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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-27649
UPGRADE INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 58-2441311
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1411 FOURTH AVE., SUITE 629; SEATTLE, WASHINGTON 98101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 903-3116
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
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(TITLE OF CLASS)
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(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The registrant's revenues for the fiscal year ended September 30, 2001 were
$-0-.
The aggregate market value as of January 8, 2002 of the voting and
non-voting common equity held by non-affiliates of the registrant computed by
reference to the closing price on January 8, 2002, was $38,643,026.
There were issued and outstanding 41,282,802 shares of the Registrant's
common stock as of January 8, 2002.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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UPGRADE INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-KSB
SEPTEMBER 30, 2001
INDEX
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PAGE
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PART I
Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4 Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . .
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . .
Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7 Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . .
Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .
PART III
Item 9 Directors Executive Officers Promoters and Control Persons of the Registrant . . . . .
Item 10 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . .
Item 12 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . .
Item 13 Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . .
PART 1
ITEM 1. BUSINESS
GENERAL
Upgrade International Corporation (the "Company") is a Washington corporation
was originally incorporated in Florida in 1997 reincorporated into
Washington in 2000, that intends to be a fully integrated smart card solutions
provider. The business is centered on developing and marketing a patented data
storage technology that incorporates hard drive type of memory storage into a
standard credit card format.
Upgrade is a development stage company. It is devoting its present efforts
into establishing its business in the information technology industry, and is
currently in the process of identifying markets and establishing applications
for its technologies. The development of the technology is conducted through its
subsidiaries, which are all development stage companies that have neither
commenced their respective planned principal operations nor generated any
revenue.
Upgrade's operations, and those of its subsidiaries, to date have consumed
substantial and increasing amounts of cash. Upgrade's negative cash flow from
operations is expected to continue and to accelerate in the foreseeable future.
The expenditures of Upgrade's subsidiaries are comprised of both direct research
and development expenditures, and the acquisition of in-process research and
development.
Upgrade generates the funds provided to its subsidiaries by the sale of
common stock, and long term debt arrangements. The ongoing ability of Upgrade to
maintain the funding requirements of its subsidiaries is dependent upon its
ability to raise additional debt or equity capital. In the event that Upgrade is
unable to do so, the working capital requirements of the subsidiary companies
may be met by others. This may cause substantial dilution to the interest of
Upgrade in its subsidiary companies or, if they are unable to raise financing
independently, they may not be capable of carrying on the development of their
operations.
Upgrade's primary assets are through its subsidiaries' ownership of
patented, licensed, and proprietary intellectual property, facilities, and
equipment.
The ULTRACARD technology will provide increased data storage that enables a
combination of high security, privacy and a greater amount of personal,
transportable data storage-at the lowest cost in the industry. ULTRACARD will
operate in conjunction with a read/write device and operating software that the
Company is also developing. In addition, Upgrade may acquire and develop
application software and systems for specific applications of the ULTRACARD
technology, as well as conventional smart card solutions.
Upgrade intends to first complete the commercialization process of its core
patented technology through its UltraCard, Inc. subsidiary. In conjunction with
the completion of this commercialization, the Company intends to leverage off
this technology through its ownership interest in:
- CQUE CORPORATION (formerly Centurion Technologies, Inc.), a planned
smart card application provider for the medical, educational and
governmental industries.
- The GLOBAL CYBERSYSTEMS group of companies which will provide European
smart card sales and marketing in Europe and select markets in the
United States.
And by pending acquisition of an ownership interest in:
- ROCKSTER INC., a software and marketing company whose primary focus is
digital distribution and acquistion of intellectual properties.
These companies are developing applications software and systems for specific
applications of the UltraCard technology as well as conventional smart card
solutions. The acquisition and development of existing smart card solutions to
be provided by these groups represent a market strategy designed to accelerate
the effective integration of UltraCard technology into newly developing and
existing markets.
Upgrade intends to further leverage off its technology platform by making
additional acquisitions that will horizontally integrate its technology into
numerous business applications. This tracks with Upgrade's goal to become the
high capacity transportable data storage standard.
BUSINESS STRATEGY
Upgrade intends to first complete the commercialization process of its core
patented technology through its UltraCard, Inc. subsidiary. In conjunction with
the completion of this commercialization, the Company intends to leverage off
this technology through its ownership interest in cQue Corporation (formerly
Centurion Technologies, Inc.), a smart card application will provide for the
medical industry, and the Global Cybersystems companies, which provide European
smart card sales and marketing. In addition, Upgrade has entered into a letter
of intent with Rockster Inc., a software and marketing company whose primary
focus is digital distribution and acquisition of intellectual properties. The
family of companies is developing applications software and systems for specific
applications of the UltraCard technology as well as conventional smart card
solutions. The development of solutions to be provided by these entities is an
integral part the Company's market strategy and is designed to accelerate the
integration of UltraCard technology into newly developing and existing markets.
Upgrade intends to further leverage off its technology platform by making
additional acquisitions that will horizontally integrate its technology into
numerous business applications. This tracks with Upgrade's goal to become the
high capacity transportable data storage standard, and then to leverage off of
that platform.
SUBSIDIARIES
Upgrade owns a controlling interest in the following companies:
- ULTRACARD, INC.-a 53% subsidiary holding the patented technology that
is Upgrade's core technological platform. UltraCard is developing and
marketing ultra high capacity data storage and retrieval in a credit
card format, a read/write device, and a supporting operating system.
- CQUE CORPORATION (formerly Centurion Technologies, Inc.)-a 51%
subsidiary of Upgrade that is developing a medical card on a smart
card platform capable of providing a host of interrelated services on
line for the medical industry including such services as pharmacology
conflict analysis.
- EFORNET CORPORATION-a wholly-owned subsidiary of Upgrade that is
intended to be a research and development resource to the Upgrade
group of companies. EforNet will provide alternative smart card
solutions for specific markets in addition to the conventional smart
card and the high memory capacity UltraCard. EforNet's operations are
currently dormant.
- GLOBAL CYBERSYSTEMS INC. ( a U.S. corporation), GLOBAL CYBERSYSTEMS
S.A. (a Swiss corporation), and GLOBAL CYBERSYSTEMS PLC (a U.K.
corporation) will provide marketing and sales for the products
developed by the Upgrade group of companies in Europe and select
markets in the United States.
Upon completion of the pending acquisition, Upgrade will own approximately 57%
of the following company:
- ROCKSTER, INC.- Rockster's primary focus is digital distribution and
acquistion of intellectual properties. The underlying technology
applied to distribute and acquire content is a magnet to both artists
and consumers. It protects and creates revenues for the artist and
allows
consumers to pay for materials exchanged among themselves. The
Rockster technology enables such transactions to be done securely,
anonymously, and most importantly, conveniently. Its peer-to-peer
dynamic allows for fast dissemination of Rockster's technologies and
content. Rockster's model is to build assets and generate income
concurrently.
Rockster has been structured to be a full service distribution entity
incorporating new technologies, a record label, Rockster Records, a music
publishing division, and a production company.
Upgrade provides its subsidiaries with strategic direction, financial and
financing services, administrative and investor relations services, and
additional services facilitating the development of each business unit's
operating plans. Upgrade intends to hold substantial interests in, and maintain
an active involvement with the companies and technologies it has developed.
ULTRACARD, INC.
THE COMPANY
UltraCard, Inc. (also referred to as our "Memory Card Subsidiary") is the
developer of the UltraCard technology for high security, high capacity, portable
data storage in existing and future market sectors. The business is centered on
developing and marketing a patented data storage technology that incorporates
hard drive type of memory storage into a standard credit card format. The
UltraCard technology is designed to provide increased data storage to enable a
combination of high security, privacy, and a greater amount of personal,
transportable data storage-at the lowest cost in the industry. Our Memory Card
Subsidiary will operate in conjunction with an Ultra Drive read/write device and
operating software that the company is also developing. This technology will
combine hard disk drive technology, magnetic stripe technology, smart card
"chip" technology and UltraCard patented technology to achieve a new platform in
data storage which allows the portable sharing, exchange, archiving and
transport of large amounts of data storage.
UltraCard is a Nevada corporation, which was formed in 1997. It is headquartered
in Los Gatos, California. UltraCard's principal assets are patented, licensed
and proprietary intellectual property. UltraCard is a development stage company;
therefore, its operations to date have principally been limited to research and
development of the company's platform technology.
RECENT DEVELOPMENTS
In October of 2001, UltraCard formed a new wholly-owned US subsidiary, UltraCard
China, Inc., a Nevada corporation ("UltraCard China") to conduct its operation
in China, and will form a Chinese corporate entity to conduct its operations in
Shanghai. In November 2001, our Memory Card Subsidiary completed a technology
demonstration to Shanghai G-Pro Technology Co., Ltd. Shanghai G-Pro Technology
Co., Ltd. is a procurement company for the Shanghai government,
which has issued a purchase order to implement a pilot program consisting of two
million UltraCards and ten thousand UltraDrive reader/writers. The US $15
million purchase order is subject to delivery of the UltraCards and UltraDrives,
conforming to mutually agreeable specifications and will include the 5 1/4"
half-high UltraDrive with USB interface and triple read capability.
UltraCard is currently completing the tasks necessary to complete this order.
The overall project includes approximately 26 individual tasks, which, when
completed we expect will also position the Company not only to deliver upon the
Shanghai purchase order, but market the technology on a wide-range basis.
The tragedy of September 11, 2001 has altered the attitudes of our nation, our
government, and ultimately our world. It is painfully obvious that SAFETY and
SECURITY have become immediate priorities. Businesses and governments alike
are now re-evaluating security systems.
In the past, the industry has resisted the change to higher levels of security
in exchange for convenience and speed. In one day, that attitude abruptly
changed. UltraCard has been developing the technology that may solve the
safety/security challenge through a combination of multiple biometric
recognition programs and embedded storage capacity that can accommodate
FBI-level fingerprints, handprints, iris scans, photographs, x-rays, voiceprints
and more. UltraCard's technology will deliver authentication, security and
personal privacy. The smart card industry is essentially in its infancy and has
been stymied for years by a lack of sufficient data storage capacity. The smart
cards being highly advertised and promoted on the market today are really not
that "smart". Their limited capacity for data storage supports very limited
applications and almost no enhancement of the security issues becoming so
prevalent in the consumers' and businesses' minds. UltraCard will provide this
industry the opportunity to do today what they have only talked about possibly
doing in the future.
HISTORICAL TIMELINE OF ULTRACARD
- AUGUST 1998, successfully demonstrated the "Proof of Concept" for its core
technology by setting up a working model of the card and read/write
systems. This model demonstrated the capability of placing 5,000,000 bytes
of information on the magnetic stripe card and then reading from, writing,
erasing and replacing data on that card.
- NOVEMBER 1999, demonstrated the technology in Las Vegas, Nevada during
Comdex trade show.
- NOVEMBER 1999, licensed from Ampex Corporation the right to use the
patented Keepered media technology on magnetic cards.
- FEBRUARY 2000, entered into a cooperative affiliation with SciVac to
produce a computerized sputtering system, for their advanced memory card
technology. The sputtering equipment places the magnetic memory capacity on
the card insert.
- MAY 2000, entered into an agreement with Pemstar, Inc. for development of
the reader/writer unit. UltraCard's in-house staff of engineers provided
the core technology; Pemstar's expertise was to accelerate the design
processes. Pemstar refined and repackaged the original read/write unit for
a range of applications.
- AUGUST 2000, demonstrated high capacity card at the Democratic National
Convention using the "Iceberg V" reader/writer prototype. "Iceberg V" is
our Memory Card Subsidiary's fully-functional reader/writer unit.
- OCTOBER 2000, announced the signing of a "card substrate supply agreement",
with Komag Incorporated. Komag was founded in 1983, and has produced over
480 million thin-films disks, the primary storage medium for digital data
used in computer disk drives. Through its advanced development and high
volume production facilities in the United States and overseas, Komag
provides high quality, leading-edge disk products at a low overall cost to
its customers. These attributes enable Komag to partner with customers in
the execution of their time-to-market design and time-to-volume
manufacturing strategies.
- JANUARY 2001, Pemstar Inc. completes design and development of the Iceberg
V reader/writer prototype. 10 units are built for demonstration purposes.
- MAY 2001, the UltraCard technology is demonstrated in Las Vegas, Nevada
during the Card Tech/Secure Tech Show.
- JUNE 2001, our UltraCard's Research and Development team begins development
of the Iceberg VI prototype unit reducing the form factor to a 5 half high
unit (CD Rom size).
- JULY 2001, announcement that an agreement to supply two million UltraCards,
and ten thousand UltraDrives to the Chinese government for a pilot program
in Shanghai. The business opportunity represents, an opportunity through a
Shanghai-based joint venture that is being set up to accommodate
manufacturing and distribution of the UltraCard and the UltraDrive
throughout China.
- SEPTEMBER 2001, following the tragic events of September 11th, UltraCard
executives meet with government officials in Washington, D.C. to
demonstrate UltraCard technology and discuss a variety of personal
identification, airline security, and biometric applications that would
offer a solution to the government's efforts to find security technologies
that are effective, but that also ensure individual rights and privacy.
- OCTOBER 2001, our Memory Card Subsidiary and their technology is featured
in the article Feds Consider New Antiterrorist Smart-Card Technology in
Computerworld Magazine.
- OCTOBER 2001, formed a strategic alliance with Wynnewood Technologies, Inc.
a prime contractor for the Pentagon Renovation Program. Wynnewood
Technologies Inc. has an established history of successful US government
contracts for database management. The UltraCard/Wynnewood Technologies
team will work together to solve the database management and security card
issues for both the Pentagon and China Programs.
- OCTOBER 2001, formed a wholly-owned subsidiary UltraCard China and names
Dan Kehoe, Chief Executive Officer, Arthur Zheng, President, and Oran
Chang, Vice President. UltraCard China will be a strong and reliable source
for sales of applications utilizing UltraCard technology in China.
- NOVEMBER 2001, Research and Development team begins development of the
Iceberg VII prototype unit that continues to refine form factor and
electronics.
- NOVEMBER 2001, successfully completed its technology demonstration in
Shanghai that resulted in Shanghai G-Pro Technology Co., Ltd., a
procurement company for the Shanghai Government issuing a $15 Million
purchase order to implement a pilot program in Shanghai. This purchase
order is subject to delivery of the two million UltraCards, and ten
thousand UltraDrives.
WHAT IS ULTRACARD?
- We use a variety of patented, licensed and proprietary technologies to
provide a reliable, secure reader/writer and a secure and private data
storage card.
- Our product line will start with 20 MB of data on a "credit card" sized
media - a form factor that is widely used today and is familiar and highly
accepted by consumers.
- We have developed a way to use hard disk drive media technology in a credit
card form factor with a reader/writer that is designed to interface with
computers, hand held devices, ATM terminals, cash registers and other
devices.
- Our technology enables, for the first time, high capacity re-writeable
credit card-sized memory cards with enough capacity to store powerful error
protection schemes, redundant data areas, high-resolution biometric
information and sophisticated encryption and privacy schemes. Because of
the increased storage capacity of the UltraCard, invisible card
watermarking, several biometric recognition programs, FBI-level
fingerprints, handprints, iris scans, photographs, x-rays, voiceprints, can
all be accommodated on the UltraCard.
- Our technology will also eliminate fraud and skimming which is a major
problem with current credit cards and smart cards. Because of the increased
storage capabilities, several encryption libraries can reside on the card
at the same time. The UltraCard high capacity memory, the magnetic stripe,
the smart card chip and a PIN or biometric can all be mathematically tied
together with encryption technology to validate the card and user 4 ways.
That means it's secure, and private, not public. The card itself will also
provide the biometric recognition program and a digital signature in order
to deliver a "non-repudiatable" transaction and faultless authentication.
THE SMART CARD MARKET
A smart card is a plastic credit card with an embedded microchip. It can pick
up, store, process, and secure data. The chip can process different kinds of
information, and therefore, various industries use them in different ways.
These cards can have multiple applications operating on them at one time. For
instance, you could have a frequent flyer program working on the same card as
your debit or credit account - so anytime you use the card, you earn points in
your favorite program. Other services allow you to participate in loyalty
programs with merchants, including storing travel preferences on your smart
card. Financial institutions have partnerships with local mass transit systems
so you can pay for public transit with your smart card in various cities
throughout the world.
In 1997, 920 million smart cards were sold worldwide. The major end-user market
segments in terms of units were: phone cards, banking, digital mobile phones
(GSM), pay TV, health ID and transportation. Although sources vary, it is
estimated that North America accounted for 10% of the worldwide distribution of
smart cards in the year 2000. Most North America smart card applications use
higher priced microprocessor cards for multi-applications and multi-purse
requirements, and use very few low cost pay phone cards.
Additional requirements include hardware (readers/writers, kiosks, etc.),
software and system support, and ongoing infrastructure services primarily IT
services, transaction processing and recharging services. For the year 2000,
the Killen & Associates report forecasts the market for software support at $3.8
billion, recharging smart cards at $3.5 billion, and the dedicated equipment
market at $3.8 billion. Our Memory Card Subsidiary recognizes these tremendous
revenue growth opportunities and is preparing to meet them in the areas of smart
card sales, reader/writer sales, technology licensing, smart card application
solutions, and transaction processing.
PRODUCTS
The first generation UltraCard will enter the market with 20 MB (20 million
bytes) of interactive, re-writable, encrypted data storage. This translates
into approximately 10,000 pages of text. As a comparison, today's common credit
card with a magnetic stripe installed across its back can hold 256 bytes of
data. This amounts to no more than a cardholder's name, credit card number, and
authorization codes. The newer smart cards on the market utilize an integrated
circuit (IC) chip imbedded in a credit card, which creates an average memory
capacity of approximately 2 KB of data (2,000 bytes). That capacity is enough
to store about one page of text. Some (IC) chip cards in development are
projected to have up to 64 KB of memory, but are expensive, reaching in excess
of $20 per card with limited read/write capability.
