchant acquirers, transaction processors and credit card issuers all require
merchants to utilize Electronic Draft Capture to conduct secure credit and debit
card transactions. However, this "tethered" methodology excludes significant
under-served markets that require mobility and/or speed, such as quick service
restaurants, transportation services, delivery-based businesses, stadium
concessions and others that may be adequately served by high speed, wireless
technology. In addition, wireless technology facilitates POS transactions in
certain international markets that do not have adequate landline
infrastructures but do have or will have wireless data networks.
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As the electronic transaction processing industry has evolved, providers
have devoted substantial resources to developing proprietary solutions to gain
competitive advantages, including the development of wireless POS systems.
However, with the increasing variety of terminal manufacturers, wireless
technologies and carriers and front-end processors needing to communicate, and
with each having proprietary systems and communication protocols, the cost and
complexity of connectivity have become barriers to the deployment of wireless
POS systems.
The SYNAPSE Solution
SYNAPSE is designed to provide a solution to this connectivity problem.
SYNAPSE provides a scalable architecture that serves as a neutral gateway
between all parties in a wireless transaction. This architecture enables any
SYNAPSE compliant terminal to communicate over most major U.S. wireless carriers
to any transaction processors that have established SYNAPSE connectivity.
Typically, terminal manufacturers program a specific terminal to
communicate with a specific processor. With SYNAPSE, terminal manufacturers
can now develop a single application to communicate to SYNAPSE. The SYNAPSE
server then performs the formatting necessary to communicate the transaction
to any SYNAPSE compliant transaction processor. This process saves the
terminal manufacturers significant development expense, reduces the time to
bring new terminals to market, via the development of our "thin-client"
applications for terminals whose characteristics are largely determined by the
server. Transaction processors benefit from SYNAPSE by not having to negotiate
with each wireless carrier to build and support connections to each, nor do
they have to incur the costs associated with the maintenance of such multiple
connections. They simply connect to the SYNAPSE server as a single point of
contact. As new terminals and transaction types become available, each
transaction processor will be able to use their existing SYNAPSE connection to
gain wireless access with substantially reduced development expense or effort
on their end. As SYNAPSE enables new markets to accept wireless payment
processing, wireless carriers benefit from an increase in traffic and
simplified connectivity to the processors.
SYNAPSE provides the following advantages:
o Increased transaction speed: Wireless POS transactions via SYNAPSE
are generally completed in 2-5 seconds, versus 10-20 seconds for a
traditional landline transaction. Accordingly, such services may be
attractive to businesses such as quick service restaurants.
o Mobility: Eliminating the need for a phone line opens up an array
of new markets, including the transportation industry (such as taxi
and limousine services), overnight delivery services, stadiums and
arenas, and in-home services.
o Internet-based on-line access to real-time transaction reports:
SYNAPSE provides real-time transaction reporting, which allows for
previously unavailable levels of tracking and accountability.
Merchants, merchant acquirers and processors can view all
transactions as they occur, versus receiving the customary
end-of-month, hard copy statement. This gives the merchant the
ability to measure important information such as transaction volume
for each POS terminal by hour, day, week or month.
o Low-cost installation and maintenance: Conventional landline
service requires a phone line with an installation cost of up to
$300 and fixed monthly charges of up to $45. With SYNAPSE, no
phone line is required, and the one-time set-up fee, fixed
monthly charges and per transaction charges are often lower than
conventional landline service.
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o Fast time to market and lower costs: By providing a single point of
contact, SYNAPSE substantially reduces the time and development
cost for terminal manufacturers and transaction processors.
o Internet-based on-line activation, deactivation and terminal
diagnostic tools: SYNAPSE automates the terminal activation and
deactivation process, significantly decreasing the installation
time for new terminals. In order to activate a new account, a
merchant acquirer simply accesses the SYNAPSE server via any web
browser, defines the terminal type and is assigned a wireless IP
address or radio ID by SYNAPSE. The on-line activation process can
take as little as three hours, versus several days to a week for a
traditional landline process. We can perform real-time, remote
diagnostic services for immediate problem solving.
Strategy
Our goal is to be the premier provider of wireless transaction services. We
intend to accomplish this goal by creating the standard for the development,
implementation and management of wireless transaction processing solutions. To
achieve this goal, we are pursuing the following strategies:
o Brand SYNAPSE as a Standard for Wireless Transaction Processing. By
positioning SYNAPSE as a neutral gateway between wireless POS
terminals, carriers and processors, and by enabling seamless
connectivity among these parties, we intend to establish ourself as
the standard for wireless POS transaction processing.
o Sell Our Services Wholesale to Merchant Acquirers, Independent
Sales Organizations and Third Party Processors. We intend to focus
our primary marketing efforts on the top 50 merchant acquirers and
independent sales organizations that we believe represent the vast
majority of transaction activity in the electronic payment
marketplace. These companies will then market the SYNAPSE
technology as a turnkey system directly to merchants.
o Develop Brand Awareness and Achieve Marketshare by Promoting
Faster, Cost-Effective and Feature-Rich Services. We intend to
position SYNAPSE as a high quality, feature-rich and cost effective
wireless solution for electronic transaction processing. We intend
to price our services competitively to gain early market share and
will seek to clearly communicate the benefit of our value-added
services, such as access to immediate activation, deactivation and
diagnostics through the Internet, and the availability of real-time
transaction reports.
o Encourage All Point-of-Sale Terminal and ATM Manufacturers to
Produce SYNAPSE Compatible Products. A component in the success of
SYNAPSE will be the availability of wireless devices that can meet
the requirements of the targeted market segments. Several new and
incumbent terminal manufacturers are beginning to develop wireless
devices for the marketplace. As part of our "device neutral"
strategy, we intend to encourage these manufacturers to develop
products that are certified for use with the SYNAPSE platform.
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Additional Opportunities
We intend to expand our service offerings by:
o Acquisitions and Joint Ventures. We are exploring opportunities to
acquire or partner with companies with complementary technologies
or which will assist us in generating transaction volume to enhance
and extend our position in the industry.
o Expanding into Selected International Markets. The international
marketplace represents a significant growth opportunity for us. For
example, many developing countries are bypassing traditional
dial-up or copper wire infrastructures and building wireless
networks for voice and data communications. We believe that SYNAPSE
can be adapted and deployed in these international markets.
o Processing ATM Transactions. A number of ATM manufacturers are in
the process of developing ATM machines that are capable of
processing transactions from remote locations through the use of
wireless technology rather than over conventional phone lines. We
believe that such remote machines can benefit from SYNAPSE because
its vendor-neutral carrier approach allows SYNAPSE to be utilized
by different ATM manufacturers.
o Processing Other Wireless Transactions. Since SYNAPSE can be
adapted to handle transaction-based data from wireless networks,
the system can process other payment and/or non-payment
applications such as EBT transactions (Electronic Benefit
Transfers), medical claims and telemetric data, including data from
utility meters and vending machines.
The timing of such projects will be affected by a number of factors,
including some which will be outside of our control.
Marketing/Business Model
With the advances in cellular and digital wireless networks, wireless
electronic transaction processing is becoming a reality for many businesses that
previously had been under-served or impossible to serve by landline systems and
for conventional retailers looking to replace landline terminals due to age or
obsolescence. We market SYNAPSE to industry resellers, including merchant
acquiring banks, independent sales organizations and card processors. These
customers in turn market the SYNAPSE technology as a turnkey system directly to
merchants. In addition to our reseller channels, we jointly market the SYNAPSE
system with bankcard associations and wireless carriers. Our sales strategy is
to leverage these relationships, and to develop additional strategic
relationships, derived from business-to-business advertising campaigns, industry
and trade events and referrals from our network of customers.
SYNAPSE enables a business that requires mobility and/or transaction speed
to accept POS transactions. SYNAPSE target markets include:
o Fast-food restaurants;
o Delivery services;
o Transportation services such as taxicabs, limos and buses;
o Stadiums, arenas and amusement parks;
o Public parking lots such as at airports;
o Movie theatres;
o Golf tournaments and racetracks; and
o Traditional landline based merchants that desire high speed
transactions and/or SYNAPSE on-line reports.
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As a neutral gateway, we are positioned to receive a fee for each
transaction that moves through SYNAPSE. We anticipate that this will generate a
recurring revenue stream and provide a measure of consistency and predictability
to our business model. We generate revenues from three primary sources:
o One-time set-up charges per terminal device;
o Monthly service fees for each terminal device; and
o Transaction fees for each processed transaction.
In addition, we may supplement our primary revenue sources with revenues
from:
o Fees for reporting or other information services;
o Consulting fees for customized solutions; and
o Fees for additional training.
We are in the early stages of our marketing plan. We changed the name of
our core product, Wireless Express Payment Services (WEPS), to SYNAPSE to effect
a stronger brand identity; and created a well-received suite of marketing
materials to support sales efforts. We have retained a leading public relations
firm with wireless expertise to build awareness in the POS, wireless, and
general business communities. We currently advertise in certain trade
publications, and are in the final stages of selecting an advertising agency to
help us with lead-generating ads that will also seek to establish SYNAPSE as the
power brand in its category. An integrated online strategy and new website
design will be part of that effort. We participate in various trade shows,
including the Electronic Transactions Association's semi-annual trade shows,
where our booth was voted "best of show." We are on target with establishing a
comprehensive marketing foundation from which to generate awareness and demand
for our product and to build brand equity.
Current Implementation Status
Since the summer of 1999, when we launched the predecessor of SYNAPSE, we
have (i) established connectivity with AT&T Wireless Service, Motient
Communications and Verizon Wireless, (ii) certified SYNAPSE with several
wireless terminal manufacturers, including Hypercom, Intellect, Lipman, Mist,
Symphony and Tillsmith Systems, (iii) certified SYNAPSE with many of the leading
front-end processors, including Cardsystems, Concord/Buypass EFS, First Data
Merchant Services (an affiliate of First Data Corporation), Lynk Systems,
Maverick International Processing Services, Inc., National Data Corporation
(NDC), Paymentech Network Services LLC and Vital Processing Services, and (iv)
entered into reseller agreements with over 90 merchant acquirers and independent
sales organizations. Commercial transactions running through the SYNAPSE
platform began in the second quarter of fiscal 2000.
We continue to establish connectivity between the wireless networks, our
SYNAPSE server and various front-end processors. We are also working with
several POS terminal manufacturers and front-end processors as part of the
ongoing process of adding additional devices to the SYNAPSE menu of offerings.
We are exploring opportunities to use the SYNAPSE platform to transport
data to provide solutions for various non-payment applications or applications
using a combination of payment and non-payment data. For example, we are
establishing pilot programs for EBT transactions and vending machine transaction
reports. Over the long term, we intend to further our service offerings by:
o Expanding into selected international markets;
o Enabling wireless processing of ATM transactions;
o Transporting non-payment oriented transactions such as health care
related transactions, vending machine inventory reports, EBT
transactions and telemetric data;
o Becoming a vehicle for the transportation of frequency and loyalty
program information; and
o Recognizing and storing signatures in the SYNAPSE network, and
accommodating nonconventional payment and debit transactions.
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Market Trends
We believe we are well positioned to take advantage of the convergence of
the three trends described below:
o Increased use of credit cards;
o Increased use of wireless communications; and
o Increased use of the Internet.
The Transaction Processing Industry
Merchant acquirers, transaction processors and card issuers require
merchants to utilize Electronic Draft Capture terminals to conduct safer on-line
credit and debit card transactions. As a result, the majority of the transaction
dollars from merchant locations accepting bankcards are processed by Electronic
Draft Capture terminals. An Electronic Draft Capture terminal magnetically reads
the encoded account information from the magnetic strip on the back of a credit
or debit card and sends it, along with the transaction amount and terminal
specification data to a front-end processor for electronic on-line
authorization. The front-end processor authorizes the card with the card issuer,
electronically captures the transaction, generates an approval code and returns
the data to the terminal, which signals an attached electronic printer to print
a customer receipt. This dial-up transaction process takes approximately 10 to
18 seconds to complete. At the end of the business day, the terminal dials the
front-end processor via a telephone line to initiate the settlement, collection
and electronic deposit of funds to the merchant's local bank account.
The electronic payments industry has steadily grown over the last ten
years. According to The Nilson Report's May 2000 issue, plastic credit and debit
cards were used over 27 billion times worldwide to purchase over $1.9 trillion
in goods and services in 1999. Spending on Visa cards alone climbed 18% last
year to $1.09 trillion, the seventh consecutive year of double-digit growth.
Spending on all MasterCard credit and debit cards was $512 billion in 1999, a
15% increase. American Express reported total spending volume of $252 billion in
1999, 12% higher than in 1998. Also, the number of general-purpose credit and
debit cards increased 11% to more than 1.2 billion cards at the end of 1999
versus 1998. Until the mid-1980s, banks controlled both the merchant acquiring
and credit card issuing ends of the credit card transaction. Independent sales
organizations became the sales and deployment arm of the acquiring banks, as
merchant needs and applications became more advanced and sophisticated.
Presently, acquiring banks rely on independent sales organizations for the
majority of their new merchant accounts.
MasterCard and Visa cards are now being accepted at locations such as the
U.S. Postal Service, municipalities, hospitals and other places of business
that have historically not been considered card acceptors. One example is the
fast food industry, which currently has a low penetration rate with respect to
credit card acceptance due in large part to slow speeds associated with dial
up technology. We view the fast food industry as a key market segment for the
deployment of SYNAPSE services.
Domestic mobile transaction processing has paralleled America's demand for
convenience and desire to save time. The retail point of sale is now expected to
be located wherever the customer is located. As a result, the merchant must be
prepared to complete the sale at the card holder's 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,
door-to-door sales and delivery services depend almost exclusively on completing
the sales transactions at the card holder's location.
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Consumers tend to spend more when paying with cards rather than cash. As an
example, in an American Express Company test at 55 Arby's locations in Texas,
the average card transaction was 72% more than the average cash transaction.
Further, the increase in the types of credit and debit cards, rapid
technological advances in transaction processing and financial incentives or
loyalty reward programs offered by credit card issuers have contributed greatly
to wider merchant acceptance and increased consumer use of transaction cards.
As with many rapid growth industries, the transaction processing industry
has undergone rapid consolidation. The cost to maintain Electronic Draft Capture
systems, merchant requirements for improved customer service and the demands for
additional customer applications have made it difficult for some banks and
independent sales organizations to remain competitive. Many of these providers
are unwilling or unable to invest the capital required to meet these evolving
demands, and are increasingly exiting the transaction processing business or
otherwise seeking alliance partners to provide transaction processing for their
customers. Many of the transaction processors utilize and maintain legacy
front-end systems that are difficult to adapt to new technologies. Accordingly,
transaction processors that utilize these systems find it difficult to meet the
increasing merchant demands for more sophisticated products and services.
Despite the ongoing consolidation of the industry, it remains fragmented
with respect to the number of entities providing merchant services. Industry
sources indicate that although the ten largest bankcard processors accounted for
approximately 67.7% of the total charge volume processed in 1998, there were
over 200 additional registered service providers marketing and selling
transaction processing services to merchants. We believe that these factors will
result in continuing industry consolidation over the next several years.
We further believe it is reasonable to expect that the increase in
electronic payments within the United States will likely continue while growth
outside the United States may be even greater. Current dial-up technology is not
sufficient to support this growth. Rewiring in order to take advantage of
improvements in technology is quite costly and time intensive. This suggests
that a growing percentage of the legacy terminals attached to telephone lines
will need to be replaced to meet the various technical and functional demands of
the changing marketplace. As a result, wireless technology should emerge as a
viable solution for merchants, including those currently transmitting via
conventional telephone lines.
The Wireless Industry
According to the Cellular Telecommunications Industry Association, there
are over 101 million wireless subscribers in America today. Experts estimate
that by 2005 there will be over 1.26 billion wireless phone users around the
world. To support this explosive growth, the wireless carriers are spending a
substantial part of their revenues to expand capacity by upgrading their
infrastructure with new digital technology.
Accessing the Internet through the use of wireless communications is also
on the rise. In May 1999, the ARC Group, a technology consultancy for the
communications industry based in the United Kingdom, reported that by 2004 more
end-users will access the Internet via handheld mobile terminals than via
land-line connections. The research projects that there will be more than 1
billion Internet subscribers in five years, with 750 million using mobile
terminals and only 670 million using land-lines.
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The Internet
The Internet has emerged as a global medium enabling millions of people
worldwide to share information, communicate and conduct business electronically.
Americans are accessing the Internet at a phenomenal pace. With the tremendous
growth in daily Internet users, consumers are becoming more and more comfortable
using the Internet for a wide variety of services such as paying bills and
purchasing consumer and specialty items. We believe that the Internet will play
a key role in providing user-friendly access for merchant acquirers and
merchants to access their transaction information and provide a high level of
convenience and customer service.
Competition
Despite the existence of several wireless point-of-sale products, wireless
transaction processing is a new and relatively open service industry. We believe
that there are no products, completed or in a pilot stage, that directly compete
with SYNAPSE. To the best of our knowledge, there are no applications currently
available that are designed specifically for wireless transaction processing
utilizing Internet-based tools or that have a carrier, device and front-end
neutral structure. We currently have no one single competitor that provides
SYNAPSE's end-to-end systems "turn key" approach to the wireless transaction
processing industry.
Competition, however, is expected to increase, particularly if we are able
to demonstrate our ability to build market share and acceptance. Barriers to
entry are relatively low and we may face competitive pressure from companies
both in the United States and abroad.
Management believes that growth in the number of competitors in the
wireless transaction processing market will be driven principally by:
o Increasing acceptance and use of wireless devices for the
transmission of data;
o Interest among merchants for an alternative to the dial-up system
in order to achieve faster transactions and better pricing;
o Inability of telecommunications companies to upgrade traditional
land-line wiring quickly and inexpensively;
o Increases in data applications for high speed Internet access;
o Growing customer desire for real time information; and
o Resolution of Y2K issues that had previously occupied the
attention of companies that could become competitors.
We believe that our best strategy is to remain a neutral provider of our
services while building a network of reliability and integrity. We will also
continue to enhance our menu of services to further distance us from any
potential competitors who attempt to enter this market. We must also continue to
leverage our alliances (wireless carriers, device manufacturers, processors,
card associations and large acquirers) to strengthen our competitive position
going forward.
Employees
We had 50 employees at June 30, 2000, including 15 in our engineering group
responsible for the development of the SYNAPSE technology, 12 sales and
marketing personnel, eight in our MIS (management information systems) group,
and two in business development.
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In addition to our employees, we have also retained three consultants under
contract, two of whom are technologists and engineers and one of whom is a
management information system consultant.
We believe our future will depend in large part on our ability to attract
and retain our management team and highly skilled technical employees. None of
our employees are covered by a collective bargaining agreement.
Company History
We were founded in July 1991 for the purpose of designing, manufacturing
and marketing wireless and portable credit card and check authorization
terminals. In December 1993, we completed an initial public offering, raising
approximately $12,200,000 through the sale of 1,650,000 shares of common stock.
Our initial strategy was to manufacture and sell portable electronic
payment terminals ("boxes") to communicate via circuit switched cellular voice
technology. We designed, manufactured and marketed the POS-50(R), which was
recognized as the world's first truly integrated and portable wireless credit
card and check authorization terminal. The product was launched in the first
quarter of 1994 and was marketed through acquiring banks, POS hardware
distributors, independent sales organizations and by us directly.
The POS-50 allowed a merchant to electronically capture a credit card,
debit card or check transaction at the point of sale, virtually anywhere
cellular voice service existed, and complete the authorization process in
approximately 16 to 18 seconds. Because of its portable and wireless nature, the
POS-50 was well suited for the small to medium sized mobile retailer or service
company. Examples of POS-50 customers included craft show vendors, sporting
event concessionaires, towing services, cart and kiosk vendors and essentially
any business on-the-go that wanted to safely accept credit and debit cards for
their products and services.
While the POS 50 did receive much recognition from various sectors of the
credit card processing industry as the first truly wireless point-of-sale
terminal, only approximately 7,000 devices were sold between 1994 and 1998. Our
failure to attract broad market acceptance for our new device and, hence, more
terminal sales, stemmed primarily from four factors. They were: a) cost-the
device was very expensive to manufacture versus traditional POS terminals, b)
lack of broad terminal application certification by front-end processors, c)
slow transaction speed, and d) our primary focus on the development of the
POS-50 technology left inadequate resources to market and promote the new
wireless device to the credit card processing industry. Because of these four
factors, we were unable to capture broad market acceptance and realize
meaningful levels of sales of the POS-50 terminal.
Starting in 1997, we attempted to reposition our business from being solely
a manufacturer of wireless point-of-sale terminals to becoming a provider of
transaction processing services. This realignment was sought to augment our
one-time equipment sales with recurring revenue generated by the sale of
wireless credit and debit card processing services to retail merchants. In doing
so, we set out to offer a "one-stop" wireless solution directly to card
accepting merchants. The suite of services offered included the sale of our own
wireless point-of-sale terminals, including a device called a TRANZ-Enabler,
which adopted Verifone's wireline TRANZ devices to work wirelessly, the resale
of the newly introduced and speedier CDPD wireless services and the
establishment of credit card acceptance capabilities for merchant clients
through our relationships with two credit card acquiring institutions.
Throughout 1997 and 1998, we focused our resources on selling directly to
merchants a transaction processing "solution" consisting of a terminal, CDPD
airtime purchased from major cellular providers, and transaction processing
services. To accomplish this, we began marketing our products and services
through a series of distribution and joint marketing agreements with the major
CDPD service providers. This effort required the creation of a large,
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regionalized sales organization that trained and supported data sales
representatives from each respective cellular carrier. GTE Wireless was the
first cellular organization mobilized to sell our products and services followed
by AT&T Wireless, Bell Atlantic Mobile and, ultimately, Ameritech. The sales
force was built primarily on individuals with wireless product expertise versus
individuals skilled in the distribution of bank card products. In our efforts to
provide a turnkey solution to card accepting merchants, we had inadvertently
positioned our business in direct competition with the industry's largest
acquirers, banks and independent sales organizations. This competitive stance
resulted in disappointing sales and the perception of us by the credit card
industry as a direct competitor and not a provider of value added services, thus
hampering our ability to sell our services to many players in the industry.