The next generation of cards will be expected to carry enormous amounts of
secure portable data that can be used across a wide variety of applications:
biometrics for authentication, medical images, passport data, e-commerce
payments, access controls, global business activity, and complex financial
transactions. UltraCard is that next generation.
UltraCard's credit card sized data storage devices are being developed along
with a series of card readers/writers Ultra Drive that will compliment future
product introductions leading up to low GB storage capacity. With such dramatic
increases in data storage capabilities, soon a person will be able to carry a
personal computer hard drive in their wallet, thus, total access to all of their
records on any computer located anywhere in the world without the need for
online access. UltraCard allows decentralized databases and simultaneously
offers a very high security and privacy level for the cardholder.
UltraCard will provide the necessary operating systems, application programming
interfaces and toolkits such that card issuers and card users can take full
advantage of the huge application potential of UltraCard. Full "end-to-end"
solutions will be provided that to take full advantage of the new potential of
this innovative technology.
APPLICATIONS
Practically any application requiring data that can be transported easily and
accessed inexpensively can use UltraCard technology.
MARKET APPLICATIONS EXAMPLE OF POTENTIAL CUSTOMERS
----------------------- ------------------------------------ ------------------------------
Banking & Finance - e-Commerce, - VISA,
- business-to-business, - MasterCard,
- purse-to-purse, - American Express
- stored value cards - Europay
----------------------- ------------------------------------ ------------------------------
Communications/Wireless - Cell phones, - Nokia,
- PDAs, - Ericsson,
- universal phone cards, - Sagem,
- access control, - Motorola
- web access
----------------------- ------------------------------------ ------------------------------
Government - Access control, - General Services
- bill of lading shipping cards, Administration,
criminal record files, - Department of Defense,
- all agency interoperability - Veterans Administration,
----------------------- ------------------------------------ ------------------------------
ID Systems - Passports/immigrations, - General Services
- multi-biometrics, Administration,
- multiple operating systems, - Department of Defense
- multiple security protocols
----------------------- ------------------------------------ ------------------------------
Travel & Entertainment - retail store, - All airline carriers
- valued customer, - Theme parks
- frequent flyer programs - Hotel, Travel agencies
----------------------- ------------------------------------ ------------------------------
Healthcare Industry - patient record cards, - HMO & PPO programs
- x-rays, - All hospital systems
- insurance records & pharmacy
transaction cards,
- maternity & family care cards
----------------------- ------------------------------------ ------------------------------
The Internet - Personal preferences card, - Hard Rock International,
transaction card, - Amazon,
- privacy plus security for all - VISA
transactions
----------------------- ------------------------------------ ------------------------------
Transportation Industry - Mass transit payment cards, - All Airlines carriers
- QC/Process control records, parts - Public Transit systems
lists, - Airport security systems
- maintenance records,
- RF entry cards
----------------------- ------------------------------------ ------------------------------
COMPETITION
The main competitive products of the UltraCard include magnetic stripe cards, IC
smart cards, optical cards, magnetic cards, and flash cards. Below is a
breakdown of their memory capacity, common uses/features, and their inherent
weaknesses.
PRODUCT MEMORY WEAKNESSES
CAPACITY
------------------------------- --------------- -----------------------------------------------------
MAGNETIC STRIPE CARD 256 K low memory and prone to wear and accidental
- ATM cards, erasure
- POS readers,
- door entry,
- phone cards
------------------------------- --------------- -----------------------------------------------------
IC SMART CARDS 2 K to 64 K more memory capacity than magnetic stripe cards,
- also with magnetic stripe; but expensive, require a special card reader, more
- look like credit cards fragile, and negatively affected by shortage of
silicone
------------------------------- --------------- -----------------------------------------------------
OPTICAL CARDS 4.1 MB to 40 MB memory capacity competes with magnetic media,
- lasercards with proprietary but only available with WORM (Write Once, Read
readers, or Many) capability; lasercard time to read and write
- trimmed discs with standard is slow and prone to deterioration with high
CD-ROM readers humidity; trimmed optical discs unconventional
and hardware to write on disc is expensive
------------------------------- --------------- -----------------------------------------------------
MAGNETIC CARDS 2 KB slightly higher storage than magnetic stripe, but not
- magnetically treated plastic significant compared to smart cards, optical cards
card and flash cards and need different readers than
magnetic stripe
------------------------------- --------------- -----------------------------------------------------
FLASH CARDS 2 MB to 128 MB fast and versatile, but very expensive to
- portable, removable and manufacture and prone to damage at connectors
interchangeable memory chips and breaking in field use
(similar to computer chip);
- cell phones,
- digital cameras,
- MP3 audio
------------------------------- --------------- -----------------------------------------------------
THE TECHNOLOGY
The UltraCard technology is an innovative system for high capacity data storage
and retrieval using hard disk media in a credit card format. The product and
technology held by our Memory Card Subsidiary will offer the consumer a
combination of features not currently available in any existing data storage
medium. The first generation UltraCard product is positioned for immediate
acceptance in the existing and rapidly growing smart card market.
- 20 MB CARD ENTRY-LEVEL PRODUCT. UltraCard will offer more memory than any
of the current credit card sized cards including (IC) chip and magstripe,
20,000 times the capacity of magnetic stripe cards, and 10,000 times the
capacity of smart cards (2KB).
- FULLY EDITABLE. The UltraCard may be written on, edited and read just like
the hard disk on your computer or partitioned into non-cross-accessible
zones. UltraCard is not limited by WORM (Write Once, Read Many) technology
inherent in other smart cards.
- A PATENTED METHOD OF CARD PROTECTION. The UltraCard will ensure magnetic
data is not vulnerable to accidental erasure, tampering, fraud, or damage
from normal consumer use. Proprietary magnetic layers over the media
further enhance magnetic fields from being detected. This raises the bar in
security, privacy, and personal protection. UltraCard will allow the
consumer to control how, when and from where the data is put on and taken
off the card.
- COMPATIBILITY WITH EXISTING SMART CARD AND MAGNETIC STRIPE TECHNOLOGY. As a
result, UltraCard technology will integrate existing technologies, is
backwards compatible with conventional card readers and offers a clear
migration path to increased capabilities. UltraCard technology is the only
technology that offers diversity and backwards compatibility with existing
technologies.
- RUGGED. Because of a patented design, UltraCard holds up to the "torturous"
environment of the consumer wallet and daily abuse that may leave a credit
card inoperable.
- DESIGNED FOR HIGH VOLUME MASS PRODUCTION. At the same time that UltraCard
represents a ramping up of capacity, security and privacy, it represents a
downward spiral of cost. It will use high volume, high-throughput sputter
technology that's a mature, proven production process already cost-reduced
substantially.
- SCALABLE. The technology allows smooth transition to larger memory capacity
as needs and technology expands. Our Memory Card Subsidiary entry product
is based on technology developed by IBM in 1953. It has great growth
potential and 20 MB is just the beginning.
INTELLECTUAL PROPERTY
UltraCard relies primarily on a combination of patents, trademarks, copyright
and trade secret laws and employee and third-party non-disclosure agreements to
protect its intellectual property assets.
PATENTS
UltraCard holds, through its exclusive license with CardTech, Inc., a patent on
its Magnetic Card Reader and Method. This patent includes the apparatus and
method for a magnetic storage memory and readout for a credit card sized memory.
UltraCard also holds, through CardTech, Inc., a Continuation in Part on that
patent which includes optical recording, oscillating recording and various types
of card substrates. UltraCard has also purchased patents pertaining to memory
storage modules for applications of the Personal Computer Memory Card
International Association (commonly known as "PCMCIA").
PATENTS PENDING
UltraCard has pending two patent applications for a linear and high speed rotary
portable storage apparatus and methods for using the apparatuses. These patents
include optical, magneto-optical, near field, far field, vertical and other
modern recording technologies, all contained on a credit card-like portable
memory. These two patent applications are very broad and our Memory Card
Subsidiary's patent counsel believes that the United States Patent Office may
break them up into at least 20 separate patents. UltraCard also has pending a
patent application for a data storage unit with an embedded but accessible
storage member including the read/write apparatus and methods for using the
unit. This patent application is also very broad and our Memory Card
Subsidiary's patent counsel believes that it may result in 10 to 12 separate
patents.
FINANCIAL DATA
Revenues are expected to be derived in the following areas:
1. Production and sale of UltraCards.
2. Production and sale of UltraDrive reader/writers.
3. Licensing of the technology.
4. Revenues from smart card application solution providers.
5. Licensing (OEM) and customization of application interfaces, toolkits,
operating systems and applications.
6. System integration and professional services.
7. Transaction based pricing.
8. Per certificate, user, server, card, application, service and memory
property pricing.
STEPS IN THE COMMERCIALIZATION PROCESS
UltraCard intends to first complete the commercialization process of its core,
patented technology. Through strategic partnerships and licensing of its
proprietary technology, UltraCard plans its revenue streams based on the
following model. UltraCard product development strategy is guided by the tactic
to accumulate and retain ownership of as broad and comprehensive an intellectual
property package as possible in order to retain as much ownership of
intellectual property as possible, all R&D activities are funded and controlled
in house by UltraCard.
The steps to commercialization are the ability to produce the card body with our
Memory Card Subsidiary patented process of hard drive technology on a shim in a
credit card format. This process starts with the manufacture of the shim
itself, which, by using exacting standards established by our Memory Card
Subsidiary, has allowed for the extraction and retraction of the shim within the
card body. The shim, after cut to exacting standards, is run through a process
called sputtering. Sputtering is a process of layering the shim with magnetics
that later can be read from and written to by magnetic heads located within the
UltraDrive reader/writer.
The UltraDrive is essential. It is the only drive or reader/writer that works
with the total patented system. The UltraCard is inserted into the card slot on
the front of the UltraDrive and the card mechanism within the drive accepts the
card and extracts the shim. Next the IC chips, one with in the UltraDrive and
one present in the card body validates the authenticity of the UltraCard. This
process of communication is handled by what is called middleware. Middleware is
software used within the system for internal communications between working
mechanisms. At this point, the heads within the drive can read information
previously written on the shim. If this information has been placed onto the
shim in an area of high encrypted security known as a vault area, it is possible
that this area could be designated a write once read only area. This is where
the biometrics can be stored and accessed to verify the identity of the user.
After the user's identity has been verified, the remaining areas of data storage
can be accessed.
Within seconds of performing the above validation process, the card is ready to
perform the application architected by its issuer. Because of the 20-megabyte
data storage capacity on the introductory card, the operating program or
software can be more diverse than that which resides on a chip only card
(Smartcard). The additional storage capacity allows for many applications beyond
that which can only be imagined. The ability of the UltraCard to be read from
and written to, with such great data storage capacity, creates what we believe
to be a revolutionary product in the data storage industry allowing for
individual and personal control over highly sensitive information.
The IC chip residing on the card itself classifies the UltraCard as a smartcard
and with proper programming can be used in the many smartcard readers already in
place around the world. The magstripe on the rear of the card gives the
UltraCard the ability to be read by all of the magstripe readers around the
world. These additional abilities are what makes the UltraCard backward
compatibility and it can be used the world over by existing readers, until the
implementation of UltraDrives occurs allowing for a more secure use.
The ability of UltraCard to partner with other manufacturers of the above items
is a direct and logical track for UltraCard to follow. The more outsourcing the
less internal funding is required.
MANUFACTURING STRATEGY
UltraCard intends to use contract manufacturing and other disk drive companies
to produce its products. Because we believe there is excess manufacturing
capacity in the disk drive industry today, the contract manufacturing approach
should result in lower short term investment, maximum ability to vary production
levels to meet demand and lower risk of early manufacturing start-up problems.
In addition, we expect contract manufacturing to dramatically reduce UltraCard's
required headcount which would result in better return on assets than would be
possible if our Memory Card Subsidiary were to build its own manufacturing
facility.
IC's or chip manufacturers are readily available, and with the low memory
capacity needed for the UltraCard solution, many could be chosen, some of which
have already entered into technology partner relationships with our Memory Card
Subsidiary.
However, UltraCard does intend to maintain absolute control over manufacturing
from the perspectives of manufacturing process and inventory exposure. Our
Memory Card Subsidiary also intends to control the quality processes in the
plant including all incoming inspection procedures, in-cycle quality assurance
and final burn-in and test. UltraCard also will set up an ongoing reliability
inspection of its products to fully meet specifications and reliability goals
before they are shipped.
CURRENT STATUS
- The reader/writer is in the final R&D stage.
- Card interchangeability and interoperability are currently undergoing test
and refinement for maximum reliability
- Reader/writer units for initial pilot tests and demonstration have been
completed by the Research and Development team.
DESIGN COMPLETION
The next step will be to refine the R&D units based on test results and
definitive market information into a product specific design for a specific
customer. This first take place followed by hard tooling the pilot production
(China), after which full scale production can begin.
MEDIA
The magnetic recording media is the most critical component in the UltraCard
intellectual property package. Full control of the media from R&D through full
scale production will be maintained by our Memory Card Subsidiary. This
includes process and quality control of the substrate, the sputter deposition
equipment, the magnetic film, the protective overcoats and inspection equipment
and material handling and automation technology for high volume production. The
volume production goal from day one has been to achieve one million "shims" or
media inserts per day. The Company has a supply agreement with Komag
Incorporated is an important step towards meeting the manufacturing goal.
Komag, founded in 1983, is the world's largest independent supplier of disks and
has produced over 480 million thin-film disks, the primary high-capacity storage
medium for digital data in computers. Through its advanced development and high
volume production facilities in the United States and abroad, Komag provides
high quality, leading edge data storage products at a low overall cost to its
customers.
CARD BODIES
UltraCard is currently exploring establishing partnerships with several venders
including Orga and Giesecke & Devrient, Inc. to provide card body development,
manufacturing and supply the card bodies to UltraCard specifications.
CQUE CORPORATION
cQue Corporation (formerly Centurion Technologies, Inc.), (a development stage
company), is a systems and communications developer that has created a database
and secure network that services the medical, educational and government
markets. The Company was formed in November 1996 in Redmond, Washington.
cQue has designed a Web-based software application called iQue Rx(TM) that
manages data stored on a smart card and has the capability of disseminating
private electronic information securely, easily, and efficiently. iQue Rx(TM)
currently uses the available smart card technology and it is being upgraded to
the new UltraCard platform. The application can be accessed through any dial up,
dedicated, hard-wired, (Ethernet) or wireless connection running over a Virtual
Private Network or Windows 2000, Web or LAN Server.
The primary market focus of this technology is in the medical industry, travel
and government markets. One of the core features is providing medical and other
vital information on a smart card platform capable of providing a host of
interrelated services online including such things as pharmacology conflict
analysis. The company was formed in November 1996 in Redmond, Washington. The
flagship product, iQue Rx(TM) is ready for final commercial site testing.
Following programming and control function updates after testing, the product
will be market-ready for commercialization.
ELECTRONIC MEDICAL RECORDS - POWERED BY INTELLIQUE(TM) SMART SUITE
The United States federal government is actively involved in electronic digital
record programs, including eMR (electronic medical records). In fact, the US
Department of Defense is involved in the largest known as GCPR in the history of
digital records, with over $2.5 billion dollars allocated to convert the US
Department of Defense paper based record systems into a digital record exchange
system. These federal government initiatives, including: the GSA Smart Common ID
Program (smart card ID) and Department of Defense (D/SIDDOMS) eMR Programs are
significant both in concept and budget commitment. UltraCard & cQue coupled with
cQue team partner administrators - Litton/PRC, Logicon. SAIC, and Schlumberger
Technologies are in the right place at the right time. It will take a concerted
effort to accomplish established goals.
A news article published by the Washington Post (November 30, 1999) reads, "As
many as 98,000 Americans die unnecessarily every year from medical mistakes made
by physicians, pharmacists and other health care professionals, according to an
independent report released that calls for a major overhaul of how the nation
addresses medical errors. More Americans die from medical mistakes than from
breast cancer, highway accidents, or Aids, according to the report from the
Institute of Medicine. That costs the nation almost $9 billion a year." cQue
intends to provide a solution to this problem on an international scale.
Computerized prescribing is long overdue in the United States. Virtually all
prescriptions are still handwritten or even worse, verbally called into the
pharmacy. cQue's web-based software application permits both offline and online
access to portable smart card data, local client server, and national repository
(cQue global server). iQue Rx(TM) uses SmartCheck, an interactive medical
advisory database. Every MD Rx order is carefully reviewed for potential
conflicts or interactions with over-the-counter products, foods, herbals, and
other medications in use. A medical alert is displayed and sent directly to the
appropriate physician and pharmacist.
IQUE(TM) RX IS AN AMBULATORY AND EMERGENCY PATIENT CARE RECORD MANAGEMENT AND
CONTROLLED RX ORDER SYSTEM
The iQue Rx(TM) software is an integrated system for secured access, transfer,
and storage of cumulative patient healthcare data in a real-time on-line
environment. The system uses smart cards, biometrics, and other forms of secured
access to insure complete patient and provider confidentiality consistent with
the latest proposed HIPAA standards. The system also provides complete
portability of patient medical information in a customized, highly flexible
format, thereby creating a fully electronic ambulatory record of relevant
encounters and episodic and longitudinal care elements.
IQUEACCESS(TM) PORTABLE MEDICAL RECORD
The iQue(TM) Rx system provides dual access to records. Patient medical records
stored on a smart card provide portability. At the same time, the smart card
provides controlled PKiQue(TM) access to detailed records over a secured socket
layers (SSL) internet channel.