Faced with disappointing sales and high overhead expenses due to a recently
expanded sales-oriented headcount, we hired Mr. Roger Peirce, former President
of First Data Corporation and Chief Operating Officer of Visa International, as
our Chief Executive Officer in August 1998. Early in his tenure, Mr. Peirce
recognized the apparent danger of our competitive posture and set out to
re-orient us, as an enabler of the marketplace. It was during this period that
we began the development of SYNAPSE's predecessor. However, Mr. Peirce resigned
for personal reasons in March of 1999.
In May 1999, Dean M. Leavitt, the founder and former President of US Data
Capture, a credit card processing company serving a broad spectrum of
conventional card acceptors and emerging markets, was hired as our Chairman and
Chief Executive Officer. Mr. Leavitt immediately began redirecting our resources
in an effort to have SYNAPSE become recognized as the standard for the
development, implementation and management of wireless transaction processing
solutions. To accomplish this goal, we have repositioned ourself as an enabler
of the merchant acquirer/ISO marketplace on a "wholesale" basis and have, for
the most part, discontinued our direct marketing activities to end-user
merchants. As part of this strategy, we have re-positioned our business and
technology to be completely neutral with respect to point-of-sale terminal
manufacturers, wireless carriers, front-end and back-end processors and merchant
acquirers. In order to facilitate this process, we have begun aligning ourself
with strategic partners such as merchant acquirers, terminal manufacturers,
independent sales organizations, front-end processors and terminal deployment
companies through the execution of "SYNAPSE Agreements." As evidence of our
neutrality strategy, we have de-emphasized our development of proprietary
terminals, focusing instead on our proprietary SYNAPSE host technology and the
certification of other terminal manufacturers' products on the SYNAPSE platform.
Furthermore, in May 1999, we entered into an agreement with Motient (formerly
American Mobile) under which we added that company's communications technology
to our SYNAPSE suite of services, thereby officially signaling the end to our
CDPD-only orientation. In addition, as evidence of our neutrality with respect
to merchant acquirers and independent sales organizations, we have de-emphasized
credit card acquisition activities and, in July 1999, we sold one of our two
merchant portfolios. It is our intention to either dispose of or otherwise
terminate our relationship with the other portfolio. As part of the strategy
to re-orient us as a neutral enabler of the credit card processing marketplace,
our financial model is being transformed from one that was based upon one-time
product sales revenues to one that now relies heavily upon the development of
recurring revenues generated from SYNAPSE enabled sites.
Research and Development and Network Operating Center
Our recent efforts have been directed almost exclusively toward the SYNAPSE
service. In fiscal 2000 and 1999, we spent approximately $1,330,000 and
$461,000, respectively, on research and product development activities.
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Our combined research and network operating center facility consists of
approximately 6,100 square feet of leased space located in Palmer Lake,
Colorado. At June 30, 2000, our engineering group and network operating center
consisted of 26 employees, representing a substantial increase in personnel from
the prior year. In addition, we also contract with consultants from time to time
to meet our resource needs. At June 30, 2000, we had contracted with two
engineers to supplement our engineering group. This team is responsible for
developing the SYNAPSE software and server technology as well as new
applications and interface technology that allows SYNAPSE to communicate with
the various front-end card processors or other entities. We plan to increase the
size of the engineering group as warranted in order to continue the development
of the SYNAPSE technology and support plans for future enhancements.
The network operating center serves as our hub for communications between
the parties to a transaction, including, for example, communications between
wireless point-of-sale terminals and credit card authorization processors. The
network operating center is upgraded from time to time and we are currently in
the process of establishing a backup facility at our New York facility.
Included in our network operating center is our customer care specialists.
We train our customer care specialists to identify and resolve customer
difficulties with use of our service. We recently formalized the customer care
group and operate various shifts for 24x7 coverage. In addition, we provide an
answering service for escalation of emergencies.
Patents and Trademarks
We were granted a design patent on certain aspects of the POS-50 product in
June 1994. In April 1999, we received a design patent on the TRANZ Enabler
housing. Our name and POS-50(R) are registered trademarks. We have recently
filed for a service mark on "Wireless Express Payment Service", "SYNAPSE" and
"Wireless Made Easy".
We applied for patent coverage on various aspects of SYNAPSE. If awarded,
this patent will cover functional, design and overall process components of the
SYNAPSE technology including the proprietary internet-based interface and the
transaction message formatting and communication protocol software that performs
various functions related to SYNAPSE. We are currently reviewing final
application documents related to this intellectual property protection.
We have jointly developed a CDPD modem with a Taiwan-based technology
company. Under the terms of the agreement, we own at least 50% of the
intellectual property rights. We also have worldwide rights for the products'
use within the electronic payments industry.
We may pursue additional intellectual property protection on our hardware,
software and/or processes where applicable.
Government Regulation
Certain of the products formerly developed and distributed by us were
subject to regulation and approval by the FCC and comparable foreign regulatory
bodies. In light of our shift from such product areas, we are not directly
subject to such regulation. However, the success of our SYNAPSE system is
dependent on the sale of mobile credit card terminals and the entire wireless
communications infrastructure, which are heavily regulated, and, accordingly, we
are indirectly affected by such regulation.
If we begin offering SYNAPSE in foreign countries, it is likely that we
will be similarly indirectly affected by comparable foreign regulation. However,
specific regulatory approval of SYNAPSE or portions of the SYNAPSE service may
be required in some countries and could become an obstacle to sales of SYNAPSE
in such areas.
Impact of Environmental Laws
We do not believe that we are substantially affected by environmental laws
and do not expect any material impact as a result of such laws.
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Insurance
We believe that we maintain the type and amount of insurance customary in
the industry, including coverage for general liability, product liability,
property damage, and workers' compensation. We are currently exploring securing
coverage in the event of an interruption to our business. Although there can be
no assurance that our property damage insurance will adequately compensate us
for losses that we may incur, we consider our insurance coverage to be adequate
both as to risks and amounts.
ITEM 2. DESCRIPTION OF PROPERTIES
We entered into a lease for approximately 11,700 square feet of office
space located at 750 Lexington Avenue, New York, NY 10022. The lease commenced
on June 1, 2000 for a term of ten years. Effective September 1, 2000, we
relocated our principal executive offices to this new facility.
We also lease approximately 6,100 square feet of office space located in
Palmer Lake, Colorado. Our engineering research and development, MIS and
customer care areas are primarily located at this facility, which also serves as
our network operations center.
Our previously leased office space located in New York City was subleased
to a third party for the balance of our lease term, which expires on September
29, 2001.
As of March 31, 2000, we closed our Emeryville, California office and were
released from any further lease obligations.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our shareholders during the fourth
quarter of our fiscal year ended June 30, 2000. However, an annual meeting of
stockholders was called on September 7, 2000, at which meeting the stockholders
approved the following proposals: (i) election of Edwin M. Cooperman, Michael S.
Falk, Barry A. Kaplan, Dean M. Leavitt, Amy L. Newmark, Alvin C. Rice and
Chester N. Winter as members of our Board of Directors for the ensuing year,
(ii) an amendment to our Articles of Incorporation to increase the total number
of authorized shares of Capital Stock from 55,000,000 to 225,000,000, of which
200,000,000 shall be Common Stock, no par value per share, and 25,000,000 shall
be Preferred Stock, no par value per share, (iii) a change of our domicile to
Delaware from Colorado, (iv) the adoption of our 2000 Stock Option Plan, (v) an
amendment to our Articles of Incorporation to effectuate a one-for-four reverse
stock split of our Common Stock and (vi) the ratification of the appointment of
M.R. Weiser & Co. LLP as our independent auditors and Public Accountants.
The reverse split and the change of our domicile from Colorado to Delaware
will become effective, at the discretion of the Board of Directors, subsequent
to filing this Annual Report on Form 10-KSB for the fiscal year ended June 30,
2000. We amended our charter on September 22, 2000 for the increase to
authorized shares. The amendment also removed the designation for Series B
Preferred Stock.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information.
Our no par value common stock (the "Common Stock") is traded in the
over-the-counter market and quoted on the OTC Electronic Bulletin Board under
the symbol "USWDA." The following table sets forth, for the fiscal quarters
indicated, the range of high and low prices for the Common Stock. These
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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 2000 High Low
----------- ---- ---
Fourth Quarter $5.060 $1.812
Third Quarter 9.437 1.093
Second Quarter 1.720 0.810
First Quarter 1.906 0.594
Fiscal 1999 High Low
----------- ---- ---
Fourth Quarter $1.250 $0.600
Third Quarter 4.250 0.563
Second Quarter 4.438 2.313
First Quarter 4.875 1.938
There is no public trading market for our Series C Preferred Stock or any
of our securities other than the Common Stock.
(b) Holders.
As of June 30, 2000, there were 181 holders of record of the Common Stock.
There were also an undetermined number of holders who hold their stock in
nominee or "street" name.
(c) Dividends.
We have not declared cash dividends on our Common Stock since our inception
and we do not anticipate paying any cash dividends in the foreseeable future.
(d) Recent Sales of Unregistered Securities
During fiscal 2000, except as previously reported, there were no sales of
our securities which were not registered under the Securities Act of 1933, as
amended.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
During fiscal 2000, we repositioned ourself as a facilitator of wireless
transaction and data services. We are a device-neutral, wireless
carrier-neutral, merchant acquirer and front-end processor neutral enabler of
wireless transaction processing services through our SYNAPSE service. SYNAPSE
provides a gateway between all of the parties within a wireless point-of-sale
("POS") transaction. By providing a seamless interface between a merchant's POS
terminals, wireless carriers and transaction processors, credit, debit and other
card transactions can be processed almost as fast as cash, without the cost and
inconvenience of being tethered to a telephone line. In addition, SYNAPSE'S
Internet-based tools offer online, real-time transaction monitoring and
reporting, remote diagnostics and automated terminal activation.
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We provide merchant acquirers, Independent Sales Organizations ("ISOs") and
payment processors with a wireless transaction management service that can be
utilized at both conventional and emerging merchant segments, permits the
retrieval of on-line/real-time transactional reports and diagnostics via the
Internet and simplifies the customer service and application development effort.
In late March and May 2000, we raised an aggregate of $55.8 million of
gross proceeds in a private placement.
RESULTS OF OPERATION - FISCAL 2000 COMPARED TO FISCAL 1999
Revenue
As a result of the change in business model from fiscal 1999 to fiscal
2000, a year-to-year comparison is not necessarily meaningful.
Revenue from services of $326,000 for fiscal 2000 decreased 50% from
revenue of $654,000 generated during fiscal 1999 as we continued the
implementation of our new business model. As noted above, we have phased out our
direct offering of wireless credit card processing services and terminals to
merchants and are now marketing SYNAPSE to merchant acquirers, ISOs and
front-end processors. We currently have over 90 "Clients" (merchant acquirers,
payment processors or independent service organizations) under contract for
SYNAPSE. Billing for the new SYNAPSE service accounted for approximately
$265,000 of the services revenue during fiscal 2000 versus $38,000 for fiscal
1999. Revenue from SYNAPSE should continue increasing as the number of active
terminals increase from growth in the number of clients and merchants. We are
also working to increase the number of SYNAPSE certified devices and obtaining
communications connectivity to, and integration with, additional payment
processors. A portion of the decrease in services revenue between fiscal 2000
and the prior fiscal year was due to lost revenue from one of our merchant
credit card portfolios which was sold at the beginning of July 1999.
Revenues from product sales decreased to $271,000 in fiscal 2000 from
$770,000 in the prior fiscal year as we completed the transition from one-time
product sales to a recurring revenue model based on the SYNAPSE service. For
fiscal 2000, total revenues decreased to $597,000 from $1,424,000 in the prior
year.
Gross Profit
We recorded a gross loss of $299,000 in fiscal 2000 compared to a gross
profit of $396,000 in fiscal 1999. We took a charge aggregating $385,000 for
inventory obsolescence in fiscal 2000 versus $23,000 in fiscal 1999, reflecting
our shift in business focus. The product margin for fiscal 2000 reflects
markdowns on product sales and the prior year product cost included a $240,000
one-time gain resulting from the successful restructuring of a note payable to a
former terminal equipment supplier. Costs of services include the initial setup
and ongoing communications costs associated with terminals connected through
SYNAPSE. The services margin was $56,000 for fiscal 2000 versus a loss of $1,000
for the prior year. With the transition to SYNAPSE, the spread in revenue and
associated cost is impacted by the initialization of new terminals, the quantity
of active terminals, transaction volume and the associated rates we bill our
clients for such services versus our charges from the various carrier networks.
We expect the gross profit margins to improve substantially in fiscal 2001
versus fiscal 2000 as SYNAPSE revenues increase and become the primary revenue
stream.
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Operating Expenses
A number of expenses increased as we began to use the proceeds of our $55.8
million private placement to ramp up in support of our SYNAPSE launch. During
most of fiscal 1999, capital constraints prevented us from making certain
expenditures.
As part of our implementation of our new business model, our personnel
increased from 20 at the end of June 1999 to 50 by the end of June 2000.
Selling, general and administrative expense was $6,826,000 in fiscal 2000,
versus $4,655,000 in fiscal 1999. A variable stock option issued in 1998
resulted in a $1,327,000 non-cash credit to variable option expense in fiscal
1999 to reflect the change in the carrying value of the option, versus a charge
of $382,000 in fiscal 2000. Compensation and other costs have increased due to
the growth of our staff. Marketing and promotions have also increased.
Research and development expenses increased to $1,330,000 in fiscal 2000
from $461,000 in the prior year. This increase was due primarily to an increase
in the number of employees and full time consultants focused on the
implementation and development of SYNAPSE.
In April 1999, certain former noteholders holding approximately 83,500
shares of Common Stock, agreed to waive certain "guarantee" and "put" rights in
return for the issuance of 200,000 restricted shares of our Common Stock,
resulting in a $49,000 charge to litigation settlement.
Interest and Other
Interest expense of $1,394,000 for the year ended June 30, 2000 includes
$451,000 of non-cash expense relating to warrants issued as part of a bridge
financing of debt and warrants in advance of the $55.8 million private placement
and $225,000 accrued for late registration penalties on our previously
outstanding 6% Debentures and Series B Preferred Stock. The prior year's
interest expense of $1,528,000 includes accrued interest expense on the 6%
Convertible Debentures and various notes payable, and $341,000 of late
registration penalties related to the 6% Convertible Debentures. Interest
expense for fiscal 1999 also included $279,000 of accelerated amortization of
debt issuance expense and $145,000 of accelerated amortization of debt discount
as a result of the debt becoming due on demand.
The Interest credit of $597,000 in fiscal 2000 related primarily to the
reversal of accrued interest and penalties on the 6% Debentures and Series B
Preferred Stock. The interest and penalties were waived as part of the
redemption agreements reached with the holders.
Interest income amounted to $644,000 for fiscal 2000 versus negligible
amounts for prior periods. Prior to March 2000, we had substantial liquidity
problems. Our receipt of the net cash from the three closings of the $55.8
million private placement beginning in March 2000 provides us with a large cash
balance from which we earn interest or other investment income.
Other income of $84,000 for the year ended June 30, 2000 included a
$124,000 gain on the July 1999 sale of a portion of our merchant credit card
portfolio to PMT Services Inc., a wholly owned subsidiary of Nova Corporation.
The transaction resulted in a cash payment to us of $450,000. The sale included
approximately 450 installed TRANZ Enabler point-of-sale devices owned by us and
deployed with certain merchants.
Extraordinary Item
In fiscal 1999, an agreement was reached with two note holders to convert
$2,490,000 of notes payable plus accrued interest to 2,933,671 shares of Common
Stock. This transaction was recorded in the fourth quarter of fiscal 1999 upon
consummation of the exchange and resulted in an extraordinary gain of $807,000.
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Preferred Stock Dividends
Preferred Stock Dividends for fiscal 2000 include deemed dividends of
$44,114,000 for the value of the "in the money" conversion feature for the
Series C Preferred Stock from the closings of the private placement. The "in the
money" conversion feature is calculated on each closing of the private placement
as the difference in the market price of our Common Stock on the date of such
closing versus the conversion price of the Series C Preferred Stock multiplied
by the number of shares of Common Stock into which the Series C Preferred Stock
would convert. The "in the money" conversion feature is limited to the gross
proceeds less the valuation of the associated common stock warrants. In
addition, common stock purchase warrants were issued to induce the redemption of
Series B Preferred Stock. These warrants are treated as Preferred Stock
Dividends valued at $628,000. Preferred Stock Dividends also include $898,000 to
accrete the value of the Series B Preferred Stock up to its redemption value and
$106,000 of dividends declared for Series A and B Preferred Stock.
Preferred Stock Dividends for fiscal 1999 include deemed dividends of
$391,000 for the value of the "in the money" conversion feature for Series B
Preferred Stock. In addition, $571,000 is included to accrete the value of the
Series B Preferred Stock up to its redemption value. The balance of the
Preferred Stock Dividends amount represents $453,000 of dividends declared for
Series A and B Preferred Stock and $13,000 related to the partial redemption of
Series A Preferred Stock.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
On May 31, 2000, we completed a private placement of units, consisting of
Series C Preferred Stock and common stock purchase warrants. Gross proceeds were
$55.866 million and net proceeds amounted to approximately $49.1 million, after
payment of commissions, fees and expenses of $6.766 million.
As of May 2000, we are debt free and have no current financing needs. In
addition, in connection with the private placement, we simplified our capital
structure and eliminated uncertainties caused by prior defaults by redeeming all
outstanding Series A Preferred Stock, Series B Preferred Stock, 6% Debentures
and repaying all other outstanding debt, including the notes from a bridge
financing of $1,100,000 which was done in anticipation of the $55.8 million
private placement.
The funds from the private placement free management from the daily
struggles of operating with little to no liquidity and provide a long-term
solution to our cash needs. Our "Burn Rate", which excludes capital expenditures
and other noncash charges and is adjusted for onetime items, approximated
$675,000 for the month of June 2000. The monthly Burn Rate in the future could
be affected by a number of factors, including revenues from SYNAPSE and changes
in rates charged by our carriers for wireless airtime and the impact of any
acquisitions. During the implementation of our new business plan, we expect
expenses to continue to exceed revenues, at least during the initial phases of
the plan. Interest income provided from the available cash balance will help to
reduce monthly deficits. Our unrestricted cash position of $39 million as of
June 30, 2000, provides, in management's opinion, the financial resources to
pursue our business plan and fund monthly deficits. Our currently anticipated
capital equipment expenditures for technology infrastructure are not extensive.
Prior to March 2000, we faced significant challenges due to our then
current financial condition and lack of liquidity. We have incurred recurring
losses from operations and have an accumulated deficit of approximately $89.3
million at June 30, 2000.
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Year 2000 Issues
While we believe the greatest risks associated with the Year 2000 issue
have passed, we are not certain that Year 2000 issues with respect to the
electronic payments infrastructure utilized by credit card processors, banks and
financial institutions within the United States and on which we are reliant will
not emerge over the coming months. We could be materially adversely affected,
both operationally and financially, to the extent third parties with whom it
interfaces, either directly or indirectly, have not properly addressed their
Year 2000 issues. We do not have an available contingency plan that would
alleviate a disruption of service in the electronic transaction sector.
Seasonal Variation of Business
We anticipate that the recurring revenue generated under SYNAPSE agreements
with merchant acquirers and credit card processors will be relatively immune to
seasonal variations, although we expect that transaction related revenue will
reflect seasonal variations paralleling consumer spending patterns, generally
increasing somewhat during the Christmas holiday season. 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.
Securities Issuances to Fund Operations
To fund its operating requirements, we have had to rely primarily on the
sale of debt or equity securities over the last two fiscal years.
On December 10, 1997, we closed a private offering of $3 million principal
amount of 8% Adjustable Rate Convertible Subordinated Debentures Due December
31, 1999 (the "8% Convertible Debentures"), raising net proceeds of
approximately $2.6 million. The 8% Convertible Debentures automatically
converted to 3,060,000 shares of Series A Preferred Stock as of February 9,
1998. See also the Note to the Financial Statements entitled "Series A Preferred
Stock."
On July 27, 1998, we completed a private offering of $2 million 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 at $4.50 per share until July 21, 2001. The proceeds to
us from the offering were approximately $1.8 million. See also the Note to the
Financial Statements entitled "Borrowings-6% Convertible Subordinated
Debentures."
On May 6, 1999, we raised gross proceeds of $1.5 million and issued 6%
Cumulative Convertible Redeemable Preferred Stock (Series B Preferred Stock) for
$1.00 per share. Series B holders had the right to convert the Series B
Preferred Stock into shares of our Common Stock at 80% of the then current
market price. Concurrent with this transaction, the holders of our 6% Debentures
agreed to convert all accrued interest and penalties into approximately 455,000
shares of Series B Preferred Stock. The value of the "in the money" conversion
feature of $391,000 was recognized as a charge to retained earnings. The
proceeds were used to pay finders fees of $180,000 plus estimated offering
expenses of $41,000 (including approximately $26,000 for the investor's legal
fees), and professional services fees of $413,000 (including a substantial
amount of fees that were past-due), with the estimated balance of $676,000 being
used for working capital. See also the Note to the Financial Statements entitled
"Series B Cumulative Convertible Redeemable Preferred Stock."
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In April 1999, we received $400,000 in return for a 10% promissory note
from an investor that purchased Series B Preferred Stock. The note was repaid
with the issuance of 408,000 shares of Series B Preferred Stock in May 1999. We
also issued common stock purchase warrants exercisable to purchase 300,000
shares of common stock at $1.50 per share for five years from April 30, 1999 to
the cash purchasers of the Series B Preferred Stock.
In May 1999, we issued 454,705 shares of Series B Preferred Stock at $1.00
per share to compensate the 6% Debenture holders for the penalties and interest
owed on the 6% Debentures through June 30, 1999. As part of this agreement, the
6% Debenture holders agreed to adopt the default timetable and remedies set
forth in the Series B Preferred Stock purchase agreement and to waive their
rights arising out of certain prior defaults on the 6% Debentures.
We also entered into an agreement with the purchasers of the Series B
Preferred Stock and holders of the 6% Debentures to file a registration
statement with the SEC covering the common stock underlying the Series B
Preferred Stock, the Series B Warrants, the 6% Debentures and the common stock
purchase warrants issued at the same time as the 6% Debentures. We were subject
to certain late filing penalties with respect to such registration statement
until such securities were redeemed in connection with the $55.8 million private
placement, at which time such penalties were either waived or paid as part of
the redemptions.