IQUEVIEW(TM) DETAILED MEDICAL RECORD ACCESS
Through the use of our Access Profile Control Interface (APCI) the iQue(TM) Rx
environment provide quick, real-time access to vital medical data stored on a
Primary Institutional Site (PIS) Server located at the patients primary
physician's office.
IQUEORDER(TM) ONLINE MEDICATION ORDERING
An additional feature of the iQue(TM) Rx system is web-enabled medication
ordering. This permits doctors to send a digital prescription order directly to
a selected pharmacy that includes vital patient health information with the
order (script).
IQUELOGIC(TM) DRUG INTERACTION INTERVENTION
The built-in Rx screening software is designed, to reduce most identified drug
interactions and conflicts. To accomplish this, iQueLogic(TM) looks at all
orders checking them against meds to meds, meds to allergies, meds to
immunizations, meds to herbals, and soon to follow meds to foods and meds to
over-the-counters (e.g. Rogaine).
INSURANCE FORMULARY CONTROL
The built-in intelligent interface alerts the doctor when attempts are made to
place medication orders that are not covered under the patient's insurance plan.
IQUECONNECT(TM) TWO-WAY CONTACT MANAGER.
Allows two-way text communication to take place between healthcare
professionals, either in real-time or synchronized delayed communication.
iQue(TM)Rx monitors the user on-line activities through the smart card login
process and routes messages to them remotely.
iQue Rx(TM) is designed to connect any person around the globe with real-time
encrypted data transfer instantaneously. The smart card is a key component in a
system that uses iQue Rx,(TM) because it provides off-line record access and
provides the security link to the database by keeping the passwords or other
biometric access controls on a computer chip embedded on a plastic card. cQue
believes that it makes patient and client data readily available in a secure,
universally accessible, portable, nonproprietary, digital format, using a smart
card integrated into iQue Rx(TM) application software that provides a real-time,
universal, online, interactive, MD-based order entry system.
The iQue Rx(TM) workstation application manages the patient's data through
various screens. The entrance into a patient's data is through a "profile"
screen that shows all of the data. The profile screen displays a summary of the
information stored on a User's card in a flexible and intuitive manner. The
information is grouped by category into a series of boxes, which the access user
can arrange and resize to their liking. The profile screen arrangement is stored
on the access user's card-their preferences are present on whatever workstation
they use.
iQue Rx(TM) stores a patient profile that consists of several blocks of
information including prescription medications, over-the-counter medications,
allergies, immunizations, foods, herbals and insurance coverage as well as other
patient information specific to the application. For example, Rx SmartCheck is a
component of iQue Rx(TM) that can alert physicians and pharmacists to possible
conflicts, drug interactions or medical insurance coverage qualification.
THE INTELLIQUE(TM) SYSTEM IS A SMART CARD ENABLED SECURED RECORD MANAGEMENT
FRAMEWORK.
PKIQUE(TM) SMART CARD SECURED LOGIN SCHEMA
By using the PKIQUE(TM) solution, digital certificates can be access through the
smart card and facilitate the transfer of private and public keys to the server.
This method can also be used to create a smart card secured website access.
BIOIQUE: USER AUTHENTICATION BIOMETRIC INTERFACE
Using fingerprint verification, any new fingerprint scan sample can be compared
to the stored fingerprint template (386 bytes) held on the card. This method
provides 1 to 1 verification and eliminates the need to store prints on a
centralized server, protecting individual's personal identities.
CONTROLIQUE: SYSTEM ADMINISTRATOR CARD TYPE DEPLOYMENT
Different card types create multiple gateways into the software, allowing
controlled, and/or restricted access to sensitive information. As an added
benefit, the interface can turn off features and procedures that are not
relevant to the card user, reducing the software's complexity and technical
support requirements.
APCIQUE: INFORMATION DATABASE PROFILING
Using the Access Profile Control Interface (APCI) the IntelliQue(TM) environment
can easily be configured to provide quick, real-time access to any database. The
APCI environment creates a very flexible and GUI design method for view, editing
and browsing important information.
CASHIQUE: E-PURSE WITH BACK-END PROCESSING & CARD MANAGEMENT SOLUTION
IntelliQue(TM) utilizes an e-purse solution that is CEPS compliant, allowing
multiple purses and currencies to be stored on the same card. A complete on-line
or off-line back-end settlement system supports the loading and exchange of
funds. Their card issuance program is support by a 24/7 customer support team,
which handles any card tracking problems and card re-issuance concerns.
The ability to provide proper identification of the patient is important. The
iQue Rx(TM) system provides alternative identification options, including: voice
print, fingerprint and photo identification. Two different photo resolution
versions could be created at patient registration. The higher quality, size, and
larger digital file size photo would be stored either on the workstation or
server and the thumbprint (e.g., drivers license size) could be stored on the
smart card.
Keeping a patient's medical history safe from computer intruders can be
accomplished by having them carry their personal health records in a wallet or
purse on smart cards or the new UltraCard. cQue believes that new media will
change the way people think about prescription orders and medical records. Using
secure encrypted data, smart cards (and soon UltraCards) allow physicians and
other healthcare providers to create, maintain and update standardized patient
medical information for use throughout the whole medical community on a tightly
controlled "right-to-know" basis. This is accomplished through individual
patient, pharmacist and physician personal smart cards (and soon UltraCards),
read/write card terminals and high security cryptographic software globally tied
together with the use of Internet and interlinked networks.
The smart card (and soon the UltraCard) contains the patient's emergency health
details, established in compliance with most generally accepted American medical
standards. The patient's general practitioner, who possesses a professional's
card, may update the medical file, as permitted by legal standards. Read and
write access to the patient's card is protected by the card-bearer's
confidential code. The card also contains the name and address of the patient
and even details of insurance coverage, if necessary. A special smart card
reader (soon to be an UltraDrive) reads the card via the software application
program.
Data storage space on the smart card is very limited, unlike the relatively
larger storage capacity of the new UltraCard. Using existing smart cards, in
order to use the space effectively and efficiently, literal data (text) is used
sparingly. The Schlumberger 8K Cyberflex card, as an example, has only 8192
bytes of available EEPROM (non-volatile storage space). Such a card will only
hold approximately 1-1/2 typewritten pages. The alternative to storing literal
data, such as a personal physician's demographic information, is to provide a
database table populated with this information for all relevant physicians and a
reference number, or "key" for each one stored. This method requires much less
space on the smart card than the literal data. A problem associated with this
method occurs when the database is stored on a server. A connection to the
server is required or some alternative method must be used to retrieve the
literal data associated with a key. With the introduction of the UltraCard, the
medical industry will be able to make portable in the form of literal data much
more of the patient information, while also using additional UltraCard space to
enhance data security.
EFORNET CORPORATION
EforNet Corporation, a wholly-owned subsidiary of Upgrade, is a software and
hardware development company focused upon the commercialization of smart card
initiatives.
EforNet's objective has been to extend the high capacity, hard disk storage
technology of the UltraCard by incorporating this technology into a new
innovative smart card solution. Currently activities at EforNet are dormant.
GLOBAL CYBERSYSTEMS COMPANIES
Global Cybersystems Inc. is a Nevada Corporation which has licensed the sales
and marketing rights to the UltraCard technology in the United States for retail
and convenience applications, as well as banking. In addition the Company has
been licensed the worldwide gaming applications.
Global Cybersystems PLC is a privately owned company based in London, England
which is wholly owned by Global Cybersystems SA, a Swiss Company. The Companies
have the exclusive rights to commercialize the UltraCard technology in Europe.
The purpose of the company is to provide a variety of services including the
distribution, trade and licensing of electronic data storage media, hardware,
and software. Currently activities at Global Cybersystems are dormant.
ROCKSTER, INC. (TRANSACTION IN-PROCESS)
Rockster and Upgrade entered into a letter of intent dated December 11, 2000
pursuant to which Upgrade agreed to purchase 57% of Rockster's the outstanding
capital stock. On March 6, 2001, the Company also entered into a letter of
intent with Rockster Records, Inc. (Rockster Records) to acquire 10% of Rockster
Records for total purchase price of $2,000,000. The payments were to be made on
or before April 30, 2001. No definitive agreement has been entered into by the
parties. Upgrade has made substantial non-secured advances to Rockster there can
be no assurance that the transaction will be consummated or that Upgrade will
recover the advances made to Rockster.
ROCKSTER's primary focus is digital distribution and acquisition of intellectual
properties. The underlying technology applied to distribute and acquire content
is a magnet to both, artists and consumers. It protects and creates revenues for
the artist and allows consumers to pay for materials exchanged among themselves.
And all this can be done securely, anonymously, and most importantly,
conveniently. Its peer-to-peer dynamic allows for fast dissemination of
Rockster's technologies and content. Rockster's model is to build assets and
generate income concurrently.
ROCKSTER has been structured to be a full service distribution entity
incorporating new technologies, a record label, a music publishing division, and
a production company.
THE TECHNOLOGY - Rockster has four products that when deployed will create a
methodology for a complete solution of intellectual property distribution
system. The products are: WebBouncer, WebCard, RightTrack and DEEVA.
WEBBOUNCER can catalogue every Web user in the world that's not unique for a
Proxy Server. But, what's unique to WebBouncer is its Extra Intelligence that
can encrypt this database and do 3 things with it:
BI-DIRECTIONAL SECURITY
Allows parents to prevent their kids from being exposed to undesirable materials
that can be downloaded to their PCs. But, also it allows employers to control
what goes out of their network and into the hands of the competition or
strangers that have no business acquiring such information. It's an intelligent
filter that works in both directions with data coming in and data going out.
BROWSE WITH COMPLETE ANONYMITY
Once your personal information is encrypted, no one can learn anything about you
anymore, and you can choose to browse the web with complete anonymity. Your
Internet pseudonym, say John Doe or Marie Jane, is all the Data Miners can
collect on you. There is absolutely no footprints left behind your journey on
the web - it's zero knowledge about what you do. If you don't break any laws,
no one will ever know what you do or what you buy or what sites you visit when
you browse the net.
INTERFACE WITH WEBCARD
The WebCard lies on top of your real information on the WebBouncer Server, but
like WebBouncer, it allows you to go out click and buy without leaving any
information behind for the digital vultures. Moreover, it makes the online
shopping faster and more pleasant - you find a song (single track), a book, a
shampoo, or whatever, just click and go. All the information that you need to
buy is pre-set on the anonymous card, and therefore you no longer need to fill
out forms, give credit card numbers, mother's maiden name, social security, etc.
RIGHTTRACK - a very significant technology. RightTrack embeds code (not
fingerprint or watermark) into digital files. It does not matter if it is a
song, an article, a music sheet, a video game, etc. Once encoded with this
technology, such a file can be tracked on the web for various purposes. For
example, a song can allow WebBouncer to collect money for the artist who wrote
the song or for the writer of an article, and so on.
DEEVA - is an acronym for Dynamic Efficient E-commerce Virtual Agent. It causes
every computer on the Internet to look and feel like a directory on your own
computer. That's called a peer-to-peer network. Do you want to buy a rare stamp?
Just fill out a simple form with specifics about the stamp, and how much you
want to pay for it, and submit it. Anyone in the world selling that stamp will
find you within seconds - voila you got your stamp. No more useless trips to
e-bay, Yahoo!, or stamp sites on the Internet. And guess what? If the seller is
a WebBouncer member with a WebCard you don't even have to talk money. His
WebCard will be credited the amount upon which you both agreed, and your WebCard
will be debited the same amount.
FOREIGN OPERATIONS
The Company does not engage in any operations in foreign countries.
PERSONNEL
As of September 30, 2001, the Company and its subsidiaries had 35 full time
employees. The Company from time-to-time will contract with outside
programmers, engineers and other data processing professionals, rather than
hiring full-time staff. The employees are not represented by a collective
bargaining unit, and the Company considers its relationship with its employees
to be good. Rockster, Inc on September 30, 2001 had 3 full time equivalent
employees.
ITEM 2. PROPERTIES
-------------------
The following table sets forth information relating to each of the Company's
offices as of September 30, 2001. The total net book value of the Company's
premises and equipment (including land, building and leasehold improvements and
furniture, fixtures and equipment) at September 30, 2001 was $2.1 million.
PRINCIPAL BUSINESS OFFICE:
1411 Fourth Avenue, Suite 629, Seattle, Washington 98101
SUBSIDIARY OFFICES:
Ultracard, Inc.
---------------
980 University Ave., Los Gatos, California 95032 (effective January 11,
2001)
4101 Westerly Place, Suite 108, Newport Beach, California 92660
2220 Eastman, Suite 106, Ventura, California 93003 (closed October 2001)
cQue Corporation
----------------
10900 NE 8th Street, Suite 900, Bellevue, Washington 98004
EforNet
-------
1411 Fourth Avenue, Suite 629, Seattle, Washington 98101
Rockster, Inc. (Transaction In-Process)
--------------
8820 Wilshire Blvd., Beverly Hills, California 90211
Upgrade and all its subsidiaries lease their facilities for various terms.
Ultracard also owns a residence near the company's office which is used by
management when necessary. The Company believes that all of its properties and
equipment are well maintained, in good operating condition and adequate for all
present and anticipated needs of the Company. The premises are adequately
insured against perils consistent with industry standards.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
Upgrade, its president, Daniel S. Bland, and Chief Operating & Financial
Officer, Howard Jaffe, are defendants in The Pathways Group, Inc. v. Upgrade
-----------------------------------
International Corporation et al., Superior Court of the State of California in
-------------------------------
for the County of Sonoma. The complaint, filed August 3, 2001, alleges breach of
merger and collateral agreements between Upgrade and plaintiff, breach of oral
agreement, fraud, and negligent material misrepresentation, and seeks specific
performance of the agreements, and an injunction against exercising provisions
pursuant to the merger agreement whereby Upgrade could obtain control of
Pathways. Specifically, the complaint alleges that Upgrade failed to provide
interim financing to Pathways pending consummation of the proposed merger
transaction, and prevented Pathways from obtaining alternate sources of
financing. Upgrade believes that the plaintiff's allegations are without legal
or factual basis and intends to vigorously defend the lawsuit. Upgrade filed a
counterclaim against Pathways, its Board of Directors and executive officers,
for moneys due and owing from funds advanced, fraud in the inducement as well as
other misrepresentations made by Pathways to Upgrade. As a result, Upgrade
recorded a provision for the advances made to Pathways in the event those
amounts prove to be uncollectible.
Upgrade, its president, Daniel S. Bland, and Chief Operating & Financial
Officer, Howard Jaffe, are defendants in Kenneth Donnelly v. Upgrade
---------------------------
International Corporation et al., Superior Court of the State of California in
---------------------
for the County of Santa Clara, Cause No. CV801537. The complaint, filed
September 18, 2001, alleges breach of employment contract, breach of oral
argument, and false representations to induce relocation. Specifically,
plaintiff alleges that Upgrade has failed to pay him employment wages. Upgrade
believes that the plaintiff's allegations are without legal or factual basis
and intends to vigorously defend the lawsuit.
Pursuant to a court order dated May 26, 2000, the three actions previously filed
against Upgrade and its president, Daniel S. Bland, have been consolidated into
one action, In Re Upgrade International Corporation Securities Litigation, U.S.
District Court, Western District of Washington at Seattle, c/a #C00-0298. A
Consolidated and Amended Class Action Complaint was filed July 24, 2000. Six
minority shareholders are named as lead plaintiffs. The complaint alleges that
material misrepresentations and omissions were made by Upgrade and Mr. Bland in
violation of the Securities Exchange Act of 1934. Specifically, the complaint
alleges that Upgrade and Mr. Bland made false statements regarding market
readiness and technological capabilities of its UltraCard technology, thereby
artificially inflating Upgrade's stock. The consolidated complaint seeks class
certification and payment of unspecified damages and attorneys fees. Upgrade
filed a motion to dismiss the complaint, which was affirmed by the court on
February 9, 2001. Plaintiffs appealed the court's order to dismiss, and the
defendants filed a cross appeal seeking sanctions. The parties entered into a
stipulated agreement to dismiss their appeals; which closed this case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
On March 27, 2001, the Company held its Annual Meeting of Shareholders. The
shareholders voted on and approved the following matters, with the voting
results indicated:
Issue 1: Election of Directors:
Daniel S. Bland, Class 3 (term expiring 2004)
For: 11,273,980 Withheld Vote: 123,068
Malcolm P. Burke, Class 3 (term expiring 2004)
For: 11,277,580 Withheld Vote: 119,468
Ronald P. Erickson, Class 2 (term expiring 2003)
For: 11,132,474 Withheld Vote: 264,574
Howard A. Jaffe, Class 2 (term expiring 2003)
For: 11,271,930 Withheld Vote: 125,118
Issue 2: For approval of the Company's 2000 Omnibus Stock Option Plan:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
7,127,515 63,314 60,055 4,146,164
Issue 3: The appointment of Grant Thornton, L.L.P. as the Company's
independent auditors for the fiscal year 2001:
For Against Abstain Other Non-Votes
--- ------- ------- ----------------
11,353,455 13,801 29,792 9,758,113
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------
The Company's common stock is traded on the OTC Bulletin Board Market under the
symbol "UPGD" as well as the Frankfort Stock Exchange. The approximate number
of stockholders of record of common stock as of January 8, 2002 was 388.