Other Recent Borrowings and Financing Activities
Between October 1, 1998 and March 31, 1999, we borrowed $500,000 from the
Chief Executive Officer and 50% owner of Cardservice International, Inc. ("CSI")
and $1,990,000 from Liviakis Financial Communications, Inc. ("LFC"). The loans
bore interest at 8% per annum. In consideration for the loan from the CSI Chief
Executive Officer, we also issued a Common Stock purchase warrant exercisable to
purchase 25,000 shares of Common Stock at $3.038 per share through October 27,
2001. On March 19, 1999, holders of these 8% notes and us agreed to convert all
$2.5 million of principal plus accrued interest to common stock at the rate of
$.875 per share and 2,933,671 restricted shares were issued under this
agreement. This rate was established at a 20% discount from the closing price of
the Common Stock as of March 18, 1999. The market price on the actual date of
issuance of the shares of common stock (June 24, 1999) was $.60 per share and
therefore the transaction resulted in an extraordinary gain of $807,000.
On March 12, 1999, we borrowed $250,000 from RBB Bank Aktiengesellschaft,
which was the agent for the holders of certain shares of our Series A Preferred
Stock and $1,000,000 of the 6% Debentures. As part of this agreement, we issued
50,000 shares of Common Stock to RBB Bank. We were unable to repay the loan by
the required due date and RBB Bank agreed to forebear initiating an action
against us to collect the amount due until the earlier of receipt by us of
funding in the aggregate of at least $2.5 million, or December 1, 1999. See also
"Item 12-Certain Relationships and Related Transactions -Transactions with RBB
Bank Aktiengesellschaft."
As of May 28, 1999, we entered into a software license agreement with
Maverick International Processing Services which provides a perpetual license to
software used for front-end authorization and capture services. We issued
425,000 shares of restricted common stock for this license and three months of
service under a separate operating agreement.
In the first half of fiscal 2000, investors purchased approximately
2,230,000 shares of Common Stock plus warrants to purchase 446,000 shares of
Common Stock for an aggregate purchase price of $1,380,000. The warrants have a
term of five years and are exercisable at $1.50 per share.
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In connection with the engagement of Commonwealth Associates, L.P.
("Commonwealth"), we entered into an agreement with ComVest Capital Management,
LLC ("ComVest"), an affiliate of Commonwealth, pursuant to which ComVest
initially lent us $1,000,000 and Dean M. Leavitt, our Chairman and Chief
Executive Officer lent us $100,000 (the "Bridge Financing"). ComVest and Mr.
Leavitt subsequently lent us an additional $250,000 and $25,000, respectively.
The loans were collateralized by substantially all of our assets pursuant to
general security agreements and bore interest at a rate of 8% per annum. The
notes were due on the earlier of (x) the date a change of control (as defined in
the note) occurs, (y) the date we concluded a debt or equity financing in which
we received at least $5,000,000 of gross proceeds, or (z) December 30, 2000. The
notes included certain negative covenants, including prohibitions on the payment
of certain dividends, redemptions and asset sales and limitations on the
incurrence of indebtedness, liens and the issuance, prior to March 31, 2000, of
securities not specifically exempted. The lenders had the option to convert the
outstanding principal amount of the notes into securities issued in connection
with any private placement transaction on the same terms as investors in such
placement. In addition, we agreed to appoint a designee of the bank affiliate
lender to the Board and to have an observer present at all meetings of the
Board. In addition to the Bridge Financing, we also borrowed $125,000 from
ComVest and $75,000 from Mr. Leavitt (the "Additional Notes"). The Additional
Notes were due on demand interest free. We repaid the full outstanding amount of
the Bridge Financing and Additional Notes on March 18, 2000, from the $55.8
million private placement. The rights under the Bridge Financing expired on
March 18, 2000, when the loans were repaid.
In connection with the Bridge Financing, we also issued ComVest and Mr.
Leavitt warrants to purchase 13,636,363 shares and 1,363,637 shares,
respectively, of Common Stock at an exercise price of $.01 per share. On March
10, 2000, Commonwealth and Mr. Leavitt exercised their warrants with respect to
7,920,000 shares and 792,000 shares, respectively. The remaining warrants expire
on December 30, 2006. ComVest and Mr. Leavitt have certain demand and
"piggyback" registration rights, commencing in June 2000, as to the shares of
Common Stock underlying the warrants.
Commonwealth acted as placement agent in the $55.8 million private
placement which closed on May 31, 2000 pursuant to which 558.66 Units were sold
at $100,000 per Unit for aggregate proceeds of $55.8 million. Each Unit consists
of 10,000 shares of our Series C Preferred Stock (initially convertible into
66,667 shares of Common Stock) and warrants to purchase Common Stock equal to
25% of the number of shares into which the Series C Preferred Stock is
convertible.
The Series C Preferred Stock has a liquidation preference of $10 per share,
plus accrued and unpaid dividends. The holders of Series C Preferred Stock are
entitled to vote their shares of Series C Preferred Stock on an as converted
basis with the holders of Common Stock as a single class on all matters
submitted to a vote of the shareholders, except as otherwise required by
applicable law and except that the holders of Series C Preferred Stock voting
separately as a class have the right to elect two directors to the Board.
Each share of Series C Preferred Stock is convertible at any time, at the
option of the holder, into a number of shares of Common Stock determined by
dividing the liquidation value by the conversion price, initially $1.50 per
share, which is subject to adjustment for stock splits, recapitalizations and
other similar events. If we issue shares of Common Stock at a price per share
less than the then current conversion price, then, subject to certain
exceptions, the conversion price will be automatically reduced to such lower
price and the number of shares issuable upon conversion of the Series C
Preferred Stock shall be increased proportionately. The Series C Preferred Stock
automatically converts into Common Stock (a) if, at any time after June 17,
2000, the average closing bid price of our Common Stock exceeds 300% of the
conversion price for 20 consecutive trading days or (b) upon a public offering
of our securities that raises gross proceeds in excess of $30,000,000, provided
the shareholders have approved an increase in authorized capital to allow for
the conversion of the Series C Preferred Stock.
21
<PAGE>
The warrants issued in connection with the Series C Private Placement (the
"Unit Warrants") are exercisable for a period of seven years for an aggregate
number of shares of Common Stock equal to 25% of the number of shares into which
the Series C Preferred Stock is convertible, at an exercise price equal to the
then conversion price. The initial exercise price is $1.50 per share, subject to
adjustment under the same circumstances as the Series C Preferred Stock. The
Unit Warrants are callable for a nominal price at our option on 30 days' notice
to the holders of the Unit Warrants if (a) the average closing bid price of our
Common Stock for 20 consecutive trading days exceeds 300% of the exercise price,
as adjusted, (b) our Common Stock is trading on a national securities exchange
or Nasdaq SmallCap or National Market Systems, and (c) a registration statement
covering the shares issuable upon exercise of the Unit Warrants has been
declared effective and the shares issuable upon exercise of the Unit Warrants
are not otherwise subject to any lock-up restrictions.
The terms of the Series C Preferred Stock and the Unit Warrants may be
amended, modified or waived by an agreement among us, Commonwealth and a
committee to be designated by Commonwealth whose members hold in the aggregate
not less than 20% of the outstanding Series C Preferred Stock and not less than
20% of the outstanding Unit Warrants.
We have agreed to file a registration statement with respect to the shares
of Common Stock issuable upon conversion of the Series C Preferred Stock and
exercise of the Unit Warrants under the Securities Act by December 2000. The
investors also have certain "piggyback" registration rights with respect to the
shares of Common Stock issuable upon conversion of the Series C Preferred Stock
and the exercise of the Unit Warrants.
Each investor who purchased Units in the Series C Private Placement agreed
that it will not sell, transfer or otherwise dispose of any of the securities
sold in the Series C Private Placement for one year from May 31, 2000.
Thereafter, investors may not sell, transfer or dispose of more than 25% of such
securities during each of the following four 90-day periods. The lock-up period
may be extended by Commonwealth for up to an additional six months from the
closing of any public offering that is consummated prior to the end of the
initial lock-up period, in which event there shall be no further lock-up at the
end of such period. Our officers, directors and certain other existing
shareholders agreed to substantially these same lock-up provisions.
Redemption of Series B Preferred Stock and 6% Debentures
We used an aggregate of $3,549,000 of the proceeds from the $55.8 million
private placement to redeem all then outstanding shares of Series B Preferred
Stock and 6% Debentures. As an additional inducement for such redemptions, we
issued Common Stock purchase warrants to those holders, the specific terms of
which are discussed herein.
RISK FACTORS
We have never been profitable, and there is no assurance that we will generate
significant revenues or profits in the future.
We have never been profitable and have incurred substantial losses since
our inception. We had an accumulated deficit of approximately $89.3 million at
June 30, 2000, and had a loss of $8.5 million for the year ended June 30, 2000.
Our SYNAPSE system is relatively new and there is no history upon which to base
a judgment of its prospects. There is no assurance we will generate significant
revenues from SYNAPSE or otherwise or that we will ever become profitable. There
can be no assurance that SYNAPSE will gain market acceptance.
22
<PAGE>
The success of our new business plan is uncertain.
The success of our new business plan, which is to concentrate on trying to
develop a recurring revenue stream from customers' use of our SYNAPSE neutral
gateway, is dependent on SYNAPSE being utilized by merchant acquirers,
processors and independent sales organizations in sufficient quantities to
generate profits. To date, the revenues generated from SYNAPSE have been
nominal. The failure to successfully implement our new business plan would have
a material adverse effect on our business, operating results and financial
condition.
Approximately 52% of our revenue for fiscal 2000 was generated from one customer
and, accordingly, the loss of such a customer could adversely affect our
revenues.
For the fiscal year ended June 30, 2000, Cardservice International, Inc.
("CSI") accounted for approximately 52% of our revenue. Although we are seeking
to broaden our client base, no assurance can be made that our efforts will be
successful or that CSI or another client will not account for a large
concentration of our revenues. If any one customer accounts for a significant
portion of our revenues, the loss of such customer could adversely affect our
business, operating results and financial condition.
There is no assurance that the market will accept our SYNAPSE system.
We plan to generate our revenue from sales of services relating to wireless
credit card and other transactions. The market for providing this service is in
the early stages of development and it is difficult to predict the rate at which
this market will grow, if at all. Future competitors are likely to introduce
services that compete with the services offered by us. Demand for these services
could be affected by numerous factors outside of our control, including, among
others, market acceptance by prospective customers, the introduction of new or
superior competing technologies or services that are available on more favorable
pricing terms than those being offered by us, and the general condition of the
economy. Any market acceptance for our services may not develop in a timely
manner or may not be sustainable. Our success will likely depend on our ability
to sell our services to merchant acquirers and independent sales organizations,
as well as an increase in the availability of terminals that interface with
SYNAPSE. New or increased competition may result in market saturation, more
competitive pricing, or lower margins. Our business, operating results and
financial condition would be materially and adversely affected if the market for
our services fails to grow, grows more slowly than anticipated, or becomes more
competitive or if our products and services are not accepted by targeted
customers even if a substantial market develops.
We may not be able to protect our proprietary technology, which could enable
others to more easily compete with us.
Our performance and ability to compete are dependent to a significant
degree on our proprietary technology. We rely on our patents, copyrights,
service marks, trademarks, trade secrets and similar intellectual property as
critical to our success, and rely on patent, trademark and copyright law, trade
secret protection and confidentiality and/or license agreements with our
employees, customers, partners and others to protect our proprietary rights. We
have been granted two design patents, have filed an application to patent the
SYNAPSE process and expect to file additional patents as we determine
appropriate. There can be no assurance that a patent will be issued from the
patent application filed by us or that patents will be issued from any patent
applications filed by us or our licensors in the future or that the scope of any
claims granted in any patent will provide meaningful proprietary protection or a
competitive advantage to us. There can be no assurance that the validity or
enforceability of patents issued or licensed to us will not be challenged by
others or, if challenged, will be upheld by a court. In addition, there can be
no assurance that competitors will not be able to circumvent any patents issued
or licensed to us. We have been granted the service mark "U.S. Wireless Data"
and have filed for the service mark "SYNAPSE", "Wireless Made Easy", "Wireless
Express Payment Service", "WEPS", "Powered by WEPS", "e-Processing"
"e-Processing for the new millennium" in the United States. There can be no
assurance that we will be able to secure significant protection for these marks.
Our inability to protect our proprietary rights adequately would have a material
adverse effect on our business.
23
<PAGE>
We generally have entered into agreements containing confidentiality and
non-disclosure provisions with our employees and consultants and limit access to
and distribution of our documentation and other proprietary information. There
can be no assurance that the steps taken by us will prevent misappropriation of
our technology or that agreements entered into for that purpose will be
enforceable.
Notwithstanding the precautions taken by us, it might be possible for a
third party to copy or otherwise obtain and use our proprietary information
without authorization or to develop similar technology independently. Policing
unauthorized use of our technology is difficult. The laws of other countries may
afford us little or no effective protection of our intellectual property.
Effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our products and services are made
available. In the future, we may also need to file lawsuits to enforce our
intellectual property rights, protect our trade secrets, and determine the
validity and scope of the proprietary rights of others. Such litigation, whether
successful or unsuccessful, could result in substantial costs and diversion of
resources, which could have a material adverse effect on our business operating
results and financial condition.
We may be sued by third parties for infringement of their intellectual property
rights and incur costs of defense and possibly royalties or lose the right to
use technology important to providing our services.
The telecommunications and software industries are characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of participants in our market increases, the possibility
of an intellectual property claim against us could increase. Any intellectual
property claims, with or without merit, could be time-consuming and expensive to
litigate or settle, could require us to enter into costly royalty arrangements,
could divert management attention from administering our business and could
preclude us from conducting our business.
Our services rely on an emerging infrastructure that could encounter capacity
constraints or system failures which could adversely affect our reputation and
market acceptance of our product.
We utilize a variety of technologies, infrastructures and products in
providing SYNAPSE, including wireless networks, web servers, Internet
information servers, local area networks, data storage devices and proprietary
applications. If these systems experience difficulties, capacity constraints or
service interruptions, it could have a detrimental impact on our business,
operating results and financial condition.
The satisfactory performance, reliability and availability of SYNAPSE and
our network infrastructure are critical to our reputation and our ability to
attract and retain customers and maintain adequate customer service levels. Any
system interruptions or quality defects would reduce the quantity and/or quality
of services rendered and the attractiveness of our product offerings and would
have a material adverse effect on our reputation, business, operating results
and financial condition.
We are dependent on outside parties for our wireless infrastructure.
Our ability to retain and attract merchant acquiring banks, independent
sales organizations and card processors to SYNAPSE is dependent upon, among
other things, the performance of the cellular and digital wireless communication
networks and credit card processing networks used by us. Any system or network
failure that causes interruption or slower response time of our services could
result in reduced usage and could reduce the attractiveness of SYNAPSE to
consumers.
24
<PAGE>
The recent growth in cellular and digital wireless traffic has caused
periods of decreased performance requiring wireless providers to upgrade and
expand their infrastructures. If wireless usage continues to increase rapidly,
the wireless infrastructure may not be able to support the demands placed on it
by this growth and its performance and reliability may decline. Consequently,
the emergence and growth of the market for our services is dependent on future
improvements to the entire wireless network.
We will have to keep pace with new products and rapid technological change in
order to remain competitive in the marketplace.
If we are able to penetrate the market with our SYNAPSE service, our future
success will depend upon our ability to keep pace with technological
developments and respond to evolving merchant demands. Failure to anticipate or
respond adequately to technological developments or significant delays in
product development could damage our potential position in the marketplace and
could result in less revenue or an inability to generate profits. With our
current financial and technical resources, we may not be able to develop or
market new services or enhancements to our existing service offerings. It is
possible that we could experience significant delays in these endeavors. Any
failure to successfully develop and market services and service enhancements
could have a material adverse effect on our business, operating results and
financial condition.
We face potential competition and pricing pressures from larger, well financed
and recognized companies and we may not be able to compete successfully if such
potential competitors enter the market.
The market for our products and services is highly competitive, including
pressure to maintain competitive pricing structures for credit card processing
services. We have identified potential competitors that may be logical
candidates to develop SYNAPSE-like solutions, although at the present time, we
are aware of no other applications currently available that are designed
specifically for wireless transaction processing utilizing Internet-based tools.
However, barriers to entry in our business are relatively insubstantial and
companies with substantially greater financial, technical, marketing,
manufacturing and human resources, as well as those with far greater name
recognition than us, may attempt to enter the market. We believe that our
ability to compete depends on brand recognition, price, distribution channels
and quality of service. There can be no assurance that we will be able to
compete successfully in the market.
We depend on recruiting and retaining key management and technical personnel and
we may not be able to develop new services or support existing services if we
cannot hire or retain qualified employees.
Our success depends to a large degree upon the skills of our senior
management team and current key employees. We depend particularly upon Dean M.
Leavitt, our Chief Executive Officer. We have an employment agreement with Mr.
Leavitt and with certain of our other employees. We do not maintain key person
life insurance for any of our officers or key employees other than Mr. Leavitt.
We do not generally require our executives or our employees to enter
non-competition agreements with us, and those executives or employees could
leave us to form or join a competitor. The loss of any of our key executives,
the use of proprietary or trade secret data by former employees who compete with
us, or the failure to attract, integrate, motivate, and retain additional key
employees could have a material adverse effect on our business, operating
results and financial condition. Because of the technical nature of our services
and the dynamic market in which we compete, our performance depends on
attracting and retaining key employees. Competition for qualified personnel in
the wireless data and software industries is intense and finding qualified
personnel with experience in both industries is even more difficult. We believe
there are only a limited number of individuals with the requisite skills in the
field of wireless data communication, and it is becoming increasingly difficult
to hire and retain these persons.
25
<PAGE>
We might not be able to manage our growth.
We anticipate a period of significant growth in connection with our entry
into the market for wireless payment transaction delivery. The resulting strain
on our managerial, operational, financial, and other resources could be
significant. Success in managing this expansion and growth will depend, in part,
upon the ability of senior management to manage our growth effectively. Any
failure to manage our proposed growth and expansion could have a material
adverse effect on our business, operating results and financial condition.
In addition to managing our company-wide growth, we must continue to
develop and expand our systems and operations to accommodate expected growth in
the use of SYNAPSE. Due to the limited deployment of our services to date, the
ability of our systems and operations to connect and manage a substantially
larger number of customers while maintaining superior performance is unknown.
Any failure on our part to develop and maintain our wireless transaction service
as we experience rapid growth could significantly reduce demand for our services
and materially adversely affect our revenue.
Our use of wireless and internet technologies could pose security issues
regarding data transmission and reporting.
Utilization of SYNAPSE involves the transmission of payment transactions
via a wireless network and SYNAPSE server from the merchant's POS to the payment
processor and back. All airlink data is transmitted in an encrypted format
through secure channels. The reporting and utility functions accessible via the
Internet are designed with a variety of security precautions, and the end-user's
card number is not contained in the database accessible via the Internet.
However, a significant barrier to the growth of wireless data services or
transactions on the Internet or by other electronic means has been the need for
secure transmission of confidential information. Our systems could be disrupted
by unauthorized access, computer viruses and other accidental or intentional
actions. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by such breaches. If a third
party were able to misappropriate our users' personal or proprietary information
or credit card information, we could be subject to claims, litigation or other
potential liabilities that could materially adversely impact our revenue and may
result in the loss of customers.
We may be subject to liability for transmitting information, and our insurance
coverage may be inadequate to protect us from this liability.
We may be subject to claims relating to information transmitted over
systems we develop or operate. These claims could take the form of lawsuits for
defamation, negligence, copyright or trademark infringement or other actions
based on the nature and content of the materials. Although we carry general
liability insurance, our insurance may not cover potential claims of this type
or may not be adequate to cover all costs incurred in defense of potential
claims or to indemnify us for all liability that may be imposed.
Because our business is not currently diversified, if our wireless payment
transaction delivery processing business does not succeed, our business may
fail.
We currently have only one product, Synapse, and accordingly, there is no
diverse portfolio of products on which to rely if Synapse fails. If Synapse
fails, we would fail unless we develop new products and a new business plan.
26
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Our business is dependent on our relationship with wireless carriers.
A significant aspect of our strategy is to be able to market Synapse as
working with all major wireless protocols. Our business depends, in part, on our
ability to purchase sufficient capacity from the wireless carriers and the
security and reliability of their systems. If our current arrangements with
wireless carriers are terminated, if we are unable to enter into arrangements
with any new carriers or if the terms of our arrangements are altered or prices
are increased, it may have a material adverse effect on our business.
The benefits derived from any acquisition or strategic alliance may be less than
the price we pay and may result in excessive expenses if we do not successfully
integrate them. The costs and management resources we expend in connection with
such integrations may exceed our expectations.
Acquisitions and strategic alliances may have a significant impact on our
business, financial condition and results of operations. The value of
acquisitions may be less than the amount we pay for them if there is:
o A decline of their position in the respective markets; or
o A decline in general of the markets they serve.
The expenses associated with these transactions may be greater and their
revenue may be smaller than expected if:
o We fail to assimilate any acquired assets with our pre-existing
business;
o We lose key employees of these companies or ours as a result of
acquisitions;
o Our management's attention is diverted by other business concerns; or
o We assume unanticipated liabilities related to any acquired assets.
In addition, the companies we may acquire may be subject to the other
business risks we describe in this section which may adversely impact such
business. Further, we cannot guarantee that we will realize the benefits or
strategic objectives we are seeking to obtain if we make any acquisitions.
We may be adversely impacted by government regulation of the wireless
infrastructure and the Internet.
We are not currently subject to direct regulation by the Federal
Communications Commission or any other governmental agency, other than
regulations applicable to business in general. However, in the future, we may
become subject to regulation by the FCC or another regulatory agency. In
addition, the wireless carriers who supply us airtime are subject to regulation
by the FCC and regulations that affect them could increase our costs or reduce
our ability to continue selling and supporting our services.
The laws governing Internet transactions remain largely unsettled. The
adoption or modification of laws or regulations relating to the Internet could
adversely effect our business, operating results, and financial condition by
increasing our costs and administrative expenses. It may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel, consumer protection, and taxation apply to the Internet. Laws
and regulations directly applicable to communications or commerce over the
Internet are becoming more prevalent. We must comply with new regulations in the
United States, as well as any other regulations adopted by other countries where
we may do business. The growth and development of the market for online commerce
may prompt calls for more stringent consumer protection laws, both in the United
States and abroad, as well as new laws governing the taxation of Internet
commerce. Compliance with any newly adopted laws may prove difficult for us and
may harm our business, operating results, and financial condition.
27
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We have a 51% shareholder who is able to exercise substantial influence over us.
We are effectively controlled by ComVest Capital Management LLC
("ComVest"), which beneficially owns, as of June 30, 2000, approximately 51% of
our Common Stock. Such ownership interest gives ComVest substantial influence
over the outcome of all matters submitted to our shareholders, including the
election of directors. Pursuant to an agreement, Commonwealth Associates, an
affiliate of ComVest, has the right to designate two directors.
The market for our stock could suffer because there may be too many available
shares.
We have approximately 32.4 million total shares of Common Stock outstanding
as of June 30, 2000. Of that number, approximately 11.7 million shares are in
the public float. We have a substantial number of additional shares of Common
Stock that are either presently outstanding or issuable upon conversion or
exercise of other securities that were issued as "restricted securities" and are
either presently saleable under SEC Rule 144 or which will become eligible for
sale under SEC Rule 144 over the next several months to one year. In addition,
before the end of calendar 2000 we are obligated to register the sale of a total
of 60,521,500 shares of Common Stock underlying Series C Preferred Stock,
options and warrants. Although the sale of certain of these shares is subject to
lock-ups, large numbers of securities may be sold pursuant to these
registrations and adversely affect the market for our Common Stock.
Anti-takeover provisions.
Our Articles of Incorporation authorize the issuance of up to 25,000,000
shares of preferred stock. Our Board is empowered, without shareholder approval,
to issue a new series of preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of Common Stock. Such authority, together with certain
provisions of Colorado law and of our Articles of Incorporation and bylaws, may
have the effect of delaying, deterring or preventing a change in control of us,
may discourage bids for the Common Stock at a premium over the market price and
may adversely affect the market price, and the voting and other rights of the
holders, of the Common Stock. Although we have no present intention to issue any
additional shares of our preferred stock or Common Stock, there can be no
assurance that we will not do so in the future. 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
(hereinafter "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. The Board is free, subject to its fiduciary duties to shareholders,
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 our Articles of Incorporation prohibits the Board from
using these types of rights in this manner. The Board will have similar power
following our planned reincorporation in Delaware.
We have never paid Common Stock dividends and are unlikely to do so for the
foreseeable future.
We have never paid cash or other dividends on our Common Stock. It is our
intention to retain any earnings to finance the operation and expansion of our
business, and therefore, we do not expect to pay any cash dividends in the
foreseeable future.
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Volatility of Common Stock.
The Common Stock is traded on the OTCBB under the symbol "USWDA." The
trading volume of the Common Stock historically has been limited and sporadic,
and the stock prices have been volatile. For example, during the fiscal year
ended June 30, 2000, the Common Stock has traded at prices ranging from $0.594
to $9.437. As a result of the limited and sporadic trading activity, the quoted
price for the Common Stock on the OTCBB is not necessarily a reliable indicator
of its fair market value.
ITEM 7: FINANCIAL STATEMENTS
Independent Auditors' Report......................................... 30
Balance Sheets as of
June 30, 2000 and 1999......................................... 31
Statements of Operations for the fiscal year ended
June 30, 2000 and 1999......................................... 33
Statement of Changes in Stockholders' Equity (Deficit) for the
fiscal year ended June 30, 2000 and 1999....................... 34
Statements of Cash Flows for the fiscal year ended
June 30, 2000 and 1999......................................... 36
Notes to Financial Statements........................................ 37
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 5, 1999, we dismissed PricewaterhouseCoopers LLP ("PWC") as our
independent accountants. The reports of PWC on our financial statements for the
two fiscal years ending June 30, 1998 and 1997 did not contain any adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles, except that the reports of
PWC included a reference to a substantial doubt about our ability to continue as
a going concern. In connection with its audits for the fiscal years ending June
30, 1998 and 1997 and the period July 1 through August 5, 1999, there were no
disagreements with PWC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PWC would have caused them
to make reference thereto in their report on the financial statements for such
years.
We requested that PWC furnish us with a letter addressed to the Securities
and Exchange Commission stating whether or not it agrees with the above
statements. PWC furnished us with such a letter, dated August 20, 1999, a copy
of which was filed by us as Exhibit 16 to a Current Report on Form 8-KA filed by
us as of August 20, 1999.
We engaged M.R. Weiser & Co., LLP ("M.R. Weiser"), as our new independent
accountants as of August 5, 1999. In connection with its audit for the fiscal
years ended June 30, 2000 and 1999, there have not been any disagreements with
M.R. Weiser on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of M.R. Weiser would have caused them to make
reference thereto in their report on the financial statements for such years.
Our Board of Directors recommended and approved the decision to change
independent accountants.
29
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of U.S. Wireless Data, Inc.
We have audited the accompanying balance sheets of U.S. Wireless Data, Inc.
as of June 30, 2000 and 1999, and the related statements of operations, changes
in stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U.S. Wireless Data, Inc. as
of June 30, 2000 and 1999, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ M.R.Weiser&Co.LLP
M.R.Weiser&Co.LLP
New York, New York
September 8, 2000
30
<PAGE>
<TABLE>
<CAPTION>
U.S. WIRELESS DATA, INC.
BALANCE SHEETS
June 30,
ASSETS 2000 1999
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 39,231,000 $ 425,000
Accounts receivable, net of allowance for doubtful accounts
of $75,000 and $43,000 at June 30, 2000 and 1999, respectively ............ 126,000 178,000
Notes receivable ........................................................... 79,000 --
Inventory, net ............................................................. 45,000 215,000
Other current assets ....................................................... 150,000 14,000
Escrow held for payment of professional fees ............................... -- 112,000
------------ ------------
Total current assets .................................................. 39,631,000 944,000
Restricted cash ................................................................. 459,000
Processing units - deployed, net ................................................ -- 408,000
Fixed assets, net ............................................................... 1,055,000 405,000
Other assets .................................................................... 111,000 14,000
------------ ------------
Total assets .................................................................... $ 41,256,000 $ 1,771,000
============ ============
(continued)
31
<PAGE>
<CAPTION>
U.S. WIRELESS DATA, INC.
BALANCE SHEETS (Continued)
June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2000 1999
--------------------------------------------- ---- ----
<S> <C> <C>
Current liabilities:
Accounts payable .................................................................... $ 1,014,000 $ 1,198,000
Accrued liabilities ................................................................. 498,000 413,000
Borrowings, current portion ......................................................... -- 2,272,000
Other current liabilities ........................................................... -- 450,000
------------ ------------
Total current liabilities ..................................................... 1,512,000 4,333,000
Borrowings, long-term portion ............................................................ -- 25,000
Deferred rent ............................................................................ 52,000 --
------------ ------------
Total liabilities ........................................................................ 1,564,000 4,358,000
------------ ------------
Redeemable preferred stock:
Series B 6% cumulative convertible redeemable preferred stock,
no par value, $1.00 stated value, 1,954,705 and 5,000,000
shares authorized, 0 and 1,954,705 shares issued and
outstanding at June 30, 2000 and 1999, respectively ............................... -- 1,587,000
------------ ------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, no par value, 15,000,000 shares authorized:
Series A, at $1.00 stated value, 0 and 4,000,000 shares authorized,
0 and 751,610 issued and outstanding at June 30, 2000
and 1999, respectively ........................................................ -- 752,000
Series C convertible, at $.01 stated value, liquidation value $10.00
per share, aggregating $55,866,000, 8,450,000 shares
authorized, 5,586,600 issued and outstanding at June 30, 2000 ..................... 56,000 --
Common stock, no par value, at $1.00 stated value,40,000,000
shares authorized, 32,396,748 and 17,816,075 shares issued
and outstanding at June 30, 2000 and 1999, respectively ........................... 32,397,000 17,816,000
Common stock to be distributed ........................................................ -- 243,000
Additional paid-in capital ............................................................ 96,485,000 12,082,000
Accumulated deficit ................................................................... (89,246,000) (35,067,000)
------------ ------------
Total stockholders' equity (deficit) .......................................... 39,692,000 (4,174,000)
------------ ------------
Total liabilities and stockholders' equity (deficit) ..................................... $ 41,256,000 $ 1,771,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
32
<PAGE>
<TABLE>
<CAPTION>
U.S. WIRELESS DATA, INC.
STATEMENTS OF OPERATIONS
For the years ended June 30,
2000 1999
---- ----
<S> <C> <C>
Operating revenues:
Product sales ....................................................... $ 271,000 $ 770,000
Services ............................................................ 326,000 654,000
------------ -------------
597,000 1,424,000
------------ -------------
Cost of revenues:
Product sales ....................................................... 241,000 590,000
Services ............................................................ 270,000 655,000
Inventory obsolescence .............................................. 385,000 23,000
Settlement with supplier ............................................ -- (240,000)
------------ -------------
896,000 1,028,000
------------ -------------
Gross (loss) profit ........................................... (299,000) 396,000
------------ -------------
Operating expenses:
Selling, general and administrative ............................... 6,826,000 4,655,000
Research and development .......................................... 1,330,000 461,000
Litigation settlement ............................................. -- 49,000
------------ -------------
Total operating expenses ...................................... 8,156,000 5,165,000
------------ -------------
Loss from operations .......................................... (8,455,000) (4,769,000)
Interest expense ....................................................... (1,394,000) (1,528,000)
Interest credit ........................................................ 597,000 --
Interest income ........................................................ 644,000 --
Other income, net ...................................................... 84,000 5,000
------------ -------------
Loss before extraordinary gain ......................................... (8,524,000) (6,292,000)
Extraordinary gain ..................................................... -- 807,000
------------ -------------
Net loss ............................................................... (8,524,000) (5,485,000)
Preferred stock dividends (including beneficial
conversion feature of approximately $44,114,000 for
the year ended June 30, 2000) ...................................... (45,746,000) (1,446,000)
------------ -------------
Net loss available to common stockholders .............................. $(54,270,000) $ (6,931,000)
============ =============
Basic and diluted net loss per share (after
provision for preferred stock dividends)
Loss before extraordinary gain .................................. $ (2.26) $ (0.57)
Extraordinary gain .............................................. -- 0.06
------------ ------------
Net loss available to common .................................... $ (2.26) $ (0.51)
stockholders .................................................. ============ ============
Weighted average common shares outstanding -
basic and diluted .................................................. 23,976,000 13,597,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
33
<PAGE>
<TABLE>
<CAPTION>
U.S. WIRELESS DATA, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Series A Series C Common
Preferred Stock Preferred Stock Stock
Shares Amount Shares Amount Shares
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C
Balance at June 30, 1998 ................................... 3,060,000 $ 3,060,000 -- $ -- 12,195,358
Conversion of Series A preferred stock to common stock .... (1,475,000) (1,475,000) -- -- 1,322,752
Redemption of Series A preferred stock ..................... (833,000) (833,000) -- -- --
Issuance of common stock and warrants for services ......... -- -- -- -- 320,000
Issuance of shares for Series A preferred stock dividend ... -- -- -- -- 27,528
Issuance of common stock ................................... -- -- -- -- 475,000
Exercise of stock warrants ................................. -- -- -- -- 408,459
Exercise of stock options .................................. -- -- -- -- 5,000
Issuance of common stock in conversion of bridge loan ..... -- -- -- -- 2,933,671
Issuance of stock options for services ..................... -- -- -- -- --
Issuance of warrants for services .......................... -- -- -- -- --
Issuance of warrants in consideration of Series B
preferred stock ......................................... -- -- -- -- --
Series B preferred stock "in the money conversion feature".. -- -- -- -- --
Series A preferred stock dividend declared ($.08 per share) -- -- -- -- --
Series B preferred stock dividend declared ($.01 per share) -- -- -- -- --
Issuance of warrants with 6% convertible debenture ......... -- -- -- -- --
6% convertible subordinated debentures "in the
money conversion feature" ................................ -- -- -- -- --
Accretion of mandatorily redeemable preferred stock .... -- -- -- -- --
Net loss ................................................... -- -- -- -- --
Expiration of "put" feature on redeemable common stock .... -- -- -- -- 44,807
Reclassification of redeemable common stock ................ -- -- -- -- 83,500
------------ ------------ ----------- --------- ------------
Balance at June 30, 1999 ................................... 752,000 752,000 -- -- 17,816,075
Issuance of Series C preferred stock ....................... -- -- 5,586,600 56,000 --
Series C preferred stock offering costs .................... -- -- -- -- --
Issuance of common stock to be distributed ................. -- -- -- -- 243,000
Sale and other issuances of common stock ................... -- -- -- -- 2,673,379
Conversion of 6% debentures to common stock ................ -- -- -- -- 718,018
Conversion of Series A preferred stock to common stock ..... (752,000) (752,000) -- -- 1,134,113
Series B preferred stock dividends waived .................. -- -- -- -- --
Issuance of warrants to bridge note holders ................ -- -- -- -- --
Exercise of stock warrants and options ..................... -- -- -- -- 9,108,563
Issuance of common stock and warrants for services ......... -- -- -- -- 703,600
Issuance of options to Board of Directors .................. -- -- -- -- --
Issuance of warrants to induce redemption of Series B
preferred stock (deemed dividends) ....................... -- -- -- -- --
Series C preferred stock "in the money conversion feature".. -- -- -- -- --
Accretion of Series B preferred stock ...................... -- -- -- -- --
Series B preferred stock dividend declared ($.045 per
share) ................................................... -- -- -- -- --
Net loss ................................................... -- -- -- -- --
------------ ----------- ----------- --------- ------------
Balance at June 30, 2000 ................................... -- $ -- 5,586,600 $ 56,000 32,396,748
============ =========== =========== ========= ============
34
<PAGE>
<CAPTION>
Common Additional Common
Stock Paid in Stock to be Accumulated
Amount Capital Distributed Deficit Total
------ ---------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 ................................... $12,195,000 $ 10,222,000 $ -- $(28,022,000) $(2,545,000)
Conversion of Series A preferred stock to common stock .... 1,323,000 183,000 -- (31,000) --
Redemption of Series A preferred stock ..................... -- (53,000) -- (114,000) (1,000,000)
Issuance of common stock and warrants for services ......... 320,000 1,157,000 -- -- 1,477,000
Issuance of shares for Series A preferred stock dividend.... 28,000 77,000 -- -- 105,000
Issuance of common stock ................................... 475,000 (159,000) -- -- 316,000
Exercise of stock warrants ................................. 408,000 (243,000) -- -- 165,000
Exercise of stock options .................................. 5,000 (4,000) -- -- 1,000
Issuance of common stock in conversion of bridge loan ..... 2,934,000 (1,173,000) -- -- 1,761,000
Issuance of stock options for services ..................... -- 449,000 -- -- 449,000
Issuance of warrants for services .......................... -- 264,000 -- -- 264,000
Issuance of warrants in consideration of Series B
preferred stock ......................................... -- 168,000 -- -- 168,000
Series B preferred stock "in the money conversion feature".. -- 391,000 -- (391,000) --
Series A preferred stock dividend declared ($.08 per share) -- 354,000 43,000 (439,000) (42,000)
Series B preferred stock dividend declared ($.01 per share) -- -- -- (14,000) (14,000)
Issuance of warrants with 6% convertible debenture ......... -- 218,000 -- -- 218,000
6% convertible subordinated debentures "in the
money conversion feature" ................................ -- 279,000 -- -- 279,000
Accretion of mandatorily redeemable preferred stock .... -- -- -- (571,000) (571,000)
Net loss ................................................... -- -- -- (5,485,000) (5,485,000)
Expiration of "put" feature on redeemable common stock ..... 45,000 (45,000) -- -- --
Reclassification of redeemable common stock ................ 83,000 (3,000) 200,000 -- 280,000
----------- ------------ -------- ------------ -----------
Balance at June 30, 1999 ................................... 17,816,000 12,082,000 243,000 (35,067,000) (4,174,000)
Issuance of Series C preferred stock ....................... -- 55,810,000 -- -- 55,866,000
Series C preferred stock offering costs .................... -- (6,767,000) -- -- (6,767,000)
Issuance of common stock to be distributed ................. 243,000 -- (243,000) -- --
Sale and other issuances of common stock ................... 2,673,000 (1,293,000) -- -- 1,380,000
Conversion of 6% debentures to common stock ................ 718,000 311,000 -- -- 1,029,000
Conversion of Series A preferred stock to common stock ..... 1,134,000 (360,000) -- (22,000) --
Series B preferred stock dividends waived .................. -- -- -- 91,000 91,000
Issuance of warrants to bridge note holders ................ -- 451,000 -- -- 451,000
Exercise of stock warrants and options ..................... 9,109,000 (8,861,000) -- -- 248,000
Issuance of common stock and warrants for services ......... 704,000 (11,000) -- -- 693,000
Issuance of options to Board of Directors .................. -- 381,000 -- -- 381,000
Issuance of warrants to induce redemption of Series B
preferred stock (deemed dividends) ....................... -- 628,000 -- (628,000) --
Series C preferred stock "in the money conversion feature".. -- 44,114,000 -- (44,114,000) --
Accretion of Series B preferred stock ...................... -- -- -- (898,000) (898,000)
Series B preferred stock dividend declared ($.045 per
share) ................................................... -- -- -- (84,000) (84,000)
Net loss ................................................... -- -- -- (8,524,000) (8,524,000)
----------- ------------ -------- ------------ -----------
Balance at June 30, 2000 ................................... $32,397,000 $ 96,485,000 $ -- $(89,246,000) $39,692,000
=========== ============ ======== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
35
<PAGE>
<TABLE>
<CAPTION>
U.S. WIRELESS DATA, INC.
STATEMENTS OF CASH FLOWS
For the years ended June 30,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $ (8,524,000) $ (5,485,000)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization ............................................... 223,000 301,000
Bad debt expense ............................................................ 49,000 --
Write down of inventory ..................................................... 385,000 23,000
Gain on sale of merchant portfolio .......................................... (124,000) --
Non-cash consulting services and other ...................................... 1,073,000 1,652,000
Non-cash compensation expense-variable stock option ......................... -- (1,327,000)
Non-cash interest expense ................................................... 451,000 1,307,000
Non-cash reduction of payment due supplier .................................. -- (240,000)
Extraordinary gain .......................................................... -- (807,000)
Loss on sale of fixed assets ................................................ 40,000 --
Changes in current assets and liabilities:
Accounts receivable ...................................................... 3,000 (123,000)
Notes receivable ......................................................... (79,000) --
Inventory ................................................................ (215,000) 261,000
Other current assets ..................................................... (136,000) 111,000
Escrow for professional fees ............................................. 112,000 --
Accounts payable ......................................................... (184,000) (307,000)
Accrued liabilities ...................................................... 237,000 745,000
------------ ------------
Net cash (used in) operating activities .............................. (6,689,000) (3,889,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets .................................................... (871,000) (47,000)
Proceeds from sale of merchant portfolio .................................... 450,000 (81,000)
Proceeds from sale of fixed assets .......................................... 41,000 --
Restricted cash ............................................................. (459,000) --
Increase in other assets .................................................... (97,000) (57,000)
------------ ------------
Net cash (used in) investing activities .............................. (936,000) (185,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................................... 930,000 27,000
Principal payment on borrowings ............................................. (1,872,000) (149,000)
Net proceeds from issuance of debt .......................................... 1,575,000 3,141,000
Net proceeds from issuance of convertible debenture ......................... -- 1,800,000
Proceeds from issuance of Series C preferred stock .......................... 55,866,000 --
Payments of offering costs for Series C preferred stock ..................... (6,767,000) --
Net proceeds from issuance of Series B preferred stock ...................... -- 676,000
Proceeds from exercises of options and warrants ............................. 248,000 --
Redemption of Series A preferred stock ...................................... -- (1,000,000)
Redemption of Series B preferred stock ...................................... (2,549,000) --
Redemption of convertible debenture ......................................... (1,000,000) --
------------ ------------
Net cash provided by financing activities ............................ 46,431,000 4,495,000
------------ ------------
Net increase in cash ............................................................... 38,806,000 421,000
Cash at beginning of year .......................................................... 425,000 4,000
------------ ------------
Cash at end of year ................................................................ $ 39,231,000 $ 425,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
36
<PAGE>
U.S. WIRELESS DATA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
The Company was incorporated in the State of Colorado on July 30,
1991. The Company relocated its principal executive office from
California to New York City in February 2000. The Company is in the
business of providing products and services to enable the use of wireless
technology for electronic payment and other transactions. The Company's
Synapse service ("Synapse") (formerly Wireless Express Payment Service
or WEPS) serves as a link joining all parties involved in a wireless
point-of-sale ("POS") transaction. This enables businesses requiring
mobility and/or faster transaction speed to accept non-cash payments
utilizing wireless technology. By providing a seamless interface between
a merchant's POS terminal(s), wireless carriers and front-end processors,
credit, debit and other card transactions can be processed as fast as
cash, without the cost and inconvenience of being tethered to a telephone
line. In addition, Synapse's Internet-based tools offer on-line terminal
activation and online/real-time transaction monitoring, reporting and
remote terminal diagnostics.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements included herein have been
prepared in accordance with generally accepted accounting principles. The
preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Financial Condition and Liquidity
The Company has incurred recurring losses from operations and has
an accumulated deficit of approximately $89 million. The Company expects
expenses to continue to exceed revenues during the initial phases of the
business plan.
The Company's cash position of approximately $39 million provides
the Company, in management's opinion, with the financial resources to
pursue it's business plan and fund anticipated deficits. As of June 30,
2000, the Company is debt free and has no current financing needs.
Cash and Cash Equivalents
Investments in money market funds and highly liquid investments
purchased with an original maturity of three months or less are
classified as cash equivalents. Cash equivalents are carried at cost,
which approximates fair value. The Company maintains its cash balances
with certain financial institutions. Accounts at the institutions are
insured by the Federal Deposit Insurance Corporation up to $100,000.
Uninsured balances aggregate to approximately $39,131,000 at June 30,
2000.
Inventory
Inventory is stated at the lower of cost or market, cost being
determined by the first-in, first-out method.