Certain shares of the Company are held in "nominee" or "street" name and
accordingly, the number of beneficial owners of such shares are not known or
included in the foregoing number. Such shares are not separated to count actual
beneficial owners. As of January 8, 2002 there were 41,282,802 shares of common
stock outstanding. The following table presents quarterly market information
for the Company's common stock for the fiscal year ended September 30, 2001:
MARKET PRICE RANGE
LOW HIGH CLOSING
------- ------ --------
FISCAL YEAR 2001
----------------
Quarter ended September 30, 2001 $ .57 $ 2.89 $ 1.37
-------------------------------- ------- ------ --------
Quarter ended June 30, 2001 $ 2.20 $ 3.34 $ 2.31
-------------------------------- ------- ------ --------
Quarter ended March 31, 2001 $ 1.63 $ 4.84 $ 3.34
-------------------------------- ------- ------ --------
Quarter ended December 31, 2000 $ 2.38 $11.00 $ 2.66
-------------------------------- ------- ------ --------
FISCAL YEAR 2000
----------------
Quarter ended September 30, 2000 $ 9.13 $20.25 $ 9.91
-------------------------------- ------- ------ --------
Quarter ended June 30, 2000 $ 8.00 $27.50 $ 14.88
-------------------------------- ------- ------ --------
Quarter ended March 31, 2000 $ 17.50 $89.88 $ 23.94
-------------------------------- ------- ------ --------
Quarter ended December 31, 1999 $ 3.00 $52.25 $ 40.50
-------------------------------- ------- ------ --------
During fiscal year 2001, the Company sold unregistered securities that have not
previously been disclosed in its filings on Form 10-QSB as follows:
On December 28, 2000, the Company granted to an officer/director of
the Company options to purchase 575,000 shares of common stock at an exercise
price of $2.50 per share, 375,000 of which were exercisable immediately and the
remaining 200,000 were to vest over a three-year period in equal increments of
8.33% every three months commencing on March 28, 2001. The options expire ten
years from the date of grant.
In January, Upgrade issued 3,872 shares of common stock at a price of
$2.60 per share, warrants to purchase 4,840 shares of common stock at a price of
$2.60 per share, and warrants to purchase 7,744 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Securities Act of 1933 (the "Act").
In January, Upgrade issued 7,744 shares of common stock at a price of
$2.60 per share, warrants to purchase 9,680 shares of common stock at a price of
$2.60 per share, and warrants to purchase 15,488 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In January, Upgrade issued 3,872 shares of common stock at a price of
$2.60 per share, warrants to purchase 4,840 shares of common stock at a price of
$2.60 per share, and warrants to purchase 7,744 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In February, Upgrade issued 3,904 shares of common stock at a price of
$2.60 per share, warrants to purchase 4,880 shares of common stock at a price of
$2.60 per share, and warrants to purchase 7,808 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In February, Upgrade issued 7,422 shares of common stock at a price of
$2.74 per share, warrants to purchase 9,278 shares of common stock at a price of
$2.74 per share, and warrants to purchase 14,844 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In February, Upgrade issued 3,904 shares of common stock at a price of
$2.60 per share, warrants to purchase 4,880 shares of common stock at a price of
$2.60 per share, and warrants to purchase 7,808 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
On March 27, 2001, the Company granted to officers and to board
members options to purchase 600,000 shares of common stock at an exercise price
of $3.19, 400,000 of which vested immediately with the remaining options vesting
in equal increments every three months commencing on June 30, 2001. The options
expire ten years from the date of grant.
In March, Upgrade issued 5,754 shares of common stock at a price of
$1.78 per share, warrants to purchase 7,193 shares of common stock at a price of
$1.78 per share, and warrants to purchase 11,508 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In March, Upgrade issued 11,508 shares of common stock at a price of
$1.78 per share, warrants to purchase 14,386 shares of common stock at a price
of $1.78 per share, and warrants to purchase 23,017 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In March, Upgrade issued 5,754 shares of common stock at a price of
$1.78 per share, warrants to purchase 7,193 shares of common stock at a price of
$1.78 per share, and warrants to purchase 11,508 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In April, Upgrade issued 4,448 shares of common stock at a price of
$2.32 per share, warrants to purchase 5,560 shares of common stock at a price of
$2.32 per share, and warrants to purchase 8,897 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In April, Upgrade issued 8,300 shares of common stock at a price of
$2.49 per share, warrants to purchase 10,375 shares of common stock at a price
of $2.49 per share, and warrants to purchase 16,600 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In April, Upgrade issued 4,448 shares of common stock at a price of
$2.32 per share, warrants to purchase 5,560 shares of common stock at a price of
$2.32 per share, and warrants to purchase 8,897 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In May, Upgrade issued 3,991 shares of common stock at a price of
$2.61 per share, warrants to purchase 4,989 shares of common stock at a price of
$2.61 per share, and warrants to purchase 7,982 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In May, Upgrade issued 8,669 shares of common stock at a price of
$2.40 per share, warrants to purchase 10,836 shares of common stock at a price
of $2.40 per share, and warrants to purchase 17,337 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In May, Upgrade issued 3,991 shares of common stock at a price of
$2.61 per share, warrants to purchase 4,989 shares of common stock at a price of
$2.61 per share, and warrants to purchase 7,982 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In June, Upgrade issued 4,667 shares of common stock at a price of
$2.25 per share, warrants to purchase 5,833 shares of common stock at a price of
$2.25 per share, and warrants to purchase 9,333 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In June, Upgrade issued 9,361 shares of common stock at a price of
$2.24 per share, warrants to purchase 11,701 shares of common stock at a price
of $2.24 per share, and warrants to purchase 18,722 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In June, Upgrade issued 4,667 shares of common stock at a price of
$2.25 per share, warrants to purchase 5,833 shares of common stock at a price of
$2.25 per share, and warrants to purchase 9,333 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In July, Upgrade issued 6,412 shares of common stock at a price of
$2.08 per share, warrants to purchase 8,015 shares of common stock at a price of
$2.08 per share, and warrants to purchase 12,824 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In July, 2001, Upgrade issued 11,457 units at a price of $1.76 per
share as a loan penalty fee. Each unit contained one share and one warrant to
acquire one additional share of common stock at the same price. In addition, as
part of the loan penalty fee, Upgrade issued warrants to purchase 22,914 shares
of common stock at a price of $6.00 per share. The issuances were exempt under
Regulation S of the Act.
In July, Upgrade issued 6,412 shares of common stock at a price of
$2.08 per share, warrants to purchase 8,015 shares of common stock at a price of
$2.08 per share, and warrants to purchase 12,824 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In July, Upgrade issued 17,599 shares of common stock at a price of
$1.88 per share, warrants to purchase 22,000 shares of common stock at a price
of $1.88 per share, and warrants to purchase 35,199 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In July, 2001, Upgrade issued 2,864 units at a price of $1.76 per
share as a loan penalty fee. Each unit contained one share and one warrant to
acquire one additional share of common stock at the same price. In addition, as
part of the loan penalty fee, Upgrade issued warrants to purchase 5,729 shares
of common stock at a price of $3.00 per share. The issuances were exempt under
Regulation S of the Act.
In July, 2001, Upgrade issued 14,321 units at a price of $1.76 per
share as a loan penalty fee. Each unit contained one share and one warrant to
acquire one additional share of common stock at the same price. In addition, as
part of the loan penalty fee, Upgrade issued warrants to purchase 28,643 shares
of common stock at a price of $6.00 per share. The issuances were exempt under
Rule 506 and Section 4(2) of the Act.
In July, Upgrade completed a private placement offering of 37,000
shares of its common stock at a price of $2.00 per share for total proceeds of
$74,000. The offer and sale of securities was made pursuant to an exemption from
registration under Regulation S of the Act, due to the foreign nationality of
the investor.
In July, 2001, Upgrade issued 14,322 shares of its common stock at a
price of $1.56 per share as a loan penalty fee. The issuance was exempt under
Rule 506 and Section 4(2) of the Act.
In August, 2001, Upgrade issued 23,534 shares of its common stock at a
price of $.96 per share as a loan penalty fee. The issuance was exempt under
Rule 506 and Section 4(2) of the Act.
In August, Upgrade issued 15,316 shares of common stock at a price of
$1.27 per share, warrants to purchase 19,145 shares of common stock at a price
of $1.27 per share, and warrants to purchase 30,632 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In August, Upgrade issued 31,583 shares of common stock at a price of
$1.13 per share, warrants to purchase 39,479 shares of common stock at a price
of $1.13 per share, and warrants to purchase 63,167 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In August, Upgrade issued 15,316 shares of common stock at a price of
$1.27 per share, warrants to purchase 19,145 shares of common stock at a price
of $1.27 per share, and warrants to purchase 30,632 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In August, 2001, Upgrade issued 20,312 units at a price of $1.09 per
share as a loan penalty fee. Each unit contained one share and one warrant to
acquire one additional share of common stock at the same price. In addition, as
part of the loan penalty fee, Upgrade issued warrants to purchase 45,624 shares
of common stock at a price of $6.00 per share. The issuances were exempt under
Regulation S of the Act.
In August, 2001, Upgrade issued 23,242 units at a price of $1.09 per
share as a loan penalty fee. Each unit contained one share and one warrant to
acquire one additional share of common stock at the same price. In addition, as
part of the loan penalty fee, Upgrade issued warrants to purchase 46,483 shares
of common stock at a price of $6.00 per share. The issuances were exempt under
Rule 506 and Section 4(2) of the Act.
In August, 2001, Upgrade issued 5,078 units at a price of $1.09 per
share as a loan penalty fee. Each unit contained one share and one warrant to
acquire one additional share of common stock at the same price. In addition, as
part of the loan penalty fee, Upgrade issued warrants to purchase 10,156 shares
of common stock at a price of $3.00 per share. The issuances were exempt under
Regulation S of the Act.
In September, 2001, Upgrade issued 8,143 units at a price of $.72 per
share as a loan penalty fee. Each unit contained one share and one warrant to
acquire one additional share of common stock at the same price. In addition, as
part of the loan penalty fee, Upgrade issued warrants to purchase 16,285 shares
of common stock at a price of $3.00 per share. The issuances were exempt under
Regulation S of the Act.
In September, Upgrade issued 44,333 shares of common stock at a price
of $.72 per share, warrants to purchase 55,416 shares of common stock at a price
of $.72 per share, and warrants to purchase 88,665 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In September, Upgrade issued 20,649 shares of common stock at a price
of $.81 per share, warrants to purchase 25,812 shares of common stock at a price
of $.81 per share, and warrants to purchase 41,299 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In September, 2001, Upgrade issued 40,712 units at a price of $0.72
per share as a loan penalty fee. Each unit contained one share and one warrant
to acquire one additional share of common stock at the same price. In addition,
as part of the loan penalty fee, Upgrade issued warrants to purchase 81,426
shares of common stock at a price of $6.00 per share. The issuances were exempt
under Rule 506 and Section 4(2) of the Act.
In September, Upgrade issued 20,649 shares of common stock at a price
of $.81 per share, warrants to purchase 25,812 shares of common stock at a price
of $.81 per share, and warrants to purchase 41,299 shares of common stock at a
price of $3.00 per share as loan penalty fees. The issuances were exempt under
Regulation S of the Act.
In September, 2001, Upgrade issued 32,571 units at a price of $.72 per
share as a loan penalty fee. Each unit contained one share and one warrant to
acquire one additional share of common stock at the same price. In addition, as
part of the loan penalty fee, Upgrade issued warrants to purchase 65,140 shares
of common stock at a price of $6.00 per share. The issuances were exempt under
Regulation S of the Act.
In September, 2001, Upgrade completed a private placement offering of
1,600,000 shares of its common stock at a price of $.70 per share for total
proceeds of $1,120,000. The offer and sale of securities was made pursuant to an
exemption from registration under Regulation S of the Act, due to the foreign
nationality of the investor.
In September, 2001, Upgrade issued 563,080 shares of its common stock
at a price of $.54 per share pursuant to the conversion of debentures. The
issuance was exempt under Rule 506 and Section 4(2) of the Act.
In September, 2001, Upgrade issued 284,042 shares of its common stock
at a price of $.60 per share pursuant to the conversion of debentures. The
issuance was exempt under Rule 506 and Section 4(2) of the Act.
In September, 2001, Upgrade issued 124,721 shares of its common stock
at a price of $1.30 per share as a penalty for failure to file a registration
statement registering shares underlying warrants. The issuance was exempt under
Rule 506 and Section 4(2) of the Act.
In September, 2001, Upgrade issued 7,126 shares of its common stock at
a price of $2.90 per share as a loan penalty fee. The issuance was exempt under
Rule 506 and Section 4(2) of the Act.
In September, 2001, Upgrade issued 7,362 shares of its common stock at
a price of $2.83 per share as a loan penalty fee. The issuance was exempt under
Rule 506 and Section 4(2) of the Act.
In September, 2001, Upgrade issued 9,052 shares of its common stock at
a price of $2.32 per share as a loan penalty fee. The issuance was exempt under
Rule 506 and Section 4(2) of the Act.
In September, 2001, Upgrade issued 7,570 shares of its common stock at
a price of $2.73 per share as a loan penalty fee. The issuance was exempt under
Rule 506 and Section 4(2) of the Act.
In September, 2001, Upgrade issued 8,573 shares of its common stock at
a price of $2.43 per share as a loan penalty fee. The issuance was exempt under
Rule 506 and Section 4(2) of the Act.
In September, 2001, Upgrade issued 7,807 shares of its common stock at
a price of $2.69 per share as a loan penalty fee. The issuance was exempt under
Rule 506 and Section 4(2) of the Act.
In September, 2001, Upgrade issued 1,000,000 shares of its common
stock at a price of $1.50 per share as prepayment of a financing fee; the share
issuance is subject to cancellation in the event the financing does not close.
The issuance was exempt under Rule 506 and Section 4(2) of the Act.
In September, 2001, Upgrade completed a private placement offering of
200,000 shares of its common stock at a price of $1.00 per share for total
proceeds of $200,000. The offer and sale of securities was made pursuant to an
exemption from registration under Regulation S of the Act, due to the foreign
nationality of the investor.
In September, 2001, Upgrade completed a private placement offering of
1,000,000 shares of its common stock at a price of $.50 per share for total
proceeds of $500,000. The offer and sale of securities was made pursuant to an
exemption from registration under Regulation S of the Act, due to the foreign
nationality of the investor.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATION
-------------
The following is a discussion and analysis of the Company's financial position
and results of operation and should be read in conjunction with the information
set forth under "General" in Item 1 and the consolidated financial statements
and notes thereto appearing elsewhere in this report. Certain statements
contained in this Annual Report on Form 10-KSB, including without limitation,
statements containing the words "believes," "anticipates," "estimates,"
"expects," and words of similar import, constitute "forward looking statements."
You should not place undue reliance on these forward looking statements. Our
actual results could differ materially from those anticipated in these forward
looking statements for many reasons, including the risks faced by us described
in the Annual Report and in other documents we file with the Securities and
Exchange Commission.
GENERAL
The Company is a development stage enterprise. The Company is devoting
its present efforts into establishing a new business in the information
technology industry and, is currently in the process of identifying
markets and establishing applications for its technologies. The process of
commercialization of the Company's core technology is focused upon the
development of that core technology, the UltraCard and read/write device. In
addition, the Company is in the process of acquiring strategically aligned
businesses to facilitate certain applications of the Company's core technology.
To date, no operating revenues have been generated. The Company's operations to
date have consumed substantial and increasing amounts of cash. The
Company's negative cash flow from operations is expected to continue and to
accelerate in the foreseeable future. The development of the Company's
technology and potential products will continue to require a commitment of
substantial funds. The Company will need to raise substantial additional
capital to fund its operations and may seek such additional funding
through public or private equity or debt financing.
During 2001, equity investments has been increasing difficult reflecting the
marketplace; therefore the Company has incurred a great deal of debt financing
to meet its obligations during the year.
The Company's continued existence as a going concern is ultimately dependent
upon its ability to secure additional funding for completing and marketing its
technology and the success of its future operations. There can be no assurance
that such additional funding will be available on acceptable terms, if at all.
Year ended September 30, 2001 compared to year ended September 30, 2000.
Net losses aggregated $30.2 million in the fiscal year ending September 30,
2001 compared with an $17.4 million net loss for prior fiscal year. This
increase in net loss reflects a continued and growing level of investment
into the Company's technology, production processes and the development of
commercialization of the Company's core technology. Research and
development expenditures were approximately the same in the current fiscal
year, $6.4 million, compared to the prior year, $6.8 million, indicating the
continuing technology investment as the Company nears the completion of a
production ready product. The majority of the research and development
expenses occurred at UltraCard in a concentrated effort to complete a
commercialized version of its high memory capacity UltraCard and read write
device. These expenditures reflect the Company's focused efforts upon
completing its research and development initiatives, while at the same time,
establishing production processes and specifications to facilitate the
Company to engage others to produce the UltraCard and its read write device.
The other significant operating subsidiary cQue (formerly Centurion) contributed
approximately 7% of the total loss reflecting both the allocation of
limited resources along with the focus of the consolidated groups efforts to
complete the UltraCard technology. All of the Company's research and
development costs have been expensed as incurred.
As a result of the significant increase in debt financing to the Company,
interest expense increased to $5.7 million in the current fiscal year compared
to $1.0 million the previous year. The impact of higher costing funds to the
Company is a reflection of the capital markets and resulting lack of investment
activity that took place in 2001. As future investments in the Company permit,
it is the intention of the Company to paydown on its high cost financings and
debt.
During the fiscal year the Company announced that it had terminated the merger
agreement with The Pathways Group. Advances to Pathways of over $3.0
million were deemed potentially uncollectible and accordingly the Company
has provided an allowance for collection of the amount due. The
Company's advance to Pathways is collateralized by way of a general security
over the Pathways assets. The Company plans to actively pursue collection.