37
<PAGE>
Fixed Assets
Fixed assets are stated at cost. Equipment and furniture are
depreciated on a straight-line basis over their estimated useful lives
(generally three to seven years). Leasehold improvements are amortized on
a straight-line basis over the term of the lease, which approximates
their estimated useful lives. Maintenance and repairs are charged to
operations as incurred.
Processing Units Deployed
Until the third quarter of fiscal 1999, merchants that subscribed
to the Company's credit card processing service usually received a TRANZ
Enabler unit that provides the wireless communications and processing
functionality. As these units were deployed at a customer location, the
asset value was transferred from inventory to "Processing units -
deployed" and depreciated via a charge to Cost of Revenue over its
estimated useful life of 48 months. The Company retains title to the
TRANZ Enabler units and earns usage income on the units while they are
deployed at the customer location. With the evolution of the Company's
business plan to distribution through merchant acquirers, the Company
phased out the sale of credit card offerings directly to merchants and
the associated "deployment" of the TRANZ Enabler.
Impairment of Long-lived Assets
The Company evaluates the recoverability of its long-lived assets
and recognizes an impairment in the event the net book value of such
assets exceeds the future undiscounted cash flow attributable to such
assets.
Revenue Recognition and Major Customers
Revenue from product sales is generally recognized upon shipment of
products to customers. Service revenue consists primarily of
transaction-based fees, one-time activation fees and monthly subscription
fees. Service revenue related to transactions processed or activation
fees are recognized in the period the services are provided.
During fiscal 2000 and 1999, Cardservice International, Inc.
accounted for approximately 52% and 40% of revenues, respectively.
Research and Development Costs
Research and development costs are expensed as incurred.
Advertising and Promotion
Costs of advertising are expensed as incurred. Advertising and
promotion expense for the years ended June 30, 2000 and 1999 amounted to
approximately $229,000 and $45,000, respectively.
Income Taxes
The Company accounts for income taxes under the liability method,
which requires recognition of deferred taxes and liabilities for the
income tax consequences of temporary differences between the tax basis of
assets and liabilities and their reported amounts.
Stock-based Compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of APB No. 25, "Accounting
for Stock Issued to Employees," and complies with disclosure provisions
of SFAS No. 123, "Accounting for Stock Based Compensation."
38
<PAGE>
Net Loss Per Share
Earnings (loss) per common share (EPS) is computed using Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share."
SFAS No. 128 establishes standards for the computation, presentation and
disclosure of earnings per share. Basic per share amounts are computed by
dividing the net loss available to common stockholders by the weighted
average number of common shares outstanding during the year. Diluted per
share amounts incorporate the incremental shares issuable upon the
assumed exercise of the Company's stock options and warrants and assumed
conversion of convertible securities. During fiscal 2000 and 1999, such
incremental amounts have been excluded from the calculation since their
effect would be anti-dilutive. Such stock options, warrants and
conversions could potentially dilute earnings per share in the future.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments including
accounts receivable, accounts payable, notes receivable, accrued
liabilities and debt approximate their fair values due to their
relatively short maturities.
Accounting for Derivatives and Financial Instruments
SFAS 133 establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. In July 1999, the FASB
issued SFAS 137, Deferral of the Effective Date of SFAS 133, which amends
SFAS 133, by deferring the effective date to fiscal years beginning after
June 15, 2000. The adoption of SFAS 133 is not expected to have a
material impact on the Company's reported results of operations,
financial position or cash flows.
Internally Developed Software
Certain costs of developing or obtaining software for internal use
are required to be capitalized beginning in fiscal 2000. No such costs
were incurred during the year ended June 30, 2000.
New Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No.101 ("SAB 101"), "Revenue Recognition
in Financial Statements". SAB 101 summarizes certain of the SEC's views
in applying generally accepted accounting principles to revenue
recognition in financial statements. On June 26, 2000, the SEC issued SAB
101B to defer the effective date of implementation of SAB 101 until no
later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. The Company is required to adopt SAB 101 by the
quarter ending June 30, 2001. The adoption of SAB 101 is not expected to
have a material effect on the Company's reported results of operations,
financial position or cash flow.
NOTE 3 - BRIDGE FINANCING AND PRIVATE PLACEMENT
Bridge Financing
On December 23, 1999, the Company entered into an agreement with
Commonwealth Associates, L.P. ("Commonwealth") in connection with the
private placement (the "Private Placement") of the Company's Series C
Convertible Preferred Stock (the "Series C Preferred Stock").
39
<PAGE>
In connection with the engagement of Commonwealth, the Company
entered into an agreement with ComVest Capital Management, LLC
("ComVest"), an affiliate of Commonwealth, pursuant to which ComVest
initially lent the Company $1,000,000 and Dean M. Leavitt, the Company's
Chairman and Chief Executive Officer lent the Company $100,000 (the
"Bridge Financing"). ComVest and Mr. Leavitt subsequently lent the
Company an additional $250,000 and $25,000, respectively. The loans were
collateralized by substantially all of the Company's assets pursuant to
general security agreements and bore interest at a rate of 8% per annum.
The notes were due on the earlier of (x) the date a change of control (as
defined in the note) occurs, (y) the date the Company concludes a debt or
equity financing in which the Company receives at least $5,000,000 of
gross proceeds or (z) December 30, 2000. The notes included certain
negative covenants, including prohibitions on the payment of certain
dividends, redemptions and asset sales and limitations on the incurrence
of indebtedness, liens and the issuance, prior to March 31, 2000, of
securities not specifically exempted. The lenders had the option to
convert the outstanding principal amount of the notes into securities
issued in connection with any private placement transaction on the same
terms as investors in such placement. In addition, the Company agreed to
appoint a designee of the bank affiliate lender to the Board and to have
an observer present at all meetings of the Board. In addition to the
Bridge Financing, the Company also borrowed $125,000 from ComVest and
$75,000 from Mr. Leavitt (the "Additional Notes"). The Additional Notes
were due on demand and interest free. The Company repaid the full
outstanding amount of the Bridge Financing and Additional Notes on March
17, 2000 from the Private Placement described below. The rights under the
Bridge Financing expired on March 17, 2000, when the loans were repaid.
In connection with the Bridge Financing, the Company also issued
ComVest and Mr. Leavitt warrants to purchase 13,636,363 shares and
1,363,637 shares, respectively, of Common Stock at an exercise price of
$.01 per share. These warrants are fully exercisable at any time, subject
to certain conditions, including the availability of a sufficient number
of shares of Common Stock for issuance upon exercise thereof. On March
10, 2000, Commonwealth and Mr. Leavitt exercised their warrants with
respect to 7,920,000 shares and 792,000 shares, respectively. The
remaining warrants expire on December 30, 2006. ComVest and Mr. Leavitt
have certain demand and "piggyback" registration rights, commencing in
June 2000, as to the shares of Common Stock underlying the warrants.
The Company entered into Economic Participation Agreements with the
bridge lenders since there were not enough shares authorized for the
warrants to be exercised. The lenders would have been entitled to certain
liquidated damages if an amendment to the Company's Articles of
Incorporation increasing the number of shares authorized was not filed by
September 30, 2000, but such amendment was filed on September 22, 2000.
The Company established the value of the Bridge Warrants based upon
an assessment of the market rate of interest for debt securities with
similar attributes but without the stock purchase warrants feature. For
the year ended June 30, 2000, the Company recorded a discount on the
notes from the Bridge Financing via a charge of $451,000 against the face
value of the notes for a proportionate amount of the warrant valuation.
The Company accreted the carrying value of the notes to their full face
value by the time of repayment on March 17, 2000.
Private Placement
Commonwealth acted as placement agent in the Private Placement
pursuant to which an aggregate of 558.66 Units were sold at $100,000 per
Unit for aggregate gross proceeds of $55,866,000. The Private Placement
was closed in three tranches on March 17, 2000, March 28, 2000 and May
31, 2000. Each Unit consists of 10,000 shares of the Company's Series C
Preferred Stock (which is initially convertible into 66,667 shares of
Common Stock) and warrants to purchase Common Stock equal to 25% of the
number of shares into which the Series C Preferred Stock is convertible.
40
<PAGE>
The Series C Preferred Stock has a liquidation preference of $10
per share, plus accrued and unpaid dividends. The holders of Series C
Preferred Stock are entitled to vote their shares of Series C Preferred
Stock on an as converted basis with the holders of Common Stock as a
single class on all matters submitted to a vote of the shareholders,
except as otherwise required by applicable law and except that the
holders of Series C Preferred Stock voting separately as a class have the
right to elect two directors to the Board of Directors.
Each share of Series C Preferred Stock is convertible at any time,
subject to the approval by the shareholders of an amendment to the
Company's Articles of Incorporation to increase the number of authorized
shares of Common Stock, at the option of the holder, into a number of
shares of Common Stock determined by dividing the liquidation value by
the conversion price, initially $1.50 per share, which is subject to
adjustment for stock splits, recapitalizations and other similar events.
If the Company issues shares of Common Stock at a price per share less
than the then current conversion price, then, subject to certain
exceptions, the conversion price will be automatically reduced to such
lower price and the number of shares issuable upon conversion of the
Series C Preferred Stock shall be increased proportionately. The Series C
Preferred Stock automatically converts into Common Stock (a) if, at any
time commencing three months after June 17, 2000, the average closing bid
price of the Company's Common Stock exceeds 300% of the conversion price
for 20 consecutive trading days or (b) upon a public offering of the
Company's securities that raises gross proceeds in excess of $30,000,000,
provided the shareholders have approved an increase in authorized capital
to allow for the conversion of the Series C Preferred Stock.
The warrants issued in connection with the Private Placement (the
"Unit Warrants") are exercisable for a period of seven years for an
aggregate number of shares of Common Stock equal to 25% of the number of
shares into which the Series C Preferred Stock are convertible, at an
exercise price equal to the then applicable conversion price. The initial
exercise price is $1.50 per share, subject to adjustment under the same
circumstances as the conversion price of the Series C Preferred Stock.
The Unit Warrants are callable for a nominal price at the Company's
option on 30 days' notice to the holders of the Unit Warrants if (a) the
average closing bid price of the Company's Common Stock for 20
consecutive trading days exceeds 300% of the exercise price, as adjusted,
(b) the Company's Common Stock is trading on a national securities
exchange or Nasdaq SmallCap or National Market Systems, and (c) a
registration statement covering the shares issuable upon exercise of the
Unit Warrants has been declared effective and the shares issuable upon
exercise of the Unit Warrants are not otherwise subject to any lock-up
restrictions.
The terms of the Series C Preferred Stock and the Unit Warrants may
be amended, modified or waived by an agreement among the Company,
Commonwealth and a committee to be designated by Commonwealth whose
members hold in the aggregate not less than 20% of the outstanding Series
C Preferred Stock and not less than 20% of the outstanding Unit Warrants.
The Company is obligated to file a registration statement with
respect to the shares of Common Stock issuable upon conversion of the
Series C Preferred Stock and exercise of the Unit Warrants under the
Securities Act within nine months of the closing of the Private
Placement. The investors also have certain "piggyback" registration
rights with respect to the shares of Common Stock issuable upon
conversion of the Series C Preferred Stock and the exercise of the Unit
Warrants.
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Each investor who purchased Units in the Private Placement agreed
not to sell, transfer or otherwise dispose of any of the securities sold
in the Private Placement for a period of one year following the closing
of the transaction. Thereafter, investors may not sell, transfer or
dispose of more than 25% of such securities during each of the following
four 90-day periods. The lock-up period may be extended by Commonwealth
for up to an additional six months from the closing of any public
offering that is consummated prior to the end of the initial lock-up
period, in which event there shall be no further lock-up at the end of
such period. The Company's officers, directors and certain other existing
shareholders agreed to substantially the same lock-up provisions as to
shares owned or acquired by them.
Several of the Company's officers and directors purchased Units in
the Private Placement. Dean M. Leavitt, the Company's Chairman and Chief
Executive Officer purchased 2.5 Units, Charles I. Leone, the Company's
Chief Financial Officer, Chief Operating Officer and Secretary purchased
1 Unit and Robert E. Robichaud, the Company's former Chief Financial and
Accounting Officer, Treasurer and Secretary purchased .75 of a Unit.
Edwin Cooperman, a member of the Board, purchased 1 Unit and each of
Michael S. Falk and Amy Newmark, both also members of the Board,
purchased 2.5 Units. Barry Kaplan, also a member of the Board, purchased
25 Units. Mr. Kaplan also received from Commonwealth at no charge a
warrant to purchase 1.5 Units exercisable at $100,000 per Unit (from the
warrants Commonwealth received as compensation in the Private Placement).
As part of its compensation, Commonwealth received warrants to
purchase 139.664 Units, exercisable at $100,000 per Unit, a commission
equal to $3,910,620, which is 7% of the gross proceeds raised in the
Private Placement, and a structuring fee equal to $1,675,980, which is 3%
of the gross proceeds raised in the Private Placement. Pursuant to a
prior agreement with Peter J. Solomon Securities Company Limited ("PJSC")
relating to financing transactions entered into by the Company, the
Company issued to PJSC warrants to purchase 27.935 Units at $100,000 per
Unit and a fee equal to $400,000. The warrants are exercisable commencing
on the date of issuance and for seven years thereafter. The Company
valued the unit warrants at $6.15 million.
Commonwealth has the right under an Agency Agreement to designate
two directors to the Board and the following individuals gave proxies to
Commonwealth to vote for the election of such designees: Messrs. Leavitt
and Leone, John H. Perveiler, the Company's Vice President/National Sales
Manager, Marc R. Shultz, the Company's Vice President of Business
Development, and Barry Kaplan, Alvin Rice and Chester Winter, each
members of the Board. On March 29, 2000, four new directors joined the
Board, including Michael S. Falk, the Chairman of Commonwealth, and Amy
L. Newmark, both of whom were designated by Commonwealth.
As a condition to the completion of the Private Placement, the
Company agreed that the exercise price of a warrant owned by Dean M.
Leavitt, the Company's Chairman and Chief Executive Officer, to purchase
2,687,500 shares of Common Stock should be reduced from $3.00 per share
to the market price of the Common Stock on January 4, 2000. In March
2000, the FASB issued Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation". The interpretation is not
effective until July 1, 2000. Had the interpretation been in effect on
the date of the repricing, the warrant would have been considered a
variable warrant. In compliance with this new interpretation, the Company
will adjust compensation expense based upon the Common Stock price
difference from the closing Common Stock price on July 1, 2000 versus the
closing Common Stock price at any measurement date multiplied by the
number of outstanding warrants at the measurement date. On September 20,
2000, the closing stock price was less than June 30, 2000, therefore, no
compensation expense would have been recorded.
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As a result of the Bridge Financing and Private Placement,
Commonwealth may be deemed to control the Company.
NOTE 4 - NOTES RECEIVABLE
The Company has two notes receivable outstanding with two former
employees. The notes receivable consist of one note in the amount of
$56,000 due on June 22, 2001 with an interest rate of 9.5% and a second
note in the amount of $23,000 due on June 15, 2001 with an interest rate
of 9%. The notes are collateralized by stock of the Company purchased
with the proceeds of the notes.
NOTE 5 - INVENTORY
June 30,
2000 1999
---- ----
Inventory consists of:
Raw material $ 177,000 $ 144,000
Finished goods 360,000 331,000
Lower of cost or market reserve (492,000) (260,000)
----------- -----------
$ 45,000 $ 215,000
=========== ===========
The Company has established a reserve to reflect the estimated net
realizable value of the inventory as of June 30, 2000 and 1999
NOTE 6 - PROCESSING UNITS DEPLOYED AND FIXED ASSETS
June 30,
2000 1999
---- ----
Processing units deployed consists of:
Processing units deployed $ 159,000 $ 600,000
Less: accumulated depreciation (159,000) (192,000)
----------- -----------
$ -- $ 408,000
=========== ===========
Fixed assets consist of:
Equipment and furniture $ 1,082,000 $ 509,000
Leasehold improvements 214,000 --
Demo equipment 21,000 28,000
Less accumulated depreciation
and amortization (262,000) (132,000)
----------- -----------
$ 1,055,000 $ 405,000
=========== ===========
NOTE 7 - ACCRUED LIABILITIES
June 30,
2000 1999
---- ----
Accrued liabilities consists of:
Accrued compensation $ 314,000 $ 143,000
Accrued consulting fees -- 65,000
Accrued professional fees 135,000 130,000
Accrued Series B Preferred stock penalty -- 74,000
Other 49,000 1,000
----------- -----------
$ 498,000 $ 413,000
=========== ===========
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NOTE 8 - BORROWINGS
Borrowing consist of the following: June 30,
Current portion: 2000 1999
---- ----
Note payable - supplier - OMRON $ -- $ 2,000
Note payable - investors - RBB -- 250,000
Note payable - lawsuit settlement -- 20,000
Convertible debenture -- 2,000,000
----------- -----------
$ -- $ 2,272,000
=========== ===========
Long-term portion - lawsuit settlement $ -- $ 25,000
=========== ===========
Note Payable - Supplier - OMRON
The note payable to a supplier was in default at June 30, 1998. The
Company continued to accrue monthly interest. During August 1998, the
Company and the supplier reached an agreement to cure the default with a
restructuring of the terms of the note that reduced the balance due by
$240,000. This adjustment was recorded as a credit to cost of revenue. As
of June 30, 2000, the Company owed $47,000 of accrued interest included
in accounts payable.
Note Payable - Investors - RBB
In July 1998, the Company obtained a bridge loan in the amount of
$250,000 from a holder of the Series A Preferred Stock. The Company
issued a warrant to purchase 20,000 shares of common stock at $4.375 per
share, exercisable through September 9, 2001, in connection with the
borrowing. The warrant had a fair value of $52,000 at date of issuance
which has been recorded as interest expense. The warrant contains
anti-dilution provisions and "piggyback" registration rights applicable
to the common stock issuable upon exercise of the warrant. The Company
used the proceeds from the 6% Convertible Subordinated Debentures to pay
off the bridge loan during July 1998.
On March 12, 1999, the Company borrowed $250,000 from RBB Bank
Aktiengesellschaft, which is the agent for the holders of certain shares
of the Company's Series A Preferred Stock, $1,000,000 of the 6%
Debentures, and 227,000 shares of Series B Preferred Stock, through a
$250,000 promissory note (the "RBB Promissory Note") bearing interest at
10% per annum due July 12, 1999 or upon obtaining certain financing.
Liviakis Financial Communications, Inc. agreed to guarantee the note. The
Company issued 50,000 shares of common stock with a fair market value of
$44,000 at date of closing to RBB Bank, which was recorded as interest
expense. RBB Bank agreed to waive the right to immediate repayment of the
$250,000 note (which was originally payable upon completion of the next
funding received by the Company of at least $1,000,000). RBB Bank agreed
to forebear initiating an action against the Company to collect the
amount due until the earlier of receipt by the Company of funding in the
aggregate of at least $2,500,000, or December 1, 1999.
On March 17, 2000, the Company repaid the $250,000 note in
connection with the redemption of RBB's interest in Series B Preferred
Stock and 6% Debentures.
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Note Payable - Lawsuit Settlement
As part of a lawsuit settlement, the Company executed a $60,000
note payable in September 1997 which was due in installments as follows:
$5,000 due March 17, 1998; $10,000 due September 17, 1998; $20,000 due
September 17, 1999; and $25,000 due September 17, 2000. The first two
installments were paid in fiscal 1999 and the balance in fiscal 2000.
6% Convertible Subordinated Debentures
In July 1998, the Company completed a private offering of
$2,000,000 of 6% Convertible Subordinated Debentures ("6% Debentures")
due July 21, 2000 and warrants to purchase 100,000 shares of common stock
at $4.50 per share, which expire on July 21, 2001. The shares of common
stock underlying the 6% Debentures and warrants carry registration
rights. The 6% Debentures were subordinated generally to all other
obligations of the Company excluding obligations to any subsidiary of the
Company and obligations with respect to shares of capital stock of the
Company. The net proceeds to the Company from the offering were
approximately $1.8 million. The Company used approximately $250,000 of
the proceeds from the offering to pay off the $250,000 bridge loan to RBB
Bank. The warrants had a fair value of $218,000 at date of issuance which
was being recognized as interest expense over the term of the 6%
Debentures. The Company also issued a warrant to purchase 60,000 shares
of its common stock at $4.50 per share expiring on July 21, 2001 to the
finder which assisted the Company with the private placement. The shares
underlying the warrant have "piggyback" registration rights. The fair
value of the warrant was approximately $131,000 at date of issuance and
was being expensed to operations over the term of the 6% Debentures.
The 6% Debentures included an "in the money" conversion feature
which allowed the holder to convert to common stock at an initial
discount of 20% from fair market value, as defined. The value of the "in
the money" conversion feature approximated $279,000 and was recognized as
interest expense. The Company also agreed to a 2% cash penalty if the
Company was unable to obtain an effective registration statement on the
shares within 120 days from the issue date and an additional 3% for every
30-day period thereafter until the registration statement was effective.
In the event the registration statement was not effective within 180 days
of July 21, 1998, the holders could require redemption by the Company at
an amount equal to 120% of the face value, plus accrued interest.
The Company had a commitment to file a registration statement with
the Securities and Exchange Commission by October 7, 1998, with
effectiveness by November 18, 1998, covering the shares of common stock
issuable upon conversion of the 6% Debentures and related warrants. A
registration was not effective with the Securities and Exchange
Commission by that date, and 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 was effective. The Company had not filed or obtained
effectiveness of a registration statement by January 18, 1999, thereby
giving the holders 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. Therefore, the Company recorded this
20% premium as interest expense in the amount of $400,000 in January
1999. In addition, the Company expensed the remaining unamortized debt
issuance cost of approximately $279,000 and unamortized debt discount of
approximately $145,000 due to the debt being redeemable for failure to
obtain effectiveness of the registration statement. The Company also
recorded $340,000 in penalties as of June 30, 1999 for this obligation.
On May 6, 1999, the Company and the 6% Debenture holders agreed to
convert all the accrued interest and penalties into shares of the
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Company's Series B Preferred Stock. The Company issued 454,705 shares of
Series B Preferred Stock at $1.00 per share to compensate the 6%
Debenture holders for the penalties and interest owed on the 6%
Debentures through June 30, 1999. As part of this agreement, the 6%
Debenture holders agreed to adopt the default timetable and remedies
defined in the Series B Preferred Stock purchase agreement and to waive
their rights arising out of certain prior defaults. In connection with
the 20% redemption premium noted above, the Company reversed the $400,000
accrual as a credit to interest expense in the fourth quarter of fiscal
1999 related to the waiver.
During fiscal 2000, holders of the 6% Debentures converted
$1,029,000 of the debt plus accrued interest into approximately 718,000
shares of common stock per the specified conversion formula. Upon
conversion of the 6% Debentures, approximately $225,000 of interest
previously accrued was waived by the holders and recorded as an interest
credit. In addition, the Company redeemed the balance of $1,000,000 of 6%
Debentures from RBB Bank for a price equal to 125% of the principal
amount. In connection with the redemption, RBB Bank waived certain
accrued penalties. As of June 30, 2000, no 6% Debentures remain
outstanding.
NOTE 9 - OTHER CURRENT LIABILITIES
Other current liabilities at June 30, 1999, consist of deposits for
the purchase of 727,272 shares of common stock of the Company, which were
issued in the first quarter of fiscal 2000.
NOTE 10 - ADDITIONAL FINANCING
For the year ended June 30, 2000, in addition to the Private
Placement, the Company raised $930,000 in an additional private offering
of common stock and common stock purchase warrants. The Company issued
approximately 1,500,000 shares of common stock and warrants to purchase
approximately 301,000 shares of common stock. The warrants are
exercisable at $1.50 per share through July 6, 2004.
In the first quarter of fiscal year 2000, a Colorado based
management recruiting firm successfully completed a search for a key
product development engineer. The Company agreed to pay half the $17,000
fee in the form of 13,600 shares of common stock, which were issued on
February 23, 2000.
NOTE 11 - SERIES A PREFERRED STOCK
At June 30, 2000, the Company has authorized 15,000,000 shares of
no par value preferred stock, of which 4,000,000 shares were designated
as Series A Cumulative Convertible Redeemable Preferred Stock ("the
Series A Preferred Stock") with a stated value of $1.00 per share. On
February 9, 1998, the Company issued 3,060,000 shares of its Series A
Preferred Stock in exchange for all $3,060,000 of the Company's 8%
Convertible Debentures. The 8% Debentures were issued in December 1997.
As of March 2, 2000, no shares are designated Series A Preferred Stock
and all shares have been redeemed or converted as described below.
In conjunction with the Series A Preferred Stock, on August 7,
1998, the Company registered 7,240,356 shares of common stock for sale
solely by certain security holders. This offering resulted in no proceeds
to the Company. All costs relating to the registration, estimated to be
approximately $140,000, were borne by the Company.
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<PAGE>
Registration Rights
The holders of the Series A Preferred Stock had certain
registration rights and certain penalties were accrued as a result of the
Company's late filing and inability to obtain effectiveness of such
registration statement. Such penalties were waived in connection with the
redemption of the Series A Preferred Stock.
Conversion
Each share of Series A Preferred Stock was convertible at the
election of the holder into Common Stock based on the face value of the
Series A Preferred Stock being converted, at a rate equal to the lesser
of $6.00 per share or 75% of the average of the closing bid price of the
Common Stock was reported on the OTC Electronic Bulletin Board or, if
available, the closing bid price as quoted on NASDAQ or any other
national securities exchange upon which the Common Stock is then listed,
over the five trading days prior to conversion. A minimum conversion
price of $3.76 per share was in effect from the issuance date through
September 6, 1998. Between April 1, 1999 through June 30, 1999, 37,716
shares of Series A Preferred stock were converted to 58,860 shares of
Common Stock. During fiscal 2000 and 1999, respectively, approximately
752,000 and 1,475,000 shares of Series A Preferred Stock were converted
into 1,134,113 and 1,322,752 of Common Stock at various price levels. The
common stock issued upon conversion included Common Stock issuable as
dividends accrued on the Series A Preferred Stock at time of conversion.
Dividends
Holders of Series A Preferred Stock were entitled to receive
cumulative quarterly dividends upon declaration by the Board of Directors
at an annual rate of 8% per share which was reduced to 4% per share on
August 7, 1998, the effective date of the SEC registration statement
covering the Common Stock reserved for conversion. The annual dividend
was increased to 8% in September 1998 in conjunction with a partial
redemption and agreement to refrain from conversions except per an agreed
upon schedule. The Company was entitled to pay the dividends in shares of
Common Stock, the number of shares issuable being determined by dividing
the amount of the dividend by the same formula as applies to conversions.
Unless the full amount of cumulative dividends have been paid or
sufficient funds set aside, dividends could not be paid or declared on
the Common Stock or any other stock ranking junior to the Series A
Preferred Stock.
Voting
Generally, the Series A Preferred Stock was not entitled to vote on
matters submitted to shareholders except as specifically authorized under
Colorado law.
Liquidation
In the event of a liquidation or sale of the Company, the Series A
Preferred Stockholders were entitled to a per share distribution in
preference to common shareholders or any stock of the Company ranking
junior to the Series A Preferred Stock of $1.00, plus any accrued but
unpaid dividends. If the amount available in liquidation was insufficient
to pay the full amount, the Series A Preferred Stockholders would have
shared ratably in any distribution first in proportion to their
respective liquidation preferences and then in proportion to their
respective amounts of accrued but unpaid dividends.
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<PAGE>
Voluntary Redemption
On September 22, 1998, the Company borrowed $1,300,000 from
Liviakis Financial Communications, Inc. ("LFC"), a shareholder of the
Company, through a note payable. The note payable was due April 1, 1999,
bore interest at 8% per year and was collateralized by substantially all
available assets of the Company. The Company used $1,000,000 of the
proceeds to redeem 833,000 shares of its Series A Convertible Preferred
Stock. The Company paid 120% of face value for the redemption. The amount
of $167,000 paid in excess of the face value of the preferred shares was
recorded as a reduction of additional paid-in capital as the Company had
previously recorded as a charge to retained earnings an equivalent amount
at the date of issuance for the value of the "in the money" feature. The
participating investors, representing approximately 1,342,000 shares of
the remaining Series A Preferred Stock, agreed to hold their Series A
Preferred shares until at least October 15, 1998, after which time,
one-third of the Series A Preferred shares could 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. Pursuant to the agreement, the Company issued warrants
for 78,098 shares exercisable at $2.40 per share through October 15,
2001; warrants for 67,084 shares exercisable at $3.36 per share through
November 15, 2001 and warrants for 67,084 shares exercisable at $3.69 per
share through December 15, 2001. These warrants had a fair value of
$351,000 at date of issuance, which has been recorded as a charge to
retained earnings.
NOTE 12 - SERIES B CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
The Company's Articles of Incorporation were amended by director
action as of April 29, 1999, to designate 5,000,000 shares of Preferred
Stock as Series B Cumulative Convertible Redeemable Preferred Stock (the
"Series B Preferred Stock"). On May 6, 1999, the Company sold $1,500,000
worth of Series B Preferred Stock at $1.00 per share. For no additional
consideration the Company issued 300,000 Common Stock purchase warrants
exercisable at $1.50 per share for five years from April 30, 1999 to the
purchaser of the Series B Preferred Stock (the "Series B Preferred
Warrants"). Concurrent with the transaction, the holders of the Company's
6% Convertible Debentures agreed to convert all accrued interest and
penalties into 454,705 shares of Series B Preferred Stock. The proceeds
of the financing were used to pay finders fees of $180,000 plus estimated
offering expenses of $41,000 (including approximately $26,000 for the
investor's legal fees), professional services fees of $413,000, with the
estimated balance of $676,000 used for working capital. In April 1999,
the Company received $400,000 in the form of a 10% promissory note from
the investor in the Series B Preferred Stock. The note was repaid through
the issuance of 400,800 of the 1,500,000 issued shares of Series B
Preferred Stock.
Mr. John Liviakis, a significant shareholder of the Company, also
agreed to transfer a total of 443,077 shares of Company Common Stock
owned by him to the finder who located the cash purchaser of the Series B
Preferred Stock. These shares had a value of $360,000 on the date of
issuance, which was charged against the proceeds of the offering. The
shares do not have any registration rights.
As of May 3, 2000, all shares of Series B Preferred Stock had been
redeemed by the Company.
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The Company did not have any redemption rights as to the Series B
Preferred Stock. The Series B Preferred Stock was convertible into shares
of Common Stock at the option of the holders as described below. The
Series B Preferred Stock had the following additional rights and
preferences.
Dividends
The Series B Preferred Stock accrued a cumulative dividend at the
annual rate of 6% per annum, payable semi-annually on March 31 and
September 30 of each year. The dividend could be paid at the Company's
option in cash or shares of Common Stock. If paid in Common Stock, the
number of shares issuable as a dividend was determined based on the
amount of the dividend being paid, divided by the "Average Quoted Price"
of the Common Stock, which is defined in the Designation of Series B
Cumulative Convertible Preferred Stock (the "Designation") to be the
five-day average closing bid price of the Common Stock as quoted on the
OTC Electronic Bulletin Board or one of the NASDAQ markets (if so listed
and quoted) or any other exchange where the Common Stock is listed and
quoted. All dividends owing to the date of conversion were payable upon
any conversion.
Voting Rights
Generally, the Series B Preferred Stock did not have voting rights,
although it was entitled to one vote per share on those matters upon
which all classes of a Colorado corporation's shares are entitled by law
to vote upon by class.
Conversion Terms
50% of the Series B Preferred Stock was convertible at the option
of the holders into shares of the Company's Common Stock beginning on the
earlier of 90 days after its issuance date (May 6, 1999) or five days
after notice by the Securities and Exchange Commission that the
registration statement (to be filed pursuant to the terms of the
Registration Rights Agreement) was declared effective. Thirty days
thereafter, the remaining shares of the Series B Preferred Stock became
convertible into Common Stock. The rate at which the Series B Preferred
Stock was convertible (per share of Series B Preferred Stock) into Common
Stock was equal to 80% of the average of the closing bid price of the
Common Stock over the five trading days prior to conversion (the
"Conversion Rate"). The Company could convert the Series B Preferred
Stock into Common Stock at its option at any time after the close of
business on the second anniversary of the effective date of the Series B
Registration Statement at the then-applicable Conversion Rate. The value
of the "in the money" conversion feature approximated $391,000 which was
recognized as a charge to retained earnings.
Subject to certain exceptions applicable to mandatory conversions
at the behest of the Company and automatic conversions upon the
occurrence of certain "Fundamental Changes" (as defined in the
Designation), to the extent that convertibility of Series B Preferred
Stock would result in beneficial ownership (as calculated pursuant to
Section 13(d) of the Securities Exchange Act of 1934, as amended) by a
holder in excess of 4.99% of the Company's Common Stock, the number of
shares of Series B Preferred Stock that would result in beneficial
ownership above 4.99% was not then convertible, notwithstanding any other
provision making the shares eligible for conversion.
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Registration and Redemption Rights
In the fourth quarter of fiscal 1999, the Company entered into an
agreement with the purchasers of the Series B Preferred Stock and holders
of the 6% Debentures to file a registration statement with the SEC
covering the common stock underlying the Series B Preferred Stock, a
common stock purchase warrant issued at the same time as the Series B
Preferred Stock, the 6% Debentures, and the common stock purchase
warrants issued to the 6% Debenture holders in July, 1998, within 30 days
of May 11, 1999, to be effective within 90 days of May 11, 1999. Failure
to file the registration statement by June 10, 1999 and/or obtain
effectiveness of it by August 9, 1999, was to result in the accrual of
penalties against the Company. The Company did not file the required
registration statement until June 30, 1999, and the registration
statement has never been declared effective. The Series B Preferred Stock
and 6% Debentures ultimately became subject to redemption at the option
of the holders for failure to obtain effectiveness of the registration
statement. The Company became subject to a late filing penalty of $74,000
and accrued "late effectiveness" penalties of $413,000 for the year ended
June 30, 2000. Upon redemption of these securities, approximately
$372,000 of the penalties were waived by the holders and recorded as an
interest credit in the year ended June 30, 2000. Offering costs, and
valuation of related warrants and incentive shares were recorded against
the aggregate preference value of the preferred stock and were accreted
up to the full redemption value by the date of mandatory redemption.
Accretion and accrued dividends for the year ended June 30, 2000 and 1999
were $982,000 and $584,000, respectively. As described below in this
note, the Company redeemed or converted all outstanding shares of Series
B Preferred Stock and 6% Debentures on or before May 3, 2000.
On January 20, 2000, the Company issued a 22,500 share common stock
purchase warrant to RBB Bank as an inducement to redeem 227,353 shares of
Series B Preferred Stock held by RBB Bank, exercisable at $1.50 per
share. The warrant vests immediately, was issued with an exercise price
equal to the market price of the underlying stock on the date of grant,
and expires on July 6, 2004. The Company valued the warrant at $32,000,
which was charged as a deemed dividend to accumulated deficit. On March
17, 2000, the Company redeemed 227,353 shares of Series B Preferred Stock
from RBB Bank for a price equal to 125% of the stated value. In
connection with the redemption, RBB waived certain accrued penalties and
dividends.
On March 31, 2000, the Company redeemed 1,500,000 shares of the
Company's Series B Preferred Stock from Bold Street, LLC, for a price
equal to 125% of the stated value, plus accrued dividends. As an
inducement for the redemption, the Company also issued a Common Stock
purchase warrant, expiring April 30, 2004, to purchase 150,000 shares of
Common Stock, exercisable at $2.28 per share. In connection with such
redemption, Bold Street waived certain accrued penalties. Bold Street
received certain "piggyback" registration rights as to the shares of
common stock underlying the warrant. The Company valued the warrant at
$536,000, which was charged as a deemed dividend to accumulated deficit.
On May 3, 2000, pursuant to purchase agreements reached with the
holders, the Company redeemed the remaining 227,352 outstanding shares of
Series B Preferred Stock for an aggregate price of $350,000 and, as an
inducement for the redemptions, issued common stock purchase warrants,
expiring April 30, 2004, to purchase an aggregate of 25,000 shares of the
Company's Common Stock at an exercise price of $1.50 per share. The
Company valued the warrants at an aggregate of $60,000 on the date of
grant, which was charged as a deemed dividend to accumulated deficit.
In connection with the redemption, the holders waived dividends
previously accrued in the amount of $91,000.
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NOTE 13 - SERIES C CONVERTIBLE PREFERRED STOCK
On March 10, 2000, the Company authorized 8,450,000 shares as
Series C Convertible Preferred Stock with a stated value of $0.01 per
share. See additional disclosures under Private Placement in the Note
entitled Bridge Financing and Private Placement.
Liquidation Value
In the event of a liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of the Series C
Preferred Stock will be entitled to receive for each of their shares,
prior and in preference to any distribution to the holders of the Common
Stock or other series of preferred stock, a Liquidation Value equal to
$10.00 per share, plus any accrued and unpaid dividends.
Optional Conversion
Each Series C Preferred Stock is convertible, at the option of the
holder and subject to approval of an amendment to the Company's Articles
of Incorporation authorizing sufficient Common Stock (the "Amendment"),
into a number of shares of Common Stock determined by dividing (A) the
Liquidation Value by (B) the Conversion Price (1.50).
Automatic Conversion
The Series C Preferred Stock automatically converts into shares of
Common Stock at the then Conversion Price if, commencing three months
after the Initial Closing, and the Amendment was adopted, the average
closing bid price of the Common Stock exceeds 300% of the Conversion
Price for 20 consecutive trading days. In addition, the Series C
Preferred Stock automatically converts into shares of Common Stock at the
Conversion Price upon a public offering of the Company's securities
raising gross proceeds in excess of $30,000,000.
Ranking
The Company cannot create or authorize any other stock ranking
senior to the Series C Preferred Stock.
Anti-dilution
In the event of any capital reorganization or reclassification of
the Company, or any consolidation or merger of the Company, or sale,
transfer or lease of all or substantially all of its assets which effects
the holders of Common Stock in such a way that entitles them to receive
stock, securities or assets with respect to or in exchange for their
shares, then the holder of the Series C Preferred Stock shall have the
right to purchase and receive such securities or assets as would have
been issued and payable if the holders of the Series C Preferred Stock
had converted their shares into Common Stock immediately prior to such
reorganization, reclassification, consolidation, merger or sale.
If at any time the Company distributes to holders of Common Stock
(i) securities, (ii) property, or (iii) cash, without fair payment, then
the holders of the Series C Preferred Stock, upon conversion, shall be
entitled to receive such securities, property or cash that they would
have received if they had converted their share into Common Stock
immediately prior to the distribution.
In the event the Company at any time issues additional Common
Stock, preferred stock, options, warrants or convertible securities after
the date or issuance of the Series C Preferred Stock, at the purchase
price lower than the Conversion Price, then, subject to certain
exceptions, the Conversion Price will be automatically reduced to such
lower purchase price and the number of shares issuable upon conversion of
the Preferred Shares shall be increased proportionately.
51
<PAGE>
The anti-dilution rights may be waived by a vote of the holders of
at least 20% of the Series C Preferred Stock.
Voting Rights
The holders of Series C Preferred Stock are entitled to one vote
per share of Common Stock issuable upon conversion of the Series C
Preferred Stock as of the record date for any such vote on all matters
submitted to a vote of shareholders of the Company, and the holders of
Series C Preferred Stock will vote as a single class with the holders of
Common Stock on all matters, except as otherwise required under
applicable law and except that the holders of the Series C Preferred
Stock are entitled to elect two directors.
Distribution and Dividends
If any dividend is declared on the Common Stock, the holders of the
Series C Preferred Stock will be entitled to receive dividends pari passu
out of legally available funds as if each such share of the Series C
Preferred Stock had been converted to Common Stock. No dividend shall be
paid on the Common Stock at a rate greater than the rate at which
dividends are paid on the Series C Preferred Stock. Dividends to the
holder of Series C Preferred Stock will be non-cumulative.
Modifications and Waivers
The terms of the Series C Preferred Stock may be amended, modified
or waived by agreement of the Company, the Placement Agent and a
committee to be designated by the Placement Agent whose members hold in
the aggregate not less than 20% of the outstanding Series C Preferred
Stock and 20% of the outstanding Warrants (the "Committee"); provided
however, that no such amendment, modification or waiver which would
decrease the number of Conversion Shares issuable upon the exercise of
the Series C Preferred Stock, or increase the Conversion Price therefore
(other than as a result of the waiver or modification of any
anti-dilution provisions) may be made without approval of the holders of
at least 50% of the outstanding Series C Preferred Stock.
NOTE 14 - COMMON STOCK TO BE DISTRIBUTED
June 30,
2000 1999
---- ----
Common stock to be distributed consists of:
Series A Preferred Stock Dividend (43,000 shares) $ -- $ 43,000
Relinquishment of "Put Rights" (200,000 shares) 200,000
-------- ---------
$ -- $ 243,000
======== =========
Series A Preferred Stock Dividend
Series A Preferred Stock dividends for the last three-quarters of
fiscal 1999 had been declared but not issued at June 30, 1999.
Relinquishment of "Put Rights"
As described in the Note to these financial statements entitled
"Litigation", on April 29, 1999, certain former noteholders holding
approximately 83,500 shares of Common Stock, agreed to waive their
guarantee and "put" rights in return for the issuance of 200,000
restricted shares of the Company's Common Stock.
52
<PAGE>
NOTE 15 - STOCK OPTIONS
Stock Option Plan
In September 1992, the Company adopted a combined incentive and a
non-qualified stock option plan (the "Plan"), which, as amended, provides
for the issuance of 2,680,000 shares of Common Stock under the Plan.
Stock options have been granted under the Plan and outside the Plan
at the fair market value of the Common Stock on the date of grant and
generally vest over a period of between two and four years. Options
granted under the Plan generally must be exercised no later than 10 years
from the date of grant. Included in the option grants for the year ended
June 30, 1999, are options issued by the Company to purchase 450,000
shares of Common Stock, to various consultants with exercise prices
ranging from $2.25 to $3.81 per share with a value of $449,000 at date of
issuance. As of June 30, 2000, all options had been canceled.
Directors who are not employees of the Company each 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.
The following table summarizes information about stock options
outstanding both under the Plan and outside the Plan at June 30, 2000:
<TABLE>
<CAPTION>
Outstanding Options Options Exercisable
------------------- -------------------
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Number Exercise Number
Exercise Price Life Price Outstanding Price Exercisable
-------------- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.00 - $1.00 8.44 $0.70 1,078,934 $0.73 958,934
$1.00 - $1.50 9.68 $1.46 1,140,000 $1.19 92,000
$1.50 - $2.50 9.61 $2.40 688,750 $ -- --
$2.50 - $3.00 8.38 $2.56 297,500 $2.56 106,375
$3.00 - $8.00 9.04 $4.79 423,500 $5.02 127,900
--------- ---------
3,628,684 1,285,209
========= =========
</TABLE>
Stock option transactions relating to both options granted under
the Plan and other stock options (discussed below) for the years ended
June 30, 1999 and 2000 were are follows:
53
<PAGE>
<TABLE>
<CAPTION>
Under The Plan Weighted Outside The Plan Weighted
Weighted Average Average Weighted Average Average
Number of Exercise Price Number of Exercise Price
Options Outstanding Shares Per Share Shares Per Share
------------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1998 607,281 $3.51 600,000 $1.00
Granted 1,690,000 $2.56 3,150,000 $2.38
Exercised (5,000) $1.58 -- --
Cancelled (517,500) $3.72 (2,218,416) $2.98
---------- ----------
Balance at June 30, 1999 1,774,781 $2.55 1,531,584 $1.11
Granted 903,750 $2.67 1,350,000 $1.74
Exercised (178,328) $0.90 -- --
Cancelled (890,172) $3.19 (862,931) $1.31
---------- ---------
Balance at June 30, 2000 1,610,031 $2.45 2,018,653 $1.44
========== =========
Exercisable at June 30, 2000 616,556 $1.89 668,653 $1.19
======= =======
</TABLE>
Fair Value Disclosures
Had compensation expense for the 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,
2000 1999
------------------------------------------------
<S> <C> <C> <C>
Net loss available to common stockholders As reported ($54,270,000) ($6,931,000)
after provision for preferred stock Pro forma (55,011,000) (8,138,000)
dividends
Basic and diluted loss per share As reported $(2.26) $(.51)
Pro forma $(2.29) $(.60)
</TABLE>
The weighted average fair value of options granted during the year
ended June 30, 2000 and 1999 under the Company's stock option plan was
$1.74 and $1.63 per option, respectively. In determining the minimum fair
value of each option, the Company used the Black-Scholes option-pricing
model as prescribed by SFAS No. 123 using the following assumptions:
dividend yield of zero; expected volatility of 90% for 2000 and 1999; an
average risk-free interest rate of 5.9% and 5.6%, respectively; and an
average expected option life of 3.5 years.