Sales and marketing expenditures were $1.6 million in the current fiscal
year compared to $2.0 million the previous year. Albeit modest, sales and
marketing expenditures are associated with the Company's attendance at trade
shows and industry awareness programs to enable the Company to build market
awareness and to establish and develop new markets in preparation for an
effective product launch when the Company completes the commercialization
phase of development.
Year ended September 30, 2000 compared to year ended September 30, 1999.
Net losses from operations totaled $17.4 million for the fiscal year ended
September 30, 2000. This compares to a net loss of $10.6 million for the year
ended September 30, 1999. The loss reflects the Company's continuously growing
level of investment into the Company's subsidiaries technologies, production
processes and industrialization opportunities. The increase in the net loss as
compared to the prior year is also attributable to the operations of the
Company's subsidiaries whose operating results were included, primarily, using
equity accounting prior to September 30, 1999. In addition, due to continuous
losses incurred by the subsidiaries, the Company's minority interest was
eliminated and all losses are now included in the net loss of the Company. The
losses for the year ended September 30, 2000 borne by each subsidiary are as
follows: Ultracard 42%, cQue Corporation (formerly Centurion) 15%, EforNet 11%
and 32% the Company itself.
For all expense categories, changes are largely attributable to the
aforementioned differences in inclusion of subsidiaries operating results and
minority interest allocations in the fiscal year 2000 as compared to the fiscal
year 1999. Other specific explanations by expense categories follow.
Direct research and development expenditures increased by $5.7 million as
compared to the fiscal year 1999. This increase is due primarily to costs
incurred in developing UltraCard's technology. A significant portion of the
increase was due to the addition of new personnel, prototype development and
contracts with external research and development personnel.
All of the Company's research and development costs are expensed as incurred
except for capitalized cost of research and development equipment that has
alternative future uses. Research and development costs are expected to
accelerate in order to meet anticipated market opportunities.
In an effort to establish the Company's market for UltraCard's technology and
related products, and in order to augment internally developed research and
development initiatives, the Company anticipates licensing technology from
others, engaging others to develop components and/or acquiring other businesses
with similar strategic focus.
General and administrative expenses have increased from $2.0 to $8.8 million.
Included in expenses incurred during the year ended September 30, 2000, was a
noncash compensation of approximately $1 million in legal expenses incurred in
connection with defending the Company against the outstanding class action
lawsuit and approximately $0.5 million in other contract costs. In addition,
fiscal year 2000 general and administrative expenses include approximately $1
million in legal and other professional costs incurred in conjunction with
occurred and pending acquisitions. General and administrative costs are
expected to continue to grow in the foreseeable future.
Sales and marketing expenditures increased to approximately $2.0 million or 21%
reflecting Company's trade show attendances and efforts to increase market
awareness in anticipation of product launches.
In process research and development decreased in the fiscal year 2000 and
compared to 1999 as majority of the acquisitions occurred during the year ended
September 30, 1999.
Liquidity and Capital Resources
At September 30, 2001, cash and cash equivalents were approximately $2.6 when
compared to $0.4 million as of September 30, 2000. However the increase in cash
is reflective of the timing of a closing of a financing. The US and
international economy, conditions of world capital markets, and other external
factors impact the ability of the Company to raise capital. During the last year
the capital markets willingness to invest in development companies has become
more restrictive and limited the Company's ability to fund the financing
agreements of the subsidiaries resulting in increased accounts payable balances.
However the Company was able to secure other forms of financings rather than
equity investment to meet its obligations throughout the year. During the year
ended September 30, 2001, the Company did raise approximately $15 million in
privately placed equity, debt and other forms of financings. The Company's
negative cash flow from operations is expected to continue. The Company does
expect that its existing and expected financings will be adequate to satisfy the
requirements of its current and planned operations until the end of the fiscal
year 2002.
Subsequent to September 30, 2001, the Company raised an additional $2.2 million
through $1.7 million in equity placements and $.5 million in debt and
convertible debenture placements.
The Company continues to devote extensive efforts in its ability to raise
capital, including the identification of a significant number of new sources of
capital.
Subsequent Events
Subsequent to the year end the Company has continued to fund operations through
the issuance of both equity and debt securities. During the period October to
December, 2001 the Company received $1,108,705 from foreign investors in
transactions exempt from registration under Regulation "S", private placement
offering documents for the issuance of 2,217,410 shares at a price of $0.50 per
share. In addition warrants to acquire 1,567,410 shares at $0.50 per share were
issued in conjunction with the offerings.
Between September through November 2001 the Company received proceeds
aggregating $618,734 from a number of investors pursuant to both Regulation "S"
and Rule 506 private placement offering documents for the issuance of 680,608
shares at a price of $0.91 per share. The Regulation "S" offerings represent
66,275 shares with the balance of 614,333 being issued pursuant to Rule 506. In
addition warrants to acquire an equal number of shares at $0.91 per share were
issued in conjunction with the offering.
During the period October to December 2001 the Company received proceeds
pursuant to notes payable aggregating $488,500. The notes have a term of 30
days, and bear interest at a rate of 10% per annum. In the event that the loans
are not repaid on the maturity date, a penalty charge will be due and payable as
follows;
10% of the unpaid principal and interest at the maturity date will be issued in
common stock to the lender, calculated based upon the average trading price of
the common stock of the Company on the loan maturity date.
Warrants to acquire common stock will be issued equal to 10% of the unpaid
principal and interest at the loan maturity date issued at a strike price of the
average trading price of the Company's common stock on the maturity date.
Additional warrants to acquire common stock will be issued equal to 20% of the
unpaid principal and interest at the loan maturity date calculated at the
current market issued at a strike price of $3.00.
In the event that the loan principal and interest is not repaid, an additional
penalty will become due and payable every 30 days following the maturity date.
This disclosure is not an offer to sell securities or a solicitation of an offer
to buy securities. No money or other consideration is being solicited or will be
accepted by way of this disclosure. Any public offer of the Company's common
stock will be made only by means of a prospectus filed with the SEC.
FORWARD LOOKING STATEMENTS
Statements made about the Company's future economic performance, strategic plans
or objectives, revenues or earnings projections, or other financial items and
similar statements are not guarantees of future performance, but are forward
looking statements. By their nature, these statements are subject to numerous
uncertainties that could cause actual results to differ materially from those in
the statements. Important factors that might cause the Company's actual results
to differ materially include, but are not limited to, the following:
- The Company's ability to continue the development of its products and
services in a timely manner;
- The Company's ability to adapt successfully to technological changes;
- The Company's ability to access cost effective funding; and
- Changes in financial markets and general economic conditions.
SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial and other data of
the Company at the dates and for the periods indicated. The information is
derived in part from and should be read in conjunction with the Company's
consolidated financial statements and notes thereto (dollars in thousands,
except common share data):
YEAR ENDED SEPTEMBER,
-------- -------- -------- ------- -------
2001 2000 1999 1998 1997(1)
-------- -------- -------- ------- -------
STATEMENT OF OPERATIONS DATA:
Costs and expenses:
Research and development $ 6,382 $ 6,834 $ 1,108 $ 209
Purchased in-process research and -0- 426 5,122 424
development
Sales and marketing 1,624 1,973 1,642 -0-
General and administrative 11,783 8,771 1,972 404
-------- -------- -------- -------
19,789 18,004 9,844 1,037
Other expenses:
Equity in losses of Ultracard -0- -0- 1,088 177
Interest expense 5,758 953 11 -0-
Other, net 5,076 206 36 (1)
-------- -------- -------- -------
10,834 1,159 1,135 176
-------- -------- -------- -------
Minority interest in losses of (453) (1,759) (356) -0-
subsidiaries
-------- -------- -------- -------
Net Loss $30,170 $17,404 $10,624 $1,213
-------- -------- -------- -------
COMMON SHARE DATA:
Basic and diluted loss per common $ 1.35 $ 0.93 $ 0.79 $ 0.15
share
1. Upgrade commenced operations February 5, 1997, the results of operations
during 1997 were negligible.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
Consolidated Financial Statements and Report of
Independent Certified Public Accountants
UPGRADE INTERNATIONAL CORPORATION AND
SUBSIDIARIES
(A development stage enterprise)
September 30, 2001 and 2000
C O N T E N T S
Page
STATEMENT OF MANAGEMENT RESPONSIBILITY 2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 2
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 2
CONSOLIDATED STATEMENTS OF OPERATIONS 2
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 2
CONSOLIDATED STATEMENTS OF CASH FLOWS 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3
Statement of Management Responsibility
--------------------------------------
Upgrade International's management is responsible for the preparation, integrity
and fair presentation of its published financial statements. The consolidated
financial statement shave been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on judgments and
estimates made by management. Management also prepared other information
included in the annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.
The consolidated financial statements have been audited by an independent
accounting firm, Grant Thornton, LLP, which has been given unrestricted access
to all financial records and related data, including minutes of all meetings of
shareholders, the Board of Directors and committees of the Board. Management
believes that representations made to the independent auditors during their
audit were valid and appropriate.
Management maintains a system of internal controls over the preparation of its
published financial statements, which is intended to provide reasonable
assurance to the Company's Board of Directors and officers regarding preparation
of financial statements presented fairly in conformity with generally accepted
accounting principles.
Management has long recognized is responsibility for conducting the Company's
affairs in a manner, which is responsive to the interest of employees,
stockholders, investors and society in general. This responsibility is included
in the statement of policy on ethical standards, which provides that the Company
will fully comply with laws, rules and regulations of every community in which
it operates and adhere to the highest ethical standards. Officers, employees
and agents of the Company are expected and directed to manage the business of
the Company with complete honesty, candor and integrity.
The Board, operating through its audit committee, which is composed entirely of
directors who are not officers or employees of the Company, provides oversight
to the financial reporting process.
Even effective internal controls, no matter how will designed, have inherent
limitations, such as the possibility of human error or of circumvention or
overriding of controls, and the consideration of cost in relation to benefit of
a control. Further, the effectiveness of an internal control can change with
circumstances.
Upgrade International's management periodically assesses the internal controls
for inadequacy. Based upon these assessments, Upgrade International's
management believes that, in all material respects, its internal controls
relating to the preparation of the consolidated financial statements as of
September 30, 2001 functioned effectively during the year ended September 30,
2001.
Daniel S. Bland Howard A. Jaffe
Chief Executive Officer Chief Financial Officer
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Upgrade International Corporation
We have audited the accompanying consolidated balance sheets of Upgrade
International Corporation and Subsidiaries (a development stage enterprise) as
of September 30, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years then
ended and for the period from inception (February 5, 1997) to September 30,
2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Upgrade
International Corporation and Subsidiaries as of September 30, 2001 and 2000,
and the results of their operations and their cash flows for the years then
ended and for the period from inception (February 5, 1997) to September 30,
2001, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared using generally
accepted accounting principles assuming that the Company will continue as a
going concern. As discussed in note B to the financial statements, the Company
has incurred substantial losses in each of the two years ended September 30,
2001 which raises substantial doubt about its ability to continue as a going
concern. Management's plans in regards to their planned financings and other
matters are also described in note B. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
Seattle, Washington
January 7, 2002
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
2001 2000
CURRENT ASSETS
Cash $ 2,551,465 $ 398,989
Restricted deposit 300,000 805,687
Subscriptions receivable 500,000 32,725
Note receivable from related party 135,243 -
Prepaid expenses, deposits and other 110,022 121,491
------------- -------------
Total current assets 3,596,730 1,358,892
PROPERTY AND EQUIPMENT - AT COST,
less accumulated depreciation and amortization 2,071,663 1,791,257
SPUTTERING MACHINE, held for sale at September 30, 2001 2,000,000 3,301,625
ADVANCES TO THE PATHWAYS GROUP, INC. - 1,900,825
ADVANCES TO ROCKSTER GROUP 1,084,000 -
OTHER ASSETS
Intangible and deferred assets, net of accumulated amortization 466,256 370,206
Acquisition deposits 1,820,715 -
Other deposits 194,128 328,051
------------- -------------
Total assets $ 11,233,492 $ 9,050,856
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 3,853,950 $ 1,993,796
Payable to related parties 5,503,022 175,240
Accrued liabilities 2,972,713 733,241
Bridge loans - 799,177
Notes payable 1,717,231 -
Equipment purchase contract payable 2,024,748 2,307,025
Royalty fee payable to Card Tech, Inc. 1,161,873 487,500
------------- -------------
Total current liabilities 17,233,537 6,495,979
CONVERTIBLE DEBENTURES, net of unamortized discount 2,004,488 809,043
MINORITY INTEREST 1,473,179 -
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.001 par value, 100,000,000 shares authorized 24,524 20,341
Stock subscriptions 2,742,586 323,640
Additional paid in capital 53,947,618 36,925,837
Deferred compensation (498,559) -
Receivable from stockholders of subsidiary (266,621) (266,621)
Accumulated development stage deficit (65,427,260) (35,257,363)
------------- -------------
(9,477,712) 1,745,834
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 11,233,492 $ 9,050,856
============= =============
The accompanying notes are an integral part of these statements.
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
results of
operations since
Year ended September 30, inception
-------------------------
2001 2000 (February 5, 1997)
------------ ----------- --------------------
Costs and expenses
Research and development $ 6,381,731 $ 6,834,508 $ 14,532,403
Purchased in-process research and development - 425,800 5,971,603
Sales and marketing 1,623,842 1,972,838 5,238,805
General and administrative 11,782,650 8,770,862 22,930,657
------------ ----------- --------------------
19,788,223 18,004,008 48,673,468
Other expenses
Equity in losses of UltraCard - - 1,264,316
Interest expense 5,758,307 953,286 6,722,301
Loss on advances to Pathways 3,549,780 3,549,780
Other, net 1,526,252 205,787 1,768,400
------------ ----------- --------------------
10,834,339 1,159,073 13,304,797
Minority interest in losses of subsidiaries (452,665) (1,759,091) (2,567,800)
------------ ----------- --------------------
NET LOSS $30,169,897 $17,403,990 $ 59,410,465
============ ============ ===================
LOSS PER COMMON
SHARE-BASIC AND DILUTED $ 1.35 $ 0.93 $ 4.53
============ ============ ===================
The accompanying notes are an integral part of these statements.