Other Stock Options Granted Outside the Plan
On August 21, 1998, the Company granted options to a former Chief
Executive Officer (Mr. Peirce) to purchase 1,000,000 shares of the
Company's Common Stock at $3.438 per share, the estimated fair market
value at date of grant. In November 1998, the Company and Mr. Peirce
54
<PAGE>
agreed to cancel the original 1,000,000 share option and the Company
granted Mr. Peirce an option to purchase 1,300,000 shares of the
Company's Common Stock, exercisable at $2.563 per share, the estimated
fair market value at date of the grant, for ten years from November 23,
1998. Of such options, options to purchase 39,016 shares were granted as
incentive stock options under the Company's Plan. As of Mr. Peirce's
March 19, 1999 resignation, options to purchase 189,583 shares were
vested.
In addition to the options granted under the Plan, on August 4,
1997, the Company granted to an employee 600,000 options to purchase
Common Stock at an exercise price of $1.00 per share, the market price at
date of grant. The options vest ten percent on date of grant and three
percent per month thereafter. On November 21, 1997, the Company agreed to
pay to the employee any additional income taxes which the employee may
incur as a result of the options being non-qualified stock options as
compared to incentive stock options. Due to this agreement, the stock
options are being accounted for as variable stock options which results
in recognition of compensation expense based on the fair market value of
the common stock at the end of each reporting period. During the year
ended June 30, 1999, the Company recognized $1,327,000 as a credit to
compensation expense, which equals the amount previously charged to
operations in the prior years.
On May 13, 1999, the Board of Directors granted non-qualified stock
options (not under the Plan) to two former executives of the Company. The
former President was granted 600,000 options to purchase common stock
exercisable at $0.844 per share for ten years. The option vests 50% at
date of grant, with the balance vesting 1/12 per month thereafter. The
former Chief Financial Officer was granted 250,000 options to purchase
Common Stock with identical exercise price and vesting terms.
On February 15, 2000, the Board of Directors granted 350,000
non-qualified stock options (not under the Plan) to an executive officer.
The options are exercisable at $2.43 per share, which equals the fair
market value at the date of grant, with 116,666 shares vesting annually
on February 15. The options expire on the earlier of ten years from the
grant date or one year after cessation of the optionee's relationship
with the Company.
On March 29, 2000, the Company issued each of the four new members
of the Board a nonqualified stock option for 250,000 shares of the
Company's Common Stock. The options are exercisable at $1.50 per share,
vest one third per yearly anniversary date following grant date and
expire on the earlier of ten years from the grant date or one year after
cessation of the optionee's relationship with the Company. Since the
exercise price for the options was less than the market price of the
Common Stock ($6.00) on the date of issue, the Company valued the options
under APB 25 at an aggregate of $4.5 million. The value will be charged
to compensation expense over the vesting period of the options. For the
year ended June 30, 2000, the Company charged $381,000 to compensation
expense.
In connection with stock options granted and to be granted and
warrants issued, the Company has reserved 4,912,462 shares of Common
Stock at June 30, 2000.
55
<PAGE>
NOTE 16 - STOCK WARRANTS
The following table summarizes information about stock warrants
outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Outstanding Warrants Warrants Exercisable
-------------------- --------------------
Weighted Weighted
Average Average
Range of Exercise Number Exercise Number
Exercise Price Price Outstanding Price Exercisable
-------------- ------- ----------- -------- -----------
<S> <C> <C> <C> <C>
$0.10 $0.10 6,288,000 $0.10 6,288,000
$0.88 $0.88 2,687,500 $0.88 2,687,500
$1.49 $1.47 2,687,500 $1.47 1,567,619
$1.50 $1.50 10,104,560 $1.50 10,104,560
$1.59 - $6.00 $2.67 880,432 $2.67 880,432
---------- ----------
22,647,992 21,528,111
========== ==========
</TABLE>
Prior to going public, the Company issued a warrant to purchase
a total of 150,000 shares of Common Stock to a former officer,
exercisable at $4.00 per share until April 2003. The officer's Warrants
do not have registration rights. In fiscal 1993, the Company also issued
warrants to one director of the Company to purchase 100,000 shares of
Common Stock at $4.00 per share. These were set to expire April 12, 1998
but were extended to February 7, 1999. The Company recorded a charge of
$156,000 in connection with the extension of these warrants. The 100,000
warrants expired in February 1999.
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 expired on
December 2, 1998.
In fiscal 1994, in conjunction with an acquisition, the Company
issued warrants to four former shareholders to purchase 29,548 shares of
Common Stock at $2.625 per share, which were fully vested at the date of
issuance. Of those warrants, 17,406 had been exercised, and the 12,142
balance expired as of May 31, 1999.
In August 1997, the Company issued stock warrants to Liviakis
Financial Communications, Inc. and its affiliates. The warrants entitled
the holders to purchase up to 1,600,000 shares of the Company's Common
Stock at $.01 per share during the period from January 15, 1998 through
August 4, 2002. The warrant shares have certain registration rights and
antidilution provisions. 1,200,000 of these warrants were exercised in
fiscal 1998 with the remaining 400,000 warrants exercised in fiscal 1999.
In connection with the private offering of 8% Convertible
Debentures in December 1997, the Company issued a warrant as part of the
finder's fee payment related to the offering. The warrant entitled the
holder to purchase 50,000 shares of Common Stock at $6.525 per share
during the period from December 10, 1997, through December 9, 2000. The
warrant also provided for cashless exercise. The warrant contained
antidilution protection and "piggyback" registration rights applicable to
the Common Stock issuable upon exercise of the warrant. These warrants
had been exercised as of June 30, 2000.
56
<PAGE>
In March 1998, the Company issued a warrant to entrenet Group, LLC
to purchase 10,435 shares of Common Stock at $5.75 per share as a
consulting fee. The warrant expires on March 11, 2003. The warrant has
antidilution provisions and "piggyback" registration rights applicable to
the Common Stock issuable upon exercise of the warrant. In September
1998, as a consulting fee the Company issued additional warrants to
purchase 8,333 shares of Common Stock at $2.40 per share exercisable
through September 2003.
In July 1998, the Company issued Common Stock purchase warrants to
RBB Bank Aktiengesellschaft ("RBB Bank") 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.
In conjunction with the July 1998 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, with a fair value
of $218,000, to purchase a total of 100,000 shares of Common Stock,
exercisable at $4.50 per share.
In September 1998, the Company agreed with four holders of its
Series A Preferred Stock to redemption of 833,000 shares of Series A
Preferred Stock. In conjunction with that redemption, the Company issued
three year Common Stock purchase warrants covering a total of 212,266
shares of Common Stock to the four Series A Preferred Stock holders who
participated in the partial redemption. The Series A Redemption Warrants
were issued as of October 15, November 15 and December 15, 1998. As of
June 30, 1999, the warrants had not been exercised. Also in September
1998, the Company agreed to issue warrants to purchase 15,000 shares of
Common Stock exercisable at $2.70 per share through September 13, 2001,
to JW Genesis Securities, Inc. for its assistance in negotiating the
partial redemption of the Series A Preferred Stock. These shares had a
fair value of $17,000 on the date of issuance which has been recorded as
general and administrative expense. The shares of Common Stock underlying
the warrants have "piggy-back" registration rights.
In conjunction with the issuance of the Series B Preferred Stock in
May 1999, the Company issued a Common Stock purchase warrants exercisable
until April 30, 2004, to purchase 300,000 shares of Common Stock at $1.50
per share, to the cash purchaser of the Series B Preferred Stock.
In conjunction with a $500,000 loan to the Company from Mr. Chuck
Burtzloff, the CEO and 50% shareholder of Cardservice International, Inc,
in October 1998, the Company issued a Common Stock purchase warrant
exercisable to purchase 25,000 shares of Common Stock at $3.038 per share
through October 27, 2001. The warrant had a fair value of $52,000 at date
of issuance which has been recorded as interest expense.
As part of an employment agreement, the Company issued warrants to
an executive, to purchase up to 5,375,000 shares of the Company's Common
Stock. Half of the warrants, or 2,687,500, are exercisable at $.875 per
share, the market price of the underlying stock at May 3, 1999, the date
of grant, and vest 10% upon grant with the balance vesting over the
following 12 months. The second 2,687,500 warrants have an exercise price
of $1.465 (originally $3.00) per share and vest 50% one year following
the grant date with the remaining balance vesting over the following six
months.
57
<PAGE>
On January 20, 2000, the Company issued a 22,500 share Common Stock
purchase warrant to RBB Bank as an inducement to redeem shares of Series
B Preferred Stock held by RBB Bank, exercisable at $1.50 per share. The
warrant vests immediately, was issued with an exercise price equal to the
market price of the underlying stock on the date of grant, and expires on
July 6, 2004. The Company valued the warrant at $32,000, which was
charged as a deemed dividend to retained earnings.
On March 15, 2000, the Company retained a firm to provide investor
relations services. In addition to monthly fees and expenses, the Company
agreed to issue a 15,000 share Common Stock purchase warrant each year
for the next three years. The warrants vest one year after date of grant,
are issued with an exercise price equal to the market price of the
underlying stock on the date of grant, and expire five years from the
vesting date. The first year grant was issued on March 28, 2000,
exercisable at $5.344 per share, which the Company valued at $52,000. The
Company charged investor relations expense.
On March 28, 2000, the Company issued a 50,000 share Common Stock
purchase warrant to an executive search firm, exercisable at $5.344 per
share. The warrant vests immediately, was issued with an exercise price
equal to the market price of the underlying stock on the date of grant,
and expires March 27, 2005. The Company valued the warrant at $95,000
(based on the market value of the services received less cash paid),
which was charged as executive search expense.
On May 4, 2000, the Company issued a 25,000 share Common Stock
purchase warrant to an executive search firm, exercisable at $3.1875 per
share. The warrant vests immediately, was issued with an exercise price
equal to the market price of the underlying stock on the date of grant,
and expires May 3, 2005. The Company valued the warrant at $25,000 (based
on the market value of the services received less cash paid), which was
charged as executive search expense.
On June 30, 2000, the Company issued a 100,000 share Common Stock
purchase warrant to James C. Free for consulting services, exercisable at
$2.4688 per share. The warrant vests immediately, was issued with an
exercise price equal to the market price of the underlying stock on the
date of grant, and expires June 30, 2005. The Company valued the warrant
at $159,000, which was charged as consulting expense.
NOTE 17 - WARRANTS TO PURCHASE UNITS
As part of their compensation related to the Private Placement,
Commonwealth and PJSC received warrants to purchase an aggregate of
167.599 Units (which are identical to the units sold in the Private
Placement). The warrants are exercisable at $100,000 per Unit commencing
on the date of issuance and for seven years thereafter. The Company
valued the unit warrants at $6.15 million.
See additional disclosures under the caption Private Placement in
the Note entitled "Bridge Financing and Private Placement"
NOTE 18 - BENEFICIAL CONVERSION FEATURE - SERIES C PREFERRED STOCK
The value of the "in the money" conversion feature for the Series C
Preferred Stock as of the closings of the Private Placement approximated
$44.114 million. The value was charged as deemed dividends, which
increased accumulated deficit for the fiscal year ended June 30, 2000.
58
<PAGE>
The "in the money" conversion feature was calculated on each closing of
the Private Placement as the difference in the market price of the
Company's Common Stock on the date of such closing versus the conversion
price of the Series C Preferred Stock multiplied by the number of shares
of Common Stock that the Series C Preferred Stock would convert into. The
"in the money" conversion feature is limited to the gross proceeds less
the valuation of the associated Common Stock warrants.
NOTE 19 - INCOME TAXES
At June 30, 2000 and 1999, the Company had net operating loss
carry-forwards for federal and state income tax purposes of approximately
$36 million and $26 million, respectively. Annual utilization of the loss
carry-forwards 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 carry-forwards. Future changes in ownership could
further reduce the annual availability of these benefits. If unused, the
carry-forwards will expire beginning in 2008.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, and operating loss and tax credit carry-forwards. The tax
effects of significant items comprising the Company's deferred taxes are
as follows:
June 30,
2000 1999
---- ----
Deferred tax assets
Net operating loss carry-forwards $ 13,563,000 $ 9,721,000
Inventory reserves 185,000 9,000
Allowance for bad debts 28,000 8,000
Other 77,000 (23,000)
------------ ----------
$ 13,853,000 $ 9,715,000
Valuation allowance (13,853,000) (9,715,000)
------------ -----------
Net deferred tax asset $ -- $ --
============ ===========
The Company has recorded a full valuation allowance on its net
deferred tax assets based on current evidence which indicates that it is
considered more likely than not that these benefits will not be realized.
The valuation allowance increased during fiscal 2000 and 1999 by
$4,138,000 and $1,487,000 respectively, due to additional losses for
which no tax benefits were recorded.
NOTE 20 - SALE OF CREDIT CARD PORTFOLIO
On July 7, 1999, the Company sold a portion of its merchant credit
card portfolio to PMT Services Inc., a wholly owned subsidiary of Nova
Corporation. The transaction resulted in a cash payment to the Company of
$450,000. The sale included approximately 450 installed Company owned
TRANZ Enabler point-of-sale devices deployed with a portion of the
respective merchants. A gain of $124,000 was recorded on the sale as
other income.
59
<PAGE>
NOTE 21 - 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, subject to certain limitations
imposed by current tax law and regulations. The Company did not make any
contributions to the Plan during fiscal year 2000 or 1999.
NOTE 22 - RELATED PARTIES
Transactions with Cardservice International, Inc.
Until May 1999, a director of the Company was also an officer of
the Company's largest customer, Cardservice International, Inc. ("CSI").
Another officer and director of the Company was a "nonvoting" director of
CSI. Sales to CSI approximated $310,000 and $564,000 in fiscal 2000 and
1999, respectively.
On October 28, 1998, the Company borrowed $500,000 from the CEO and
50% owner of CSI. The note bore interest at 8% per annum and was payable
in full on the earlier of the receipt by the Company of proceeds from the
sale of the Company's Common Stock to this individual or January 1, 1999.
In consideration for the loan, the Company also agreed to issue a Common
Stock purchase warrant exercisable to purchase 25,000 shares of Common
Stock at $3.038 per share through October 27, 2001. On March 19, 1999,
the Company and the noteholder agreed to convert the principal and
accrued interest into 589,213 shares of Common Stock. The shares were
issued on June 24, 1999.
Transactions with Liviakis Financial Communications, Inc.
In July of 1997, the Company entered into a Consulting Agreement
with Liviakis Financial Communications, Inc. and its affiliates ("LFC")
pursuant to which LFC agreed to provide the Company with financial and
business consulting and public and investor relations services. The
Company was obligated to pay LFC consulting fees of $10,000 in cash and
300,000 shares of its Common Stock over the one-year term of the
Consulting Agreement. Pursuant to the Consulting Agreement, the Company
was also obligated to pay LFC cash equal to 2.5% of the gross proceeds
received in any direct financing located for the Company by LFC.
The Company also sold a total of 3,500,000 shares of Common Stock
and warrants to purchase up to an additional 1,600,000 shares of Common
Stock exercisable at $.01 per share to two LFC affiliates in August 1997
for $500,000 in cash. The warrants were exercised during fiscal 1998 and
1999. Pursuant to this transaction, LFC and these affiliates became
significant shareholders of the Company. The Common Stock issued for
cash, under the Consulting Agreement and upon exercise of the warrants to
LFC and its affiliates, has certain registration rights.
In conjunction with the July 1998 closing of the sale of $2,000,000
of 6% Convertible Subordinated Debentures due July 21, 2000, LFC was paid
$50,000, as a finder's fee.
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 received 290,000 shares of Common Stock, issuable
as a signing bonus upon execution of the New LFC Agreement. The Common
Stock issued to LFC under the new Consulting Agreement has 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 agreed not to sell such shares
before February 1, 1999.
60
<PAGE>
On September 22, 1998, the Company borrowed $1,300,000 from LFC
under a note payable, which was due April 1, 1999, and bore interest at
8% per year. The Company used $1 million of the proceeds to redeem
$833,000 of its Series A Convertible Preferred Stock. Substantially all
available intangible assets of the Company were pledged to collateralize
the note. During the period from November 1998 through February 1999, the
Company received bridge loans from LFC totaling $690,000 and issuing 8%
notes payable due April 1, 1999. On March 19, 1999, the Company and
Liviakis Financial Communications agreed to the conversion of $1,990,000
of principal plus accrued interest to 2,344,458 shares of Common Stock.
The shares were issued on June 24, 1999.
On March 12, 1999, LFC guaranteed the RBB Promissory Note for
$250,000.
On July 1, 1999, the Company entered into an agreement with LFC, to
provide the Company with public relations and investor relations services
through March 15, 2000. The Company issued 690,000 restricted shares of
Common Stock to LFC for its services under this agreement. LFC was
entitled to receive a 2.5% cash finder's fee for financing located by LFC
and a 2% finder's fee based on the "total consideration provided" through
any acquisition located by LFC. The Company recorded a charge to
consulting expense of $352,000 for the valuation of the shares. LFC
agreed not to sell any of the Common Stock during the term of the
consulting services agreement.
In December 1999, the Company issued 443,077 restricted shares of
Common Stock to John M. Liviakis, the principal owner of LFC, and a
significant Company shareholder, to replace shares transferred to a
finder in conjunction with the May 1999 Series B Preferred Stock
financing.
LFC, its present and former affiliates previously agreed not to
sell any Common Stock acquired in these various transactions prior to
March 15, 2000, which is the end of the most recent consulting agreement
term.
In order to induce Commonwealth to consummate the Private
Placement, Mr. Liviakis and LFC agreed that for a period beginning on
March 15, 2000 and ending on the first anniversary of the final closing
of the Private Placement (the "Lock-up Period"), they will not sell,
transfer or otherwise dispose of any securities of the Company that were
owned by either of them as of March 14, 2000 or acquired during the
Lock-up Period, except for an aggregate of 1,139,000 shares which may be
transferred or sold under certain conditions.
Transactions with entrenet Group, LLC
Prior to the Private Placement, entrenet Group, LLC was a
significant shareholder. 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 was for six months from March 12,
1998 and renewed for additional six-month terms unless at least 60 days
notice was given to terminate the agreement prior to the end of a term.
For its advisory services under the agreement, entrenet was paid a fee
of $60,000 plus interest in July 1998. In addition, entrenet received a
common stock purchase warrant to purchase 10,435 shares at $5.75 per
share, exercisable until March 11, 2003. The Consulting Agreement was
terminated in September 1998. The Company agreed to pay the remaining
fees to entrenet of $20,000 and issued a common stock purchase warrant
for 8,333 shares exercisable at $2.40 per share until September 11,
2003. The shares issuable on exercise of this warrant carry certain
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registration rights. No warrants have been exercised as of June 30, 2000.
entrenet is entitled to receive certain finder's fees on future
financings between the Company and certain specified parties within two
years of September 12, 1998. A financing requiring payment of a fee to
entrenet had not occurred as of June 30, 2000.
Other
Commonwealth has been retained by the Company to provide financial
advisory and other investment banking services. A $25,000 prepayment is
included in other current assets at June 30, 2000.
See additional disclosures of related party transactions in the
Notes entitled "Bridge Financing and Private Placement" and "Subsequent
Events". Also see the Note entitled "Stock Options" for disclosures of
options granted to the Board of Directors.
NOTE 23 - DEBT EXTINGUISHMENT
On March 19, 1999, the Company and Liviakis Financial
Communications, Inc., and Charles Burtzloff, CEO and 50% owner of
Cardservice International, holders of the Company's 8% notes payable,
agreed to convert $2,490,000 of principal plus accrued interest to
2,933,671 shares of Common Stock at the rate of $.875 per share. This
rate was established at a 20% discount from the closing price of the
Common Stock as of March 18, 1999. The market price on the actual date of
issuance of the shares of Common Stock (June 24, 1999) was $.60 per share
and therefore the transaction resulted in an extraordinary gain of
$807,000.
NOTE 24 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information:
$332,000 and $0 cash paid for interest for the year ended June 30,
2000 and 1999, respectively.
Supplemental disclosure of non-cash financing and investing
activities:
Year ended June 30, 2000
1. Issuance of 727,273 shares of Common Stock, paid by reducing notes
payable of $450,000.
2. Conversion of $1,000,000 6% convertible debenture into 718,018
shares of Common Stock.
3. Accretion on mandatory redeemable preferred stock of $982,000,
including accrued dividends of $84,000.
4. Conversion of 751,610 shares of Series A preferred stock and accrued
dividends to 1,134,113 shares of Common Stock.
5. Issuance of 443,077 shares of Common Stock to Liviakis Financial
Communications.
6. Issuance of 243,000 shares of Common Stock distributable.
7. Issuance of warrants to purchase 197,500 shares of Common Stock as
an inducement for the redemption of Series B preferred stock.
8. Recording of "in the money conversion feature" on Series C preferred
stock for $44,114,000 reflected as a preferred stock dividend.
9. Series B preferred stock dividends waived in the amount of $91,000.
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Year ended June 30, 1999
1. Conversion of $2,567,000 notes payable and interest to 2,934,000
shares of Common Stock.
2. Conversion of 1,475,000 shares of Series A preferred stock to
1,323,000 shares of Common Stock.
3. Conversion of redeemable warrants to 400,000 shares of Common Stock.
4. Expiration of put rights on 45,000 shares of redeemable Common
Stock.
5. Relinquishment of put rights on 83,000 shares of redeemable Common
Stock.
6. Issuance of warrants to purchase 300,000 shares of Common Stock to
purchaser of Series B preferred stock.
7. Recording of "in the money conversion feature" on Series B preferred
stock for $391,000.
8. Series A preferred stock redemption premium of $167,000 and
reclassification of paid in capital to retained earnings of
$114,000 reflected as a preferred stock dividend.
9. The majority shareholder agreed to transfer a total of 443,000
shares of the Company's Common Stock owned by him to the finder who
located the cash purchaser of the Series B preferred Stock. The
shares had a value of $360,000 on date of transfer.