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Since inception through September 30, 2001
Receivable
from Accumulated
Voting common stock Common stock subscribed Additional Deferred stockholders Development
--------------------- ------------------------ paid-in Compen- of stage
Shares Amount Shares Amount capital sation subsidiary deficit
---------- --------- ----------- ----------- ------------ -------- ------------ -----------
Balance at February 5, 1997 - $ - - $ - $ - $ - $ - $ -
Issuance of founder's shares at
$.03 per share in February
1997 adjusted for
December 1997 1:2 reverse
stock split 500,000 500 - - 29,500 - - -
Issuance of common stock in
February 1997 at $.10 per
share adjusted for
December 1997 1:2 reverse
stock split 29,000 29 - - 5,771 - - -
Issuance of common stock at
$.0025 per share in
December 1997 Reg. D
Rule 504 offering 4,000,000 4,000 - - 6,000 - - -
Issuance of common stock in
December 1997 to an
officer in exchange for
property contribution 4,000,000 4,000 - - 47,250 - - -
Sale of common stock at $.50
per share in January 1998
Reg. D Rule 504 offering 1,680,988 1,681 - - 838,813 - - -
Common stock subscribed in
September 1998 at $.065
per share - - 2,250,000 146,250 - - - -
Net loss for the year ended
September 30, 1998 - - - - - - - (1,213,530)
---------- --------- ----------- ----------- ------------ -------- ------------ -----------
Balances at September 30, 1998 10,209,988 10,210 2,250,000 146,250 927,334 - - (1,213,530)
Issuance of subscribed shares
in November 1998 Reg. D
Rule 504 offering 2,250,000 2,250 (2,250,000) (146,250) 144,000 - - -
Issuance of common stock in
January 1999 to satisfy trade
liabilities 437,500 438 - - 103,312 - - -
Issuance of common stock
warrants at $.25 per share in
January 1999 - - - - 221,000 - - -
Common stock subscribed at
$1.80 per share in February
1999 private placement - - 999,999 1,799,998 - - - -
Issuance of common stock
warrants for services in
August 1999 - - - - 64,155 - - -
Common stock subscribed at
$.25 per share in August
1999 through exercise of
common stock warrants - - 27,500 71,030 (64,155) - - -
Issuance of common stock
warrants and options at
exercise prices of $.25 and
$2.50 per share in
September 1999 for
services - - - - 671,893 - - -
Issuance of common stock at
$.25 per share in September
1999 through exercise of
employee stock options 60,000 60 - - 14,940 - - -
Total
------------
Balance at February 5, 1997 $ -
Issuance of founder's shares at
$.03 per share in February
1997 adjusted for
December 1997 1:2 reverse
stock split 30,000
Issuance of common stock in
February 1997 at $.10 per
share adjusted for
December 1997 1:2 reverse
stock split 5,800
Issuance of common stock at
$.0025 per share in
December 1997 Reg. D
Rule 504 offering 10,000
Issuance of common stock in
December 1997 to an
officer in exchange for
property contribution 51,250
Sale of common stock at $.50
per share in January 1998
Reg. D Rule 504 offering 840,494
Common stock subscribed in
September 1998 at $.065
per share 146,250
Net loss for the year ended
September 30, 1998 (1,213,530)
------------
Balances at September 30, 1998 (129,736)
Issuance of subscribed shares
in November 1998 Reg. D
Rule 504 offering -
Issuance of common stock in
January 1999 to satisfy trade
liabilities 103,750
Issuance of common stock
warrants at $.25 per share in
January 1999 221,000
Common stock subscribed at
$1.80 per share in February
1999 private placement 1,799,998
Issuance of common stock
warrants for services in
August 1999 64,155
Common stock subscribed at
$.25 per share in August
1999 through exercise of
common stock warrants 6,875
Issuance of common stock
warrants and options at
exercise prices of $.25 and
$2.50 per share in
September 1999 for
services 671,893
Issuance of common stock at
$.25 per share in September
1999 through exercise of
employee stock options 15,000
Continued
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) - Continued
Since inception through September 30, 2001
Receivable
from
Voting common stock Common stock subscribed Additional Deferred Stockholders Accumulated
------------------- ------------------------- paid-in Compen- of Development
Shares Amount Shares Amount capital sation subsidiary stage deficit
---------- ------ ----------- ------------ ---------- -------- ------------ --------------
Common shares subscribed
at $2.50 per share in
September 1999 - - 4,189,434 10,473,585 - - - -
Receivable from UltraCard
stockholders for
payroll taxes and
related charges inconnection
with stock
issued by UltraCard as
compensation - - - - - - (400,000) -
Net loss for the year ended
September 30, 1999 - - - - - - - (10,623,048)
---------- ------ ----------- ------------ ---------- -------- ------------ --------------
Balances at September 30,
1999 12,957,488 12,958 5,216,933 12,344,613 2,082,479 - (400,000) (11,836,578)
Common shares subscribed
by a broker at $2.50 per
share in October 1999 in
connection with placement
of $1 million in
convertible debentures
- - 16,000 40,000 (40,000) - - -
Issuance of common stock
warrants with a strike price
of $.25 per share in
October 1999 - - - - 339,500 - - -
Issuance of subscribed
Shares in November 1999 999,999 1,000 (999,999) (1,799,998) 1,798,998 - - -
Issuance of common shares
, including shares
subscribed, in November
1999 at $2.50 per share,
net of expenses
4,652,281 4,652 (4,045,583) (10,113,957) 11,521,038 - - -
Common shares subscribed
by a broker at $2.50 per
share in November 1999
in connection November
1999 private placements
- - 24,000 60,000 (60,000) - - -
Issuance of common stock at
$.25 per share in
December 1999 through
exercise of
employee stock options 90,000 90 - - 22,410 - - -
Common shares issued for
services in December 1999
70,000 70 - - 242,830 - - -
Allocation of debenture
proceeds to beneficial
conversion feature - - - - 676,360 - - -
Allocation of debenture
proceeds to stock
warrants - - - - 323,640 - - -
Issuance of common stock at
$44 per share in January
2000 through a private
placement, net of
expenses 100,000 100 - - 4,289,900 - - -
Issuance of common stock at
$.25 and $2.50 per share
in February 2000 through
exercise of stock warrants
294,449 295 - - 304,046 - - -
Total
------------
Common shares subscribed
at $2.50 per share i
September 1999 10,473,585
Receivable from UltraCard
stockholders for
payroll taxes and
related charges inconnection
with stock
issued by UltraCard as
compensation (400,000)
Net loss for the year ended
September 30, 1999 (10,623,048)
------------
Balances at September 30,
1999 2,203,472
Common shares subscribed
by a broker at $2.50 per
share in October 1999 in
connection with placement
of $1 million in
convertible debentures
-
Issuance of common stock
warrants with a strike price
of $.25 per share in
October 1999 339,500
Issuance of subscribed
Shares in November 1999 -
Issuance of common shares
, including shares
subscribed, in November
1999 at $2.50 per share,
net of expenses
1,411,733
Common shares subscribed
by a broker at $2.50 per
share in November 1999
in connection November
1999 private placements
-
Issuance of common stock at
$.25 per share in
December 1999 through
exercise of
employee stock options 22,500
Common shares issued for
services in December 1999
242,900
Allocation of debenture
proceeds to beneficial
conversion feature 676,360
Allocation of debenture
proceeds to stock
warrants 323,640
Issuance of common stock at
$44 per share in January
2000 through a private
placement, net of
expenses 4,290,000
Issuance of common stock at
$.25 and $2.50 per share
in February 2000 through
exercise of stock warrants
304,341
Continued
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) - Continued
Since inception through September 30, 2001
Receivable
Voting common stock Common stock subscribed Additional Deferred from Accumulated
--------------------- ------------------------ paid-in compen- stockholders development
Shares Amount Shares Amount capital sation of subsidiary stage deficit
---------- --------- ----------- ----------- ----------- -------- -------------- --------------
Issuance of common stock in
February 2000
subscribed to in
August 1999 through
exercise of common
stock warrants 27,500 27 (27,500) (71,030) 71,003 - - -
Issuance of common stock in
April 2000 in connection
with reverse acquisition
of Second CMA, Inc. 45,000 45 - - 1,155 - - -
Issuance of common stock
options with a strike
price of $10.00 per share
in April 2000 for legal
services - - - - 1,047,670 - - -
Issuance of common stock at
$10 per share in April
2000 through a private
placement, net of
expenses 50,000 50 - - 449,950 - - -
Issuance of common stock at
$11.31 per share in May
2000 through a private
placement, net of
expenses 80,000 80 - - 859,480 - - -
Common shares subscribed
to through a cashless
exercise of common
stock warrants in May
2000 - - 102,609 323,640 (323,640) - - -
Issuance of common stock at
$2.50 per share in June
2000 through exercise of
stock warrants 91,878 92 - - 229,603 - - -
Issuance of common stock at
$10.48 per share in July
2000 through a private
placement 160,000 160 - - 1,676,640 - - -
Issuance of common stock at
$.25 and $2.50 per share
in July 2000 through
exercise of stock
warrants 130,000 130 - - 156,120 - - -
Distribution of common
stock warrants on
August 16, 2000 - - - - 6,016,795 - - (6,016,795)
Issuance of common stock at
$12.25 per share in
September 2000 through
a private placement, net
of expenses 408,164 408 - - 4,899,301 - - -
Issuance of common stock in
September 2000 subscribed
in September 1999 143,851 144 (143,851) (359,628) 359,484 - - -
Issuance of common stock in
September 2000
subscribed in October
and November of 1999 40,000 40 (40,000) (100,000) 99,960 - - -
Adjustment to market of
options granted for
services in April 2000 - - - - (118,885) - - -
Adjustment to receivable
from subsidiary's
stockholders - - - - - - 133,379 -
Net loss for the year ended
September 30, 2000 - - - - - - - (17,403,990)
---------- --------- ----------- ----------- ----------- -------- -------------- --------------
Balances at September 30,
2000 20,340,610 $ 20,341 102,609 323,640 36,925,837 - (266,621) (35,257,363)
Total
------------
Issuance of common stock in
February 2000
subscribed to in
August 1999 through
exercise of common
stock warrants -
Issuance of common stock in
April 2000 in connection
with reverse acquisition
of Second CMA, Inc. 1,200
Issuance of common stock
options with a strike
price of $10.00 per share
in April 2000 for legal
services 1,047,670
Issuance of common stock at
$10 per share in April
2000 through a private
placement, net of
expenses 450,000
Issuance of common stock at
$11.31 per share in May
2000 through a private
placement, net of
expenses 859,560
Common shares subscribed
to through a cashless
exercise of common
stock warrants in May
2000 -
Issuance of common stock at
$2.50 per share in June
2000 through exercise of
stock warrants 229,695
Issuance of common stock at
$10.48 per share in July
2000 through a private
placement 1,676,800
Issuance of common stock at
$.25 and $2.50 per share
in July 2000 through
exercise of stock
warrants 156,250
Distribution of common
stock warrants on
August 16, 2000 -
Issuance of common stock at
$12.25 per share in
September 2000 through
a private placement, net
of expenses 4,899,709
Issuance of common stock in
September 2000 subscribed
in September 1999 -
Issuance of common stock in
September 2000
subscribed in October
and November of 1999 -
Adjustment to market of
options granted for
services in April 2000 (118,885)
Adjustment to receivable
from subsidiary's
stockholders 133,379
Net loss for the year ended
September 30, 2000 (17,403,990)
------------
Balances at September 30,
2000 1,745,834
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Year ended September 30, 2001
Receivable
from
Voting common stock Common stock subscribed Additional Stockholders
------------------- ------------------------- paid-in Deferred of
Shares Amount Shares Amount Capital Compensation subsidiary
---------- ------- ----------- ------------ ------------ -------------- ------------
Balances at
October 1, 2000 20,340,610 $20,341 102,609 $ 323,640 $36,925,837 $ - $ (266,621)
Issuance of shares in
October 2000
subscribed to shares
in May 2000 102,609 102 (102,609) (323,640) 323,538 - -
Issuance of common
shares at $10.50 per
share in October 2000,
net of costs 142,860 143 - - 1,349,857 - -
Shares subscribed to
at $3.12 and $6.00 per share
in October 2000, net
of costs - - 258,333 1,070,000 (100,000) - -
Allocation of debenture
proceeds to
common stock 167,768 168 - - 444,435 - -
Allocation of
debenture proceeds
to common
stock warrants - - - - 829,551 - -
Allocation of debenture
proceeds to
beneficial
conversion feature - - - - 1,051,096 - -
Allocation of
promissory note
proceeds to
common stock 40,000 40 - - 136,167 - -
Common stock
subscribed to at $4.00
per share in
December 2000 - - 125,000 500,000 - - -
Common shares
subscribed at $2.00
per share in
December 2000, net
of issuance costs - - 389,129 778,257 (102,208) - -
Common shares
subscribed in
December 2000
at $0.25 through
the exercise of
stock warrants - - 20,000 5,000 - - -
Issuance of common
shares at $2.02 per
share pursuant to
conversion of
debenture 107,981 108 - - 218,014 - -
Issuance of common
shares subscribed pursuant to
warrant exercise
at $0.25 per share - - 200,000 50,000 - - -
Shares subscribed to
at $2.50 per share
in January 2001,
net of costs - - 200,000 500,000 (50,000) - -
Modification of
warrants - - - - 2,414,000 - -
Issuance of common
shares at $1.43
per share pursuant
to conversion
of debentures 307,509 307 - - 438,049 - -
Shares subscribed to
at $2.50 per share
in February 2001
net of costs - - 80,000 200,000 (20,000) - -
Common shares
subscribed at $3.75
per share as
additional
consideration
on debt - - 16,267 61,001 - - -
Common shares
subscribed at $3.31
as additional
consideration on debt - - 18,429 61,001 - - -
Common stock issued
in March 2001 for
shares previously
subscribed 253,334 254 (253,334) (925,000) 924,746 - -
Warrants issued with a
strike price of $6.00
per share as
additional
compensation
on debt - - - - 7,708 - -
Warrants issued with
a Strike price of $3.75
per share as
additional
compensation
on debt - - - - 14,659 - -
Warrants issued with
a Strike price of $3.31
per share as
additional
compensation
on debt - - - - 12,715 - -
Issuance of common
shares subscribed at $2.00
per share net of
financing costs - - 806,073 1,612,146 (5,000) - -
Placement fees accrued
on prior financings (831,133) - -
Allocation of debenture
Proceeds to beneficial
Conversion feature - - - - 790,369 - -
Adjustment to
remeasurement of
attorney stock
options - - - - (510,315) - -
Issuance of common
Stock in April for
shares previously
subscribed 1,606,721 1,607 (1,606,721) (3,703,442) 3,701,835 - -
Common stock
subscribed at $2.00 per
share in April - - 15,000 30,000 - - -
Common stock
subscribed at $1.74 per
share pursuant to
conversion of
debentures
in June 2001 - - 12,784 22,203 - - -
Common stock
subscribed at $2.70
per share in
connection
with debt in
June 2001 - - 50,000 106,299 - - -
Common stock
subscribed at $2.32
to $2.83 per share
from April through
June 2001 as
Additional
financing fees - - 47,490 125,000 - - -
Shares issued pursuant
to conversion of
debentures
at $1.25 per share 82,000 82 - - 102,418 - -
Shares issued pursuant
to conversion of
debentures
at $1.74 115,606 116 - - 200,692 - -
Shares issued pursuant
to conversion of
debentures at $1.00 29,433 29 - - 29,404 - -
Shares issued in
April, 2001 for $2.00
per share pursuant to
private placement net
of stock issue costs 375,000 375 - - 649,625 - -
Issuance of warrants
issued at $2.03 to $3.75
as additional
financing fees - - - - 1,383,353 - -
Allocation of debenture
proceeds to beneficial
conversion feature - - - - 281,843 - -
Allocation of debenture
proceeds to cashless
exercise warrants - - - - 48,487 - -
Common stock
subscribed in lieu of
loan origination fees - - 50,000 145,000 - - -
Common stock issued
at $3.19 per share from
April through June 2001
as additional
financing fees 53,185 53 - - 169,474 - -
Common stock subscribed at
$0.54 per share pursuant to
conversion of debentures in
September 2001 - - 563,080 304,063 - - -
Common stock subscribed at
$0.60 per share pursuant to
conversion of debentures in
September 2001 - - 284,042 170,425 - - -
Common stock subscribed at
$1.30 in September 2001 to
satisfy penalty on late filing
of the Registration Statement
with the SEC for conversion
shares in connection with
convertible debt agreements
dated November 2000. - - 124,721 162,141 - - -
Common stock issued in July
2001 for shares previously
subscribed 262,784 263 (262,784) (178,506) 178,243 - -
Common stock issued at
$2.70 per share in June 2001
in lieu of loan origination
fee 50,000 50 - - 134,950 - -
Common stock subscribed
At $2.00 per share in
July 2001 - - 37,000 74,000 - - -
Common stock subscribed
At $1.00 per share in
September 2001 - - 200,000 200,000 - - -
Common stock subscribed
At $0.50 per share in
September 2001 - - 1,000,000 500,000 - - -
Common stock issued at
$0.72 to $2.08 per share
from July through September
2001 as additional finance
fees 363,432 363 - - 361,774 - -
Common stock issued in
September 2001 for shares
Previously subscribed 82,186 82 (82,186) (247,002) 246,920 - -
Common stock issued at
$1.98 per share in July
2001 for late issuance of
debt converted in June 2001 2,649 3 - - 5,242 - -
Common stock issued at
$1.56 per share in July 2001
for prepaid debt penalty 14,322 14 - - 22,328 - -
Common stock issued at
$0.96 per share in August
2001 as prepaid debt penalty 23,534 24 - - 22,569 - -
Warrants issued between July
and September 2001, with
exercise price from $0.72 to
$6.00, as additional
financing fees - - - - 828,602 - -
Adjustment of warrants
Issued between January and
June 2001 as a result of
Settlement agreement dated
June 2001 regarding
Additional finance fees - - - - (559,273) - -
Warrants issued in August
2001 with exercise price
of $1.00 in connection
with debt - - - - 114,484 - -
Stock option issued to
Employees below fair
Market value on March
27, 2001 - - - - 1,762,563 (498,559) -
Common stock subscribed
On September 26, 2001
At $0.70 per share - - 1,600,000 1,120,000 - - -
Net loss for the year
ended September 30, 2001 - - - - - - -
---------- ------- ----------- ------------ ------------ -------------- ------------
Balances
September 30, 2001 24,523,523 $24,524 3,892,323 $ 2,742,586 $53,947,618 $ (498,559) $ (266,621)
========== ======= =========== ============ ============ ============== ============
Accumulated
Development
stage
deficit Total
------------- -------------
Balances at
October 1, 2000 $(35,257,363) 1,745,834
Issuance of shares in
October 2000
subscribed to shares
in May 2000 - -
Issuance of common
shares at $10.50 per
share in October 2000,
net of costs - 1,350,000
Shares subscribed to
at $6.00 per share in
October 2000, net
of costs - 970,000
Allocation of debenture
proceeds to
common stock - 444,603
Allocation of
debenture proceeds
to common
stock warrants - 829,551
Allocation of debenture
proceeds to
beneficial
conversion feature - 1,051,096
Allocation of
promissory note
proceeds to
common stock - 136,207
Common stock
subscribed to at $4.00
per share in
December 2000 - 500,000
Common shares
subscribed at $2.00
per share in
December 2000, net
of issuance costs - 676,049
Common shares
subscribed in
December 2000
at $0.25 through
the exercise of
stock warrants - 5,000
Issuance of common
shares at $2.02 per
share pursuant to
conversion of
debenture - 218,122
Issuance of common
shares pursuant to
warrant exercise
at $0.25 per share - 50,000
Shares subscribed to
at $2.50 per share
in January 2001,
net of costs - 450,000
Modification of
warrants - 2,414,000
Issuance of common
shares at $1.43
per share pursuant
to conversion
of debentures - 438,356
Shares subscribed to
at $2.50 per share
in February 2001
net of costs - 180,000
Common shares
subscribed at $3.75
per share as
additional
consideration
on debt - 61,001
Common shares
subscribed at $3.31
as additional
consideration on debt - 61,001
Common stock issued
in March 2001 for
shares previously
subscribed - -
Warrants issued with a
strike price of $6.00
per share as
additional
compensation
on debt - 7,708
Warrants issued with
a Strike price of $3.75
per share as
additional
compensation
on debt - 14,659
Warrants issued with
a Strike price of $3.31
per share as
additional
compensation
on debt - 12,715
Issuance of common
shares at $2.00 per
share net of
financing costs - 1,607,146
Placement fees accrued
on prior financings - (831,133)
Allocation of debenture
Proceeds to beneficial
Conversion feature - 790,369
Adjustment to
remeasurement of
attorney stock
options - (510,315)
Issuance of common
Stock in April for
shares previously
subscribed - -
Common stock
subscribed at $2.00 per
share in April - 30,000
Common stock
subscribed at $1.74 per
share pursuant to
conversion of
debentures
in June 2001 - 22,203
Common stock
subscribed at $2.70
per share in
connection
with debt in
June 2001 - 106,299
Common stock
subscribed at $2.32
to $2.83 per share
from April through
June 2001 as
Additional
financing fees - 125,000
Shares issued pursuant
to conversion of
debentures
at $1.25 per share - 102,500
Shares issued pursuant
to conversion of
debentures
at $1.74 - 200,808
Shares issued pursuant
to conversion of
debentures at $1.00 - 29,433
Shares subscribed in
April, 2001 for $2.00
per share pursuant to
private placement net
of stock issue costs - 650,000
Issuance of warrants
issued at $2.03 to $3.75
as additional
financing fees - 1,383,353
Allocation of debenture
proceeds to beneficial
conversion feature - 281,843
Allocation of debenture
proceeds to cashless
exercise warrants - 48,487
Common stock
subscribed in lieu of
loan origination fees - 145,000
Common stock issued
at $3.19 per share from
April through June 2001
as additional
financing fees - 169,527
Common stock subscribed at
$0.54 per share pursuant to
conversion of debentures in
September 2001 - 304,063
Common stock subscribed at
$0.60 per share pursuant to
conversion of debentures in
September 2001 - 170,425
Common stock subscribed at
$1.30 in September 2001 to
satisfy penalty on late filing
of the Registration Statement
with the SEC for conversion
shares in connection with
convertible debt agreements
dated November 2000. - 162,141
Common stock issued in July
2001 for shares previously
subscribed - -
Common stock issued at
$2.70 per share in June 2001
in lieu of loan origination
fee - 135,000
Common stock subscribed
At $1.00 per share in
July 2001 - 74,000
Common stock subscribed
At $1.00 per share in
September 2001 - 200,000
Common stock subscribed
At $0.50 per share in
September 2001 - 500,000
Common stock issued at
$0.72 to $2.08 per share
from July through September
2001 as additional finance
fees - 362,137
Common stock issued in
September 2001 for shares
Previously subscribed - -
Common stock issued at
$1.98 per share in July
2001 for late issuance of
debt converted in June 2001 - 5,245
Common stock issued at
$1.56 per share in July 2001
for prepaid debt penalty - 22,342
Common stock issued at
$0.96 per share in August
2001 as prepaid debt penalty - 22,593
Warrants issued between July
and September 2001, with
exercise price from $0.72 to
$6.00, as additional
financing fees - 828,602
Adjustment of warrants
Issued between January and
June 2001 as a result of
Settlement agreement dated
June 2001 regarding
Additional finance fees - (559,273)
Warrants issued in August
2001 with exercise price
of $1.00 in connection
with debt - 114,484
Stock option issued to
Employees below fair
Market value on March
27, 2001 - 1,264,004
Common stock subscribed
On September 26, 2001
At $0.70 per share - 1,120,000
Net loss for the year
ended September 30, 2001 (30,169,897) (30,169,897)
------------- -------------
Balances
September 30, 2001 $(65,427,260) $ (9,477,712)
============= =============
The accompanying notes are an integral part of this statement.