10. Declaration of $137,000 dividends on Series A and Series B preferred
stock.
11. Purchase of software in exchange for 375,000 shares of Common Stock.
12. Accretion on mandatorily redeemable preferred stock of $571,000
NOTE 25 - COMMITMENTS AND CONTINGENCIES
The Company leases office facilities in Colorado and New York
expiring January 16, 2003 and May 31, 2010, respectively. Future minimum
lease commitments are $588,000, $689,000, $652,000, $608,000, $613,000
for each of the years ending June 30, 2001 through 2005 and $3,279,000
thereafter. As a security deposit for the Company's New York facility,
the Company maintains a letter of credit in the amount of $456,300. The
Company has restricted cash of $459,000 on deposit in a money market fund
maintained by the bank as collateral for the letter of credit.
The Company is obligated through September 29, 2001 under a lease
for its former office facility located in New York, which the Company
vacated as of the close of business on August 31, 2000. Future minimum
lease commitments for the year ending June 30, 2001 and for the period
July 1, 2001 through the date of expiration are $219,000 and $55,000,
respectively. The Company has subleased this facility for the balance of
the Company's lease term. Future rental income is expected to be $212,000
for fiscal year 2001 and $64,000 for fiscal year 2002. The associated
costs of effectuating the sublease approximate the excess sublease
revenue.
The Company has employment agreements with two of its executive
officers. The agreements are for initial terms of two years, with
automatic one-year extensions after the initial term. On May 4, 2000, the
Board approved an increase in Mr. Leavitt's annual salary to $250,000.
The Board also approved a bonus of $200,000 to Mr. Leavitt for the year
ending May 3, 2000, the first anniversary of Mr. Leavitt's position as
Chairman and Chief Executive Officer. As of June 30, 2000, the employment
agreements commit the Company to annual salary compensation of $425,000
and annual discretionary bonuses. The agreements include provisions for
severance payments upon termination under certain conditions.
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The Company entered into certain agreements that include various
marketing, distribution and CDPD service purchase terms. The agreement
with AT&T Wireless includes purchase obligations for a term of three
years, with automatic renewals of additional one-year terms if either
party fails to give 90 days prior notice of termination at the end of
term. The Company is obligated to maintain a minimum number of active
CDPD addresses over the term of the agreement, or pay for such addresses
even if the Company has not resold the numbers to merchants. Based on the
agreement of April 1, 1997, the Company is obligated to have minimum
monthly CDPD billings of $13,500. The Company believes the exposure under
this agreement is immaterial at June 30, 2000.
Under one of the Company's transaction processing agreements, the
Company is required to pay 50 percent of the amounts due to the processor
from the merchant, which remain unpaid for 60 days. As of June 30, 2000
and 1999, no amounts were due.
See additional disclosure regarding the Economic Participation
Agreements in the Note entitled "Bridge Financing and Private Placement."
In addition, see additional disclosures in the Notes entitled
"Litigation" and "Subsequent Events."
NOTE 26 - LITIGATION
In April 1998, the Company entered into an agreement with certain
former noteholders of its Demand Notes under which the Company issued
525,800 shares of Common Stock in settlement of the dispute regarding
conversion terms of their notes. Terms of the settlement entitled the
noteholders to certain guarantee and/or "put" provisions related to the
shares issued in conversion of the notes. The shares originally issued
upon conversion of the notes and the additional shares resulting from the
settlement were reflected as redeemable Common Stock on the balance
sheet. The guarantee expired as to all shares on June 19, 1999. The "put"
expired as to all shares on June 24, 1999. As of June 30, 1999, the "put"
provisions related to the shares had expired or been relinquished in
return for the Company's agreement to issue up to 200,000 shares of
Common Stock to certain holders who had exercised their "put" rights. In
the fourth fiscal quarter of 1999, $49,000 was accrued to reflect the
settlement. The agreement has been executed and 200,000 shares of Common
Stock were issued on February 22, 2000.
Note 27 - SUBSEQUENT EVENTS
The following items, were approved by our shareholders at the
Company's meeting of shareholders held on September 7, 2000: (1)
re-election of the Company's entire Board of Directors, (2) approval of
the Company's change of domicile from Colorado to Delaware, (3) approval
of an amendment to the Company's charter to authorize the issuance of up
to 225,000,000 shares of which, 200,000,000 shall be Common Stock, no par
value per share, and 25,000,000 shall be Preferred Stock, no par value
per share, (4) approval of a one-for-four reverse stock split of the
Company's Common Stock, (5) approval of the Company's new stock option
plan and (6) ratification of M.R. Weiser & Co.LLP as the Company's
accountants for the fiscal year ended June 30, 2000.
The reverse split and the change of the Company's domicile from
Colorado to Delaware will become effective subsequent to filing the
Annual Report on Form 10-KSB for the fiscal year ended June 30, 2000. The
Company amended its charter on September 22, 2000 for the increase to
authorized shares. The amendment also removed the designation for Series
B Preferred Stock.
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Also effective September 7, 2000, unit purchase warrants to
purchase units consisting of (a) Series C Convertible Preferred Stock and
(b) additional warrants to purchase Common Stock at $1.50 per share were
amended so that such warrants are now exercisable, at $1.50 per share,
solely for the total number of shares of Common Stock into which the
underlying Series C Convertible Preferred Stock and warrants would have
been convertible and exercisable. The modified warrants are held by
Commonwealth Associates and Peter J. Solomon Securities Company Limited.
The change does not change the aggregate number of shares of Common Stock
which the holders would have received upon exercise in full of the unit
purchase warrants and conversion and exercise in full of the underlying
securities. The change also does not affect the aggregate purchase price
which such holders would have paid for the underlying Common Stock.
The new stock option plan reserves 15,000,000 shares of Common
Stock for issuance pursuant to options that may be granted under the
plan. On September 7, 2000, the Company granted options to certain
employees to purchase 3,451,000 shares of Common Stock. The options are
exercisable at $1.875 per share, the market price of the Company's Common
Stock on the date of grant. The options vest one-third per yearly grant
date anniversary and expire ten years from the date of grant.
The Company effected the authorized increase to capital by filing
an Amendment to its Articles of Incorporation with the Colorado Secretary
of State on September 22, 2000. Total authorized capital consists of
225,000,000 shares, 200,000,000 or which are no par value Common Stock
and 25,000,000 of which are no par value Preferred Stock.
Pursuant to an extension of the time allowed by ComVest Capital
Management and Dean M. Leavitt, to implement this increase in capital,
the Economic Participation Agreements (which provided certain rights to
such persons if the Company was able to obtain sufficient authorized
capital to allow exercise of certain Common Stock purchase warrants held
by them) has been satisfied and the rights under it are no longer
exercisable.
The Company signed an employment agreement with an individual for
the position of Senior Vice President, Chief Financial Officer and
Treasurer. The agreement becomes effective on the start date of the
executive's employment, expected to begin by the end of September, 2000,
and has a term of two years, subject to automatic renewal for one-year
terms if not terminated by either party at least ninety days prior to the
end of each term. The executive is entitled to receive a base salary of
$225,000 per year, plus reimbursement of customary business expenses. The
executive is guaranteed a first year bonus of $50,000. In addition, the
Company has agreed to cover the costs of the executive's relocation
expenses up to $50,000. The agreements include provisions for severance
payments upon termination under certain conditions. The executive will
also be granted an option to purchase 400,000 shares of Common Stock at
an exercise price determined as of the close of business on the date he
begins his employment.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item will be included in our Proxy
Statement for the 2000 Annual Meeting of the Shareholders under the caption
"Directors and Executive Officers" which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended June 30, 2000, and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item will be included in our Proxy
Statement for the 2000 Annual Meeting of the Shareholders under the caption
"Executive Compensation" which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the fiscal year ended June
30, 2000, and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The information required by this Item will be included in our Proxy
Statement for the 2000 Annual Meeting of the Shareholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the fiscal year ended June 30, 2000, and is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in our Proxy
Statement for the 2000 Annual Meeting of the Shareholders under the caption
"Certain Relationships and Related Transactions" which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
fiscal year ended June 30, 2000, and is incorporated herein by reference.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our officers, directors, and persons owning more than
ten percent of a registered class of our equity securities ("ten percent
shareholders") to file reports of ownership and changes of ownership with the
SEC. Officers, directors, and ten-percent shareholders are required by SEC
regulations to furnish us with copies of all Section 16(a) reports they file
with the SEC.
To our knowledge, based solely on our review of the copies of such reports
and amendments thereto furnished to us, and written representations that no
other reports were required, we believe that during our fiscal year ended June
30, 2000, the above requirements were met.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Number Description of Exhibit
-------------- ----------------------
3.1 Amended Articles of Incorporation (8)
3.2 Articles of Amendment to the Articles of Incorporation (including
Designation of Series B Cumulative Convertible Redeemable Preferred
Stock) filed by us on April 29, 1999 (18)
3.3 Articles of Amendment to Articles of Incorporation (including Removal
from Designation of Series A Preferred Stock) filed by us with the
Colorado Secretary of State on March 9, 2000 (including Certificate of
Correction filed March 16, 2000) *
3.4 Articles of Amendment to Articles of Incorporation (including
Designation of Series C Convertible Redeemable Preferred Stock) filed
by us with the Colorado Secretary of State on March 10, 2000
(including Certificate of Correction filed March 16, 2000) (25)
3.5 Articles of Amendment to Articles of Incorporation filed with the
Colorado Secretary of State on September 22, 2000 (including removal
from Designation of Series B Preferred Stock) *
3.6 Amended Bylaws (3)
4.1 Specimen Common Stock Certificate (4)
4.2 1992 Stock Option Plan, as amended (7)
4.3 2000 Stock Option Plan (including forms) (29)
4.4 Common Stock Purchase Warrant issued to Kenneth DeJohn on or about May
1, 1993 (5)
4.5 Form of Common Stock Purchase Warrant issued to John Liviakis and
Robert Prag as of August 4, 1997 (included in Exhibit 10.11)
4.6 Common Stock Purchase Warrant dated December 10, 1997 issued to JW
Genesis Securities, Inc. (10)
4.7 Common Stock Purchase Warrant dated March 12, 1998, issued to entrenet
Group, LLC (12)
4.8 Common Stock Purchase Warrant issued to James B. Walters on or about
April 12, 1993 (5)
4.9 Agreement to Amend Stock Purchase Warrant effective April 1, 1998 with
James Walters (13)
4.10 Common Stock Purchase Warrant dated June 26, 1998 issued to RBB Bank
Aktiengesellschaft (13)
4.11 Form of Common Stock Purchase Warrant issued to a 6% Debenture
Purchasers and JW Genesis Securities, Inc. as of July 21-27, 1998 (11)
4.12 Form of Registration Rights Agreement for 6% Convertible Subordinated
Debentures Due July 21, 2000 and Common Stock Purchase Warrant issued
to 6% Debenture Purchasers and JW Genesis Securities, Inc. as of July
21-27, 1998 (11)
4.13 Form of Common Stock Purchase Warrants issued to Certain Holders of
Series A Preferred Stock participating in the modifications to the
terms of the Series A Preferred Stock (which was effective as of
September 17, 1998) (15)
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4.14 Form of Common Stock Purchase Warrant issued to Charles Burtzloff in
conjunction with the $500,000 loan made to us as of November 1, 1998
(15)
4.15 Form of Warrant issued by us (24)
4.16 Commitment Letter dated as of December 30, 1999, between us and the
bank affiliate lender (24)
4.17 Form of 8% Senior Secured Promissory Note (24)
4.18 Form of General Security Agreement dated as of December 30, 1999,
between us and the lenders (24)
4.19 Letter dated as of December 30, 1999, addressed to the lender from
Dean M. Leavitt (24)
4.20 Form of Unit Warrant (25)
4.21 Form of Subscription Agreement (25)
4.22 Form of Placement Agent Warrant (25)
4.23 Form of Peter J. Solomon Securities Company Limited Warrant (25)
4.24 Form of Bold Street, LLC Warrant (25)
4.25 Form of Warrant Amendment Agreement, dated as of September 7, 2000, by
and between U.S. Wireless Data, Inc. and unit purchase warrant holders
(26)
4.26 Common Stock Purchase Warrant issued to Dean M. Leavitt as of May 3,
1999 (19)
4.27 Form of Stock Option Agreement under 1992 Stock Option Plan (23)
4.28 Non-Qualified Common Stock Option issued to Rod L. Stambaugh,
effective as of May 13, 1999 (23)
4.29 Non-Qualified Common Stock Option issued to Robert E. Robichaud,
effective as of May 13, 1999 (23)
4.30 Form of Nonqualified Stock Option Certificate issued to Edwin M.
Cooperman dated March 29, 2000 (27)
4.31 Form of Nonqualified Stock Option Certificate issued to Michael S.
Falk dated March 29, 2000 (27)
4.32 Form of Nonqualified Stock Option Certificate issued to Barry A.
Kaplan dated March 29, 2000 (27)
4.33 Form of Nonqualified Stock Option Certificate issued to Amy L. Newmark
dated March 29, 2000 (27)
4.34 Form of Nonqualified Stock Option Certificate issued to Charles I.
Leone dated February 15, 2000 (27)
4.35 Form of Common Stock Purchase Warrant (originally issued to Dean M.
Leavitt as of May 3, 1999), as re-executed as of January 4, 2000 to
reflect repricing authorized as of such date (27)
4.36 Form of Common Stock Purchase Warrant for 22,500 shares issued to RBB
Bank dated January 20, 2000 (27)
4.37 Form of Common Stock Purchase Warrant for 15,000 shares issued to
Lippert/Heilshorn & Associates, Inc. dated March 28, 2000 (27)
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4.38 Form of Common Stock Purchase Warrant for 50,000 shares issued to
Cornell Consulting International, Inc. dated March 28, 2000 (27)
4.39 Form of Common Stock Purchase Warrant for 25,000 shares issued to
Cornell Consulting International, Inc. dated May 4, 2000 (27)
4.40 Lock-up Agreement between us, John M. Liviakis and Liviakis
Financial Communications, Inc. dated March 15, 2000 (28)
10.1 AT&T CDPD Value Added Reseller Agreement dated April 30, 1997** (6)
10.2 Bell Atlantic AIRBRIDGE Packet Service Agreement dated August 12,
1997** (6)
10.3 GTE Mobilnet Communications Service and Equipment Agreement dated
August 1, 1997** (6)
10.4 Liviakis Financial Communications, Inc. Consulting Agreement and forms
of Subscription Agreements for the purchase of U.S. Wireless Data,
Inc. Common Stock and Warrants from John M. Liviakis and Robert B.
Prag and effective as of July 25, 1997 (6)
10.5 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)
10.6 Underwriting Agreement between us, RAS Securities Corp., Walford &
Company, Incorporated and Thomas James Associates, Inc. dated December
2, 1993 (2)
10.7 Merchant Marketing and Services Agreement with National Bank of
Commerce dated March 9, 1998** (12)
10.8 Assignment Agreement (with Escrow Provisions) with Richard P. Draper,
Tillicombe International LDC and Ireland, Stapleton, Pryor & Pascoe,
P.C., as escrow agent, dated March 12, 1998 (12)
10.9 Form of Option Purchase and Assignment Agreement (relating to
assignment of call option on Tillicombe stock) (12)
10.10 Joint CDPD Sales and Marketing Agreement with Bell Atlantic Mobile
dated as of March 23, 1998** (12)
10.11 Engagement Agreement between us and entrenet Group, LLC, dated as
of March 12, 1998 (12)
10.12 Joint Marketing and Operating Agreement with Ameritech Mobile
Communications, Inc. dated July 16, 1998 (11)
10.13 Amendment dated September 9, 1998 to GTE Mobilnet Communications
Service and Equipment Agreement dated August 1, 1997 (15)
10.14 Employment Agreement between us and Dean M. Leavitt entered into as
of May 3, 1999 (19)
10.15 Indemnification Agreement between us and Dean M. Leavitt entered
into as of May 3, 1999 (19)
10.16 Software License Agreement - Maverick International Processing
Service, Inc. - May 28, 1999 (19)
10.17 Form of Redemption Agreement between us and Bold Street, LLC dated
January 31, 2000 (27)
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10.18 Form of Repurchase Agreement between us and RBB Bank
Aktiengesellschaft dated January 31, 2000 (27)
10.19 Form of Purchase Agreement between us and The Cuttyhunk Fund dated
May 3, 2000 (27)
10.20 Form of Purchase Agreement between us and Tonga Partners Fund dated
May 3, 2000 (27)
10.21 Form of Employment Agreement between us and Charles I. Leone dated
February 11, 2000 (27)
10.22 Form of Amended and Restated Employment Agreement between us and
Charles I. Leone dated September 7, 2000 *
10.23 Form of Employment Agreement between us and Peter J. Adamski dated
September 11, 2000 *
10.24 Form of lease agreement for the 20th floor at 750 Lexington Avenue
dated May 22, 2000 *
16 Letter from PricewaterhouseCoopers LLP to the United States Securities
and Exchange Commission dated August 12, 1999 (22)
27.1 Financial Data Schedule
* Filed herewith.
** Confidential treatment for certain portions of this document were granted to
us 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 was filed separately with the Commission pursuant to Rules 24b-2 and/or
406.
(1) Incorporated by reference from the like-named exhibit filed with our
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 our Registration Statement on Form SB-2, SEC File No. 33-69776-D (filed
on December 2, 1993).
(3) Incorporated by reference from the like-named exhibit filed with our 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 our 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 our 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 our Annual
Report on Form 10-KSB/A (Amendment No. 3) for the Fiscal Year Ended June 30,
1997, filed on February 25, 1998.
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(7) Incorporated by reference from the like-named exhibit filed as Exhibit C to
our 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 our
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 our
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 our
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 our
Current Report on Form 8-K Reporting an Event of July 16, 1998 (earliest event
reported), filed on July 31, 1998.
(12) Incorporated by reference from the like-named exhibit filed with our
Registration Statement on Form SB-2 (SEC File No. 333-52625) as of May 14, 1998.
(13) Incorporated by reference from the like-named exhibit filed with Amendment
No. 1 to our Registration Statement on Form SB-2 (SEC File No. 333-52625) as of
July 16, 1998.
(14) Incorporated by reference from the like-named exhibit filed with Amendment
No. 2 to our Registration Statement on Form SB-2 (SEC File No. 333-52625) as of
August 3, 1998.
(15) Incorporated by reference from the like-named exhibit filed with our Annual
Report on Form 10-KSB for the Fiscal Year Ended June 30, 1998, filed on December
18, 1998.
(16) Incorporated by reference from the like-named exhibit filed with our
Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 1998,
filed on January 28, 1999.
(17) Incorporated by reference from the like-named exhibit filed with our
Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31, 1999,
filed on May 18, 1999.
(18) Incorporated by reference from the like-named exhibit filed with our
Current Report on Form 8-K Reporting an Event of May 6, 1999 (earliest event
reported), filed on May 11, 1999.
(19) Incorporated by reference from the like-named exhibit filed with our
Registration Statement on Form SB-2 (SEC File No. 333-81897), filed on June 30,
1999.
(20) Incorporated by reference from the like-named exhibit filed with our
Current Report on Form 8-K/A Reporting an Event of July 1, 1999 (earliest event
reported), filed on July 26, 1999.
(21) Incorporated by reference from the like-named exhibit filed with our
Current Report on Form 8-K Reporting an Event of July 1, 1999 (earliest event
reported), filed on July 22, 1999.
(22) Incorporated by reference from the like-named exhibit filed with our
Current Report on Form 8-K/A Reporting an Event of August 5, 1999 (earliest
event reported), filed on August 20, 1999.
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(23) Incorporated by reference from the like-named exhibit filed with our Annual
Report on Form 10-KSB for the Fiscal Year Ended June 30, 1999, filed on October
14, 1999.
(24) Incorporated by reference from the like-named exhibit filed with our
Current Report on Form 8-K Reporting an Event of December 23, 1999 (earliest
event reported), filed on January 12, 2000.
(25) Incorporated by reference from the like-named exhibit filed with our
Current Report on Form 8-K/A Reporting an Event of March 28, 2000 (earliest
event reported), filed on April 18, 2000.
(26) Incorporated by reference from the like-named exhibit filed with our
Current Report on Form 8-K Reporting an Event of September 7, 2000 (earliest
event reported), filed on September 19, 2000.
(27) Incorporated by reference from the like-named exhibit filed with our
Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31, 2000,
filed on May 15, 2000.
(28) Incorporated by reference from the like-named exhibit filed with our
Quarterly Report on Form 10-QSB/A for the fiscal quarter ended March 31, 2000,
filed on May 23, 2000.
(29) Incorporated by reference from the like-named exhibit filed with our
Definitive Proxy Statement for the 1999 Annual Meeting of Shareholders held on
September 7, 2000, filed on August 9, 2000.
(b) Reports on Form 8-K.
During the fiscal quarter ended June 30, 2000, we filed the following Current
Reports on Form 8-K:
(1) Current Report reporting an Event of June 1, 2000, which contained
information under Item 5, "Other Events," reporting the issuance by us of a
press release announcing the closing of a private placement.
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SIGNATURES
In accordance with Section 13 or 15 of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: September 27, 2000
U.S. WIRELESS DATA, INC.
By: /s/ Dean M. Leavitt
-----------------------------
Dean M. Leavitt
Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Dean M. Leavitt
----------------------------------
Dean M. Leavitt Chief Executive Officer and Chairman September 27, 2000
of the Board of the Company
(Principal Executive Officer)
/s/ Charles I. Leone
----------------------------------
Charles I. Leone Chief Financial Officer and September 27, 2000
Chief Operating Officer
(Principal Financial Officer)
/s/ Kelly McLaughlin
----------------------------------
Kelly McLaughlin Controller September 27, 2000
(Principal Accounting Officer)
/s/ Edwin M. Cooperman
----------------------------------
Edwin M. Cooperman Director September 27, 2000
/s/ Michael S. Falk
----------------------------------
Michael S. Falk Director September 27, 2000
/s/ Barry A. Kaplan
----------------------------------
Barry A. Kaplan Director September 27, 2000
/s/ Amy L. Newmark
----------------------------------
Amy L. Newmark Director September 27, 2000
/s/ Alvin C. Rice
----------------------------------
Alvin C. Rice Director September 27, 2000
/s/ Chester N. Winter
----------------------------------
Chester N. Winter Director September 27, 2000
</TABLE>
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