UPGRADE INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE
YEAR ENDED SEPTEMBER 30, SINCE INCEPTION
2001 2000 (FEBRUARY 5, 1997)
------------- ------------- -------------------
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $(30,169,897) $(17,403,990) $ (59,410,465)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 888,758 289,885 1,190,610
AMORTIZATION OF BENEFICIAL CONVERSION FEATURE AND DEBENTURE DISCOUNT 2,989,150 809,043 3,798,193
LOSS ON SALE OF PROPERTY AND EQUIPMENT 26,021 - 26,021
ADJUSTMENT TO RECEIVABLES FROM SUBSIDIARY'S - 133,379 133,379
WRITE OFF OF UNCOLLECTIBLE ADVANCES 3,549,780 - 3,549,780
IMPAIRMENT WRITE OFF 1,054,125 - 1,054,125
WRITE OFF OF OPTION COST - - 76,250
EQUITY IN LOSS OF ULTRACARD - - 1,264,316
PURCHASED IN PROCESS RESEARCH & DEVELOPMENT - 425,800 5,971,603
WARRANTS AND OPTIONS ISSUED FOR SERVICES 1,903,685 1,268,285 5,134,175
SHARES ISSUED FOR SERVICES 190,000 242,900 488,650
EMPLOYEE STOCK OPTIONS ISSUED BELOW FAIR VALUE 1,264,004 - 1,264,004
COMMON STOCK ISSUED IN SATISFACTION OF INTEREST PENALTIES 990,983 - 990,983
WARRANTIES ISSUED IN SATISFACTION OF INTEREST PENALTIES 1,687,763 - 1,687,763
EXPENSES INCURRED THROUGH LOAN ASSUMPTION - - 470,005
STOCK OF SUBSIDIARY ISSUED IN EXCHANGE FOR INTELLECTUAL PROPERTY - - 125,000
MINORITY INTEREST (452,665) (1,759,091) (2,567,800)
CHANGES IN ASSETS AND LIABILITIES:
PREPAID EXPENSES, DEPOSITS AND OTHER 145,392 244,544 1,004,102
PAYABLES, ACCRUED LIABILITIES AND OTHER 6,510,957 1,382,446 8,308,581
------------- ------------- -------------------
NET CASH USED IN OPERATING ACTIVITIES (9,421,944) (14,366,799) (25,440,725)
CASH FLOWS FROM INVESTING ACTIVITIES
ADVANCES TO THE PATHWAYS GROUP, INC. (1,648,955) (1,885,000) (3,533,955)
ADVANCES TO ROCKSTER GROUP (1,084,000) - (1,084,000)
PAYMENTS ON EQUIPMENT UNDER CONSTRUCTION - (1,200,000) (1,200,000)
ACQUISITION OF PROPERTY AND EQUIPMENT (630,476) (1,000,796) (1,698,767)
ACQUISITION OF CENTURION TECHNOLOGIES, INC., NET OF CASH - (350,000) (1,000,000)
ACQUISITION OF ULTRACARD, INC., NET OF CASH ACQUIRED - (260,300) (5,571,105)
ACQUISITION OF EQUITY INTEREST IN EFORNET - (200,000) (200,000)
ADDITIONS TO NOTE RECEIVABLE FROM RELATED PARTY (130,000) - (130,000)
ACQUISITION DEPOSIT (62,500) - (62,500)
ADDITIONS TO INTANGIBLE ASSETS (78,009) (117,178) (195,187)
------------- ------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (3,633,940) (5,013,274) (14,675,514)
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM SALE OF COMMON STOCK 9,206,768 13,720,077 35,730,218
BORROWINGS, NET OF LOAN COSTS 6,481,082 3,453,100 10,152,620
PRINCIPAL PAYMENTS ON BORROWINGS (1,040,177) (2,082,544) (3,682,920)
RELEASE OF COLLATERAL - 505,687 505,687
PURCHASE OF COLLATERAL ON SUBSIDIARY'S LETTER OF CREDIT - (805,687) (805,687)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS AND WARRANTS 55,000 712,786 767,786
------------- ------------- -------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 15,208,360 14,997,732 42,667,704
------------- ------------- -------------------
NET INCREASE (DECREASE) IN CASH 2,152,476 (4,382,341) 2,551,465
CASH AT THE BEGINNING OF THE PERIOD 398,989 4,781,330 -
------------- ------------- -------------------
CASH AT THE END OF THE PERIOD $ 2,551,465 $ 398,989 $ 2,551,465
============= ============= ===================
SUPPLEMENTARY INFORMATION:
INTEREST PAID $ 27,664 $ 54,793 $ 82,457
============= ============= ===================
SEE NOTE E FOR NONMONTARY EXCHANGES AND TRANSACTIONS.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Upgrade International Corporation (the "Company" or "Upgrade") is a development
stage company incorporated on February 5, 1997 (inception) in the State of
Florida and currently headquartered in Seattle, Washington. In April 2000
Upgrade issued 45,000 shares of its common stock in exchange for all the
outstanding shares of common stock of Second CMA, Inc., a Colorado corporation,
pursuant to an Agreement and Plan of Merger dated as of April 4, 2000 between
Upgrade and Second CMA. The transaction was accounted for as a reverse
acquisition. In August 2000, Upgrade reincorporated in the State of Washington.
The Company is active in the acquisition and development of proprietary hardware
and software in the information technology industry. Its primary business focus
has been the acquisition, development and commercial exploitation of the
UltraCard technology, a super high capacity data storage and retrieval device.
The aforementioned activities are conducted through its subsidiary, UltraCard,
Inc. (UltraCard). In addition, the Company has invested in technology
companies, developing application software and "know-how" in a focused effort to
commercialize the Company's base technology.
1. Basis of Presentation
---------------------
The Company consolidates all companies in which it invests when the Company has
a controlling financial interest in the investee. This generally occurs when
the Company owns more than 50% of the outstanding voting shares of the investee.
The Company also consolidates 50%-owned companies in which it has voting control
through agreements with other shareholders. Investments in companies where the
Company has significant influence through ownership of 20% to 50% of the
investors voting shares or contractual arrangements are accounted for by the
equity method.
The balance sheet, statement of operations and statements of cash flows as of
September 30, 2001 and 2000, and for the years then ended, reflect the
consolidated financial position and results of the Company and its subsidiaries
(Subsidiaries) as follows: UltraCard, Inc. (UltraCard), Cque Corporation
(formerly known as Centurion Technologies, Inc.) (Centurion), CTI Acquisition
Corporation (CTI), Global CyberSystems, Inc. (Global), Global CyberSystems PLC
(Global PLC), Global CyberSystems SA (Global SA), and EforNet Corporation
(EforNet). All significant intercompany balances and transactions have been
eliminated in consolidation. Minority interest represents the minority
stockholders' proportionate share in the equity of the Company's consolidated
Subsidiaries. The losses incurred by a subsidiary are allocated on a
proportionate basis to minority interest until the carrying amount of minority
interest is eliminated. Further losses are then included in the net loss of the
Company.
2. Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation expense is charged to
operations using the straight-line depreciation method over the estimated useful
life of the assets ranging as follows:
Equipment 3-5 years
Software 3 years
Office Furniture 10 years
Corporate Condominium 30 years
Leasehold Improvements Over the term of the related lease or life of assets,
whichever is shorter
The Company uses accelerated depreciation methods for tax purposes, when
allowable.
3. Intangible and Deferred Assets
------------------------------
Intangible assets consist of capitalized license fees, patent and trademark
costs, and loan fees. Intangible assets are amortized using the straight-line
method over seven years, the estimated useful life of the underlying technology.
Loan fees are amortized using effective interest method over the life of the
underlying borrowing.
4. Accounting for the Impairment of Long-Lived Assets and for Long-Lived
---------------------------------------------------------------------
Assets to be Disposed of
------------------------
The Company follows SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, which addresses accounting
for impairment of long-lived assets. SFAS No. 121 requires assets to be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
The sputtering machine is classified as an asset held for sale as of September
30, 2001, and recorded at the lower of cost or estimated fair value. Fair value
was determined by management and included an estimate of expected cash flows and
of the assets method and likelihood of disposition.
5. Research and Development
------------------------
Research and development costs are expensed as incurred.
6. Software Development Costs
--------------------------
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software developments costs subsequent to the
establishment of technological feasibility. The Company considers technological
feasibility to be established upon completion of a working model. The Company
estimates that costs incurred between completion of a working model and the
point at which the product will be ready for general release will be
insignificant. As a result, all product development costs have been expensed as
incurred.
7. Cash Equivalents
----------------
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. As of September 30, 2001 and 2000, the Company had no cash
equivalents.
The Company and its subsidiaries maintain their bank accounts with a number of
financial institutions. At September 30, 2001 and 2000, the balances in some of
these accounts were in excess of the $100,000 federally insured limit. The
Company has not experienced any losses with these cash accounts.
8. Financial Instruments
---------------------
The Company's financial instruments consist of cash, restricted deposit,
receivables, advances, acquisition deposits, accounts payable, accrued
liabilities, payable to related parties, contract payables, royalty payable,
bridge loans, notes payable, and convertible debentures. The Company believes
that the fair value of these financial instruments approximates their carrying
amounts based on their short-term nature or current market indicators such as
prevailing interest rates.
9. Loss per Common Share
---------------------
Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. The weighted
average number of shares outstanding was 22,426,612 and 18,635,082 for the years
ended September 30, 2001 and 2000, respectively, and 13,110,531 since inception
(February 5, 1997) through September 30, 2001. Diluted loss per share for all
periods presented equaled basic loss per share due to antidilutive effect of the
potentially dilutive securities. As of September 30, 2001 and 2000, total
warrants and options of 8,346,042 and 3,908,476, respectively, were not included
in diluted loss per share computations due to their antidilutive effect.
10. Use of Estimates
----------------
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and equity, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Significant estimates used in preparing the accompanying financial statements
include the estimates used to determine the fair value of the sputtering machine
and the recoverability of other long-lived assets. It is reasonably possible
that the proceeds from the sale will differ materially from the carrying amount
and a loss may be recognized.
11. Reclassifications
-----------------
Certain reclassifications were made to prior year balances to conform to current
year presentation.
12. New Authoritative Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (SFAS 141), Business Combinations. SFAS
141 applies to all business combinations initiated after June 30, 2001. The
Statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001, or later. The
Company is currently evaluating the potential effect of the initial application
of the SFAS 141 on its consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible
Assets. The provisions of SFAS 142 are required to be applied starting with
fiscal years beginning after December 15, 2001 with earlier application
permitted for entities with fiscal years beginning after March 15, 2001 provided
that the first interim financial statements have not been previously issued. The
statement is required to be applied at the beginning of the entity's fiscal year
and to be applied to all goodwill and other intangible assets recognized in its
financial statements to that date. The Company is currently evaluating the
potential effect of the initial application of the SFAS 142 on its consolidated
financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, and APB
Opinion 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for segments of a business to be disposed of.
SFAS 144 is effective for fiscal years beginning after December 15, 2001. The
Company is currently evaluating the potential effect of the initial application
of the SFAS 144 on its consolidated financial statements.
NOTE B - MANAGEMENT PLANS
The Company is a development stage enterprise as defined under Statement of
Financial Accounting Standards No. 7. The Company is devoting its present
efforts into establishing a new business in the information technology industry
and, is currently in the process of identifying markets and establishing
applications for its technologies. Accordingly, no operating revenues have been
generated. The Company's operations to date have consumed substantial and
increasing amounts of cash. The Company's negative cash flow from operations is
expected to continue but is expected to decrease as the Company commences
revenue generating activities through the sale of its products. The continued
development of the Company's technology and products will continue to require a
commitment of substantial funds. Management believes that its existing and
expected financings in addition to planned revenue generating activities will be
adequate to satisfy the requirements of its current and planned operations until
the end of the fiscal year 2002. However, the rate at which the Company expends
its resources is variable, may be accelerated, and will depend on many factors.
Subsequent to the year end the Company has continued to fund operations through
the issuance of both equity and debt securities. During the period October to
December, 2001 the Company received $783,705 from investors pursuant to
Regulation "S", private placements of 1,567,410 shares of its common stock at
$0.50 per share and warrants to acquire 1,567,410 common stock shares at $0.50
per share. In November 2001, the Company received a further $25,000 from an
investor pursuant to a Rule 506 offering memorandum for the issuance of 18,437
common stock shares at $1.356 per share. In conjunction with the offering, the
Company also issued a warrant to acquire 18,437 common stock shares at $1.356
per share.
During the period September to November 2001, the Company received proceeds
aggregating $618,734 from a number of investors pursuant to both Regulation "S"
and Rule 506 private placement offering documents for the issuance of 680,608
common stock shares at a price of $0.91 per share. The Regulation "S" offerings
contained 66,275 common shares, while 614,333 common stock shares were issued
pursuant to Rule 506. In addition, as part of these offerings, the Company
issued warrants to acquire an equal number of common stock shares shares at
$0.91 per share.
On November 26, 2001, the Company issued 100,000 shares to one of its legal
counsels in settlement of $100,000 in trade liabilities. During the period
October to December 2001, the Company issued notes payable aggregating $488,500.
The notes mature in 30 days from their date of issuance, and bear interest at a
rate of 10% per annum. In the event that the loans are not repaid on their
maturity, the following penalties will be due and payable:
- 10% of the unpaid principal and interest at the maturity date
payable in common stock, with the number of shares computed based
upon the three lowest closing bid prices during the sixty trading
days immediately preceding the maturity date.
- Warrants to acquire common stock equaling 10% of the unpaid
principal and interest at the maturity date with a strike price
based upon the three lowest closing bid prices during the sixty
trading days immediately preceding the maturity date (not to
exceed $1.40).
- Additional warrants to acquire the Company's common stock
equaling twice the amount of warrants discussed above with a
strike price of $3.00.
- In the event that the loan principal and interest is not repaid,
an additional penalty (payable in common stock and warrants to
acquire common stock) will become due and payable every 30 days
following the maturity date. The computations of this penalties
are similar to the ones disclosed in the note M for June 2001
notes under provision (c).
The Company will need to raise substantial additional capital to fund its
operations and may seek such additional funding through public or private equity
or debt financing. Current financing activities in which the Company believes
will be funded include; a $9 million - $15 million debt instrument, a $12
million equity line-of-credit and $5 million in privately placed equity. There
can be no assurance that such additional funding will be available on acceptable
terms, if at all. The Company's continued existence as a going concern is
ultimately dependent upon its ability to secure additional funding for
completing and marketing its technology and the success of its future
operations.
NOTE C - INVESTMENTS
1. UltraCard, Inc.
---------------
The results of operations of the Company's subsidiary, UltraCard are
consolidated with the Company's financial results from the time, the Company
acquired controlling interest in this subsidiary on September 30, 1999. The
purchase price totaling $7,950,000 was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition, which approximated the carrying amounts recorded by UltraCard. The
remaining unallocated amount of purchase price was allocated to purchased
in-process research and development (IPR&D). See Commitments and Contingencies
footnote for additional information on acquisitions of additional equity
interest during the year ended September 30, 2001. In connection with
acquisitions of interest in UltraCard, during the years ended September 30, 2001
and 2000, and since inception through September 30, 2001, the Company recorded
$0, $225,800, and $4,843,527, respectively, of IPR&D.
On September 30, 1999, the Board of Directors of UltraCard approved an employee
stock option plan, which authorized the issuance of up to three million shares
(after the effect of 3:1 split) in the share capital of UltraCard to its
directors, officers and employees. In order to avoid dilution of the 50% equity
interest of Upgrade if these stock options are granted and exercised, the
Company was issued an additional 3,000,000 shares. In addition, a stockholder of
UltraCard had granted to the Company certain proxy rights that allow the Company
to vote an additional 2% of the outstanding common stock of UltraCard. During
the year ended September 30, 2000, the Company acquired an additional 1%
interest in UltraCard from one of UltraCard's stockholders, increasing the
Company's interest in UltraCard to approximately 55% as of September 30, 2000.
In order to permit UltraCard to explore strategic partnerships and other funding
alternatives, some of which could include outside equity participation, on
December 15, 2000, Upgrade waived certain provisions of the Funding Agreement
including its non-dilution clause. As a result, the Company returned 3,000,000
shares of UltraCard originally issued in connection with implementation of
UltraCard's stock option plan As of September 30, 2001, the Company owned 53%
of UltraCard.
The Company has expressed an intention to acquire an additional interest in
UltraCard and to continue funding its operations until UltraCard completes an
anticipated IPO. Under terms of the Funding Agreement between the Company and
UltraCard dated March 21, 2001, should UltraCard require additional financing
prior to an IPO, the Company has agreed to provide sufficient funds on a firm
commitment basis in an amount not to exceed $20 million. All such funds
advanced by the Company will be subject to a note payable agreement, the terms
of which will require the accrual of interest at the bank's prime interest rate
and repayment of principal and accrued interest on the earlier of the occurrence
of the following events: the payment of dividends to stockholders; the
completion of an IPO where the proceeds exceed $35 million subject to the
conversion provisions described below; or upon the occurrence of a change in
control of UltraCard; but no later than March 31, 2004. Pursuant to the terms
of the Funding Agreement, the unpaid principal and accrued interest is
convertible into common stock of UltraCard at specified conversion rates upon
the completion of an IPO. The graduated conversion rates range from $0.63 to
$5.00 per share depending on the amount owed to the Company at the time of
conversion. During the years ended September 30, 2001 and 2000, the Company
loaned to UltraCard approximately $5,482,000 and $7,835,000 to fund its
operations.
During the year ended September 30, 2001, the Company entered into agreements
with two UltraCard's shareholders to acquire additional shares of UltraCard's
stock (see note O for further information).
On October 2, 2001, the Company entered into an agreement with UltraCard to
acquire 338,000 common stock shares at $2.50 per share and a conversion of
$5,847,484 in intercompany borrowings into 2,000,000 shares of UltraCard. These
transactions resulted in increase of the Company's interest in UltraCard to 55%.
2. EforNet Corporation
-------------------
As of September 30, 2001 and 2000, Upgrade held a 100% and 54% voting interest
in EforNet, a California corporation that was originally intended to develop an
application for secure, anonymous electronic commerce of the internet, utilizing
Ultracard technology and EforNet's proprietary switching software. On December
1, 2000, the Company suspended Efornet's operations. It is expected to
recommence activities during the fiscal year 2002. Also, on December 1, 2000,
the Company acquired all remaining outstanding shares of EforNet for a nominal
consideration.
3. CTI Acquisition Corporation and cQue Corporation (formerly Centurion
--------------------------------------------------------------------
Technologies Inc.)
------------------
On May 12, 1999, the Company formed CTI Acquisition Corporation for the sole
purpose of acquiring an equity interest in cQue Corporation (formerly Centurion
Technologies, Inc.)(cQue), a development stage company headquartered in Redmond,
Washington. cQue is developing a proprietary transaction processing software
designed for the real-time transmission of encrypted data over the Internet with
a business focus in the medical, educational and government market niches.
Two stockholders of cQue have granted to Upgrade certain proxy rights that
allow Upgrade to vote an additional 1% of the outstanding common stock of the
cQue. As of September 30, 2001 and 2000, Upgrade holds a 51% voting
interest in cQue.
In November 2000, Centurion changed its name to cQue Corporation.
4. Global CyberSystems, Inc., Global CyberSystems PLC and Global
-------------------------------------------------------------
CyberSystems SA
---------------
Global CyberSystems Inc., was incorporated in Nevada on January 12, 1998. As
part of the UltraCard acquisition agreement (see note C (1)), the Company
received a 50% interest in the newly formed corporation with the remaining 50%
being owned by UltraCard. On July 11, 1998, the Company entered into a master
distribution agreement with UltraCard which provided Global with the exclusive
distribution rights for the UltraCard products and technology in territories and
applications as follows: (1) in the U.S., Global holds the exclusive
distribution for banking applications and retail/convenience applications; and
(2) worldwide, Global holds the exclusive rights to gaming applications for the
UltraCard products and technology. As of September 30, 2001, Global had not
commenced its operations and the carrying amounts of its assets, liabilities and
stockholders' equity were nominal.
During the second quarter of the year ended September 30, 2000, the Company
formed Global CyberSystems PLC (incorporated in the United Kingdom) and Global
CyberSystems SA (incorporated in Switzerland). Global SA is 100% owned by Global
CyberSystems, Inc. and Global PLC is an 80% owned subsidiary of Global SA. Both
European companies had minimal operations during the year ended September
30,2001 and 2000. These results of operations were consolidated with the
Company's financial results for the year ended September 30, 2001 and resulted
in minority interest of $46,179.
5. Purchased In-Process Research and Development Costs
---------------------------------------------------
The purchased or contributed cost of in-process research and development (IPR+D)
represents the value assigned in a purchase business combination to research and
development projects of the acquired business that had commenced but had not yet
reached technological feasibility at the date of the acquisition and have no
future alternative use. In accordance with Statement on Financial Accounting
Standards No. 2, Accounting for Research and Development Costs, as clarified by
Financial Accounting Standards Board Interpretation No. 4, the amounts assigned
to IPR&D meeting these criteria are charged to expense as part of the allocation
of the purchase price of the business combination. A similar accounting was
also utilized for the Company's investment in UltraCard accounted for under the
equity method. Accordingly, charges totaling $0, $425,800, and $5,971,603
were recorded as IPR&D during the years ended September 30, 2001 and 2000 and
for the period from inception through September 30, 2001, respectively, as part
of the allocations of purchase price and equity investment of the Subsidiaries.
Since all of the Subsidiaries are development stage companies, which had not
commenced their respective planned principal operations nor generated any
significant revenues, the entire amount of the excess of the purchase price or
investment amount over the fair market value of the identifiable assets and
liabilities of the investee, which approximated the carrying amount of these
assets and liabilities, was allocated to IPR&D. As a result, no amount of the
purchase prices or investment amounts were allocated to goodwill or other
intangibles, except those already recorded by the investees.
On the dates of acquisition and consolidation of the Subsidiaries, as described
in note C (1) through (4), the Subsidiaries had non-cash assets with an
estimated fair value aggregating approximately $2,000,000 and liabilities
aggregating approximately $1,300,000.
NOTE D - RELATED PARTY TRANSACTIONS
On March 30, 2001, the Company loaned $130,000 to a company controlled by one of
the Company's shareholders (who also performs financial consulting services
to the Company). The note matures on March 30, 2002 and bears 8% annual
interest. As of September 30, 2001, the Company recorded $5,243 in accrued
interest receivable on the balance due.
Notes and other payables to related parties are comprised of the following as of
September 30:
2001 2000
---------- --------
Payables in connection with
acquisitions of additional
interests from minority
shareholders of UltraCard
and CardTech, Inc. $1,758,215 $ -
Short-term demand loan from
an executive officer 1,210,000 * -
Convertible debenture with an
executive officer 125,000 ** -
Shareholders advances 894,606 -
Other payable to stockholders
and officers 794,727 * 27,740
Loans from UltraCard's officers 373,066 *** -
Loans from minority
shareholders 200,769 **** 147,500
Payable to employees 52,373 * -
Payable to UltraCard's
employees 67,596 * -
Payable to other related parties 26,670 * -
---------- --------
$5,503,022 $175,240
========== ========
* Interest free with terms of one year or less
** Bears 8% annual interest, immediately convertible into common stock at $2
per share, and due on demand. Loan was issued with detachable cashless exercise
warrants to purchase 62,500 shares of common stock at $2 per share. The
warrants expire June 2006.
*** Bear 12% annual interest, due when Ultracard has sufficient operating cash
for repayment
**** Bear interest at 0% to 15% and have stated terms of one year or less.
See note O(9) discussing payables in connection with acquisition of additional
interest from minority shareholders.
On September 26, 2001, the Company entered into a subscription agreement to sell
1,600,000 shares of its common stock to a shareholder at $0.70 per share. As
part of this agreement, UltraCard agreed to sell 570,000 shares of its common
stock at $2.50 per share. The Company received funds for both subscriptions
prior to September 30, 2001 and included $1,120,000 paid for its common stock
into stock subscriptions and $1,427,000 paid for subsidiaries stock into
Minority Interest. No loss was allocated to minority interest resulting from
this transaction due to immateriality.
In August 2001, the Company borrowed $1,210,000 from its president and
significant shareholder. This funds were originally personally borrowed by the
president from an unrelated third party in July 2001. This borrowing was
collateralized by 2,000,000 of the Company's common stock shares pledged by the
president's family trust. In October 2001, the Company assumed the president's
liability to the lender, which continues to be collateralized by the orginal
2,000,000 shares. In addition, in October 2001, the Company issued 2,000,000
shares to the president's family trust to replace shares previously pledged.
Upon repayment of the loan, the pledged shares will be returned to the Company.
During the year ended September 30, 2001, the Company, periodically borrowed
funds from its stockholders to satisfy its daily cash needs. Generally, the
funds were subsequently converted into shares of the Company's common stock as
part of a private placement.
During the year ended September 30, 2001, the Company's subsidiaries
borrowed money from their officers and shareholders to meet daily cash flow
needs. All funds loaned during the year remained outstanding as of September 30,
2001, except for $206,000 repaid to the president of UltraCard. Loans from
related parties bear interest from 8% to 15%, and are due on demand. As of
September 30, 2001 and 2000, the Company had $373,066 in unpaid loans to
UltraCard's officers and $200,769 in loans payable to other minority
shareholders.
On June 4, 2001, the Company borrowed $125,000 from one of its executive
officers in exchange for a convertible promissory note. The note is convertible
into 62,500 shares of the Company's common stock at $2.00 per share, bears 8%
annual interest, matured on September 15, 2001, and was issued with a detachable
warrant. The warrant is exercisable into 62,500 shares of the Company's common
stock at $2.00 per share and expires on June 4, 2006. In connection with this
debenture, the Company recorded $63,750 as a beneficial conversion feature all
of which was amortized as an additional interest expense during the year ended
September 30, 2001. In addition, $48,487 of the total proceeds was allocated to
the detachable warrant based on the relative fair value of the debt and the
warrant with the value of warrant computed using Black-Scholes valuation model.
The note is currently in default and no extension was granted. The note has no
penalty provisions. As of September 30, 2001, the Company accrued $3,333 in
unpaid interest on the note, all of which is included in accrued liabilities.
Other payables to stockholders and officers are comprised, primarily, of unpaid
fees for services.
NOTE E - NONMONETARY EXCHANGES AND TRANSACTIONS
The following nonmonetary transactions occurred during the year ended September
30, 2001.
In October 2000, the Company issued 102,609 shares previously subscribed
pursuant to the cashless exercise of 120,000 warrants in May 2000.
See notes L and M for information on shares and warrants issued in conjunction
with the Company's borrowings made during the year
ended September 30, 2001.
In connection with the December 2000 subscription for 389,129 common shares of
the Company at a price of $2.00 per share, the Company paid finders fees
comprised of 18,480 common shares and $65,248 in cash. This resulted in
reduction of additional paid in capital of $102,208.
In April 2000, the Company granted 195,000 options to an outside legal counsel
for services to be performed in connection with a class action lawsuit that has
been settled in favor of the Company. The options were granted with a $10 strike
price and were scheduled to vest in three tranches of 65,000. The first tranche
vested immediately and related to services to be performed from April through
June 30, 2000. The second applies to services from July 1, 2000 through December
31, 2000, and the final tranche is consideration for services performed from
January 1, 2001 through June 30, 2001. All options expire April 17, 2005. The
value of the options earned during the year ended September 30, 2000 recorded as
legal expense was $1,047,670. During the year ended September 30, 2001, the
total value of earned options was reduced to $537,355 due to the decrease in the
Company's stock price. The difference of $510,315 was credited to legal expense
in the year ended September 30, 2001.
In January 2001, the Company issued 107,981 common shares pursuant to the
conversion of $200,000 of convertible debentures plus accrued interest
aggregating $218,122. The shares were issued at a price of $2.02 per share. The
notes were converted at the conversion price specified in the original
agreement.
In January 2001, the Company extended 800,000 warrants held by the Company's
president that were scheduled to expire on January 20, 2001. The warrants were
extended until January 20, 2003 and retained their original exercise price of
$0.25. This resulted in compensation expense of $2,414,000.
In February 2001, the Company issued 307,509 common shares pursuant to the
conversion of $400,000 of convertible debentures plus accrued interest
aggregating $438,356. The shares were issued at a price of $1.43 per share.
In April 2001, the Company issued 82,000 common shares pursuant to the
conversion of $102,500 of convertible debentures. The conversion shares were
issued at a price of $1.25 per share. The notes were converted at the conversion
price specified in the original agreement.
In May 2001, the Company issued 115,606 and 29,433 common shares pursuant to the
conversion of $ 200,000 (including accrued interest of $808) and $29,433 of
convertible debentures. The conversion shares were issued at a price of $1.74
and $1.00 per share. The notes were converted at the conversion price specified
in the original agreement.
In June 2001 the Company issued 53,185 shares as additional finders fees on debt
financings completed from April to June 2001. The share issuance was valued at
$169,527 and was recorded as interest expense.
In June 2001, the Company issued 115,606 common shares pursuant to the
conversion of $200,000 of convertible debentures plus accrued interest
aggregating $201,154. The converted shares were issued at a price of $1.74 per
share.
In August 2001, the Company entered into promissory note agreements for
aggregate proceeds of $275,500 and issued 275,000 detachable warrants to the
holders. Each warrant entitles the holder to acquire a share at $1.00 per share
for a period of three years. The warrants were valued using the Black-Scholes
pricing method resulting in a value of $114,484.
In September 2001, the Company settled $300,000 and $170,000 (both including
accrued interest) in convertible debentures through the issuance of 563,080
common shares at a conversion price of $0.54 and 284,042 common shares at a
conversion price of $0.60, respectively. The notes were converted at the
conversion price specified in the original agreement.
See additional information with regards to warrants issued during the year ended
September 30, 2001 in note P.
The following nonmonetary transactions occurred during the year ended September
30, 2000.
In connection with private placements in fiscal year 2000, the Company recorded
a subscription receivable from stockholders in the amount of $32,725. Since the
subscriptions receivable has been collected in full subsequent to September 30,
2000, it was classified as a current receivable at September 30, 2000.
In December 1999, the Company issued 70,000 shares and 100,000 warrants with a
$.25 strike price in lieu of a payment for public relation services performed.
The shares were valued using the closing market price on October 18, 2000 and
were recorded as marketing expense of $242,900. See note O for warrant
information.
In connection with the October 1999 sale of $1,000,000 in convertible
debentures, the Company allocated $323,640 and $676,360 to 120,000 detachable
warrants and beneficial conversion feature, respectively, based on their
relative fair values and computation of the effective conversion rate. See note
L for additional information.
Also in connection with the October 1999 debenture and November 2000 equity
placements, the Company issued 68,194 warrants in lieu of placement fees.
Additionally, in connection with the same debt and equity offerings, the Company
issued 40,000 shares of its common stock to the same broker.
As of September 30, 2000, in addition to the first 65,000 options, half of the
second tranch was considered earned and related legal expense was recognized.
The additional expense was computed using the Black-Scholes model with a $9.91
stock price and other assumptions discussed previously. In addition, the first
tranch was revalued using the current market price. The net result of these
computations was a reduction of legal expenses by $118,885.
On August 16, 2000, the Company distributed 465,228 warrants to stockholders
that acquired shares at $2.50 per share in a private placement during September
and October 1999. See note P.
NOTE F - RESTRICTED DEPOSIT AND LINE OF CREDIT ARRANGEMENT
In connection with a building lease entered into by one of the Company's
subsidiaries on September 19, 2000, the subsidiary entered into an arrangement
with its bank to maintain a letter of credit and related loan agreement in the
amount of $805,687. The letter of credit guarantees the lessor has available up
to $805,687 in funds to cure defaults specified in the lease agreement. The
arrangement was collateralized by a $805,687 certificate of deposit. On November
1, 2000, the subsidiary entered into an amended agreement with the lessor as a
result of a reduction in rental space, pursuant to which, both the letter of
credit and the certificate of deposit decreased from $805,687 to $300,000. The
loan underlying the letter of credit arrangement bears interest at the prime
rate plus 2% starting November 13, 2001 and is due on demand. Both the
certificate of deposit and the letter of credit matures on September 15, 2002,
which is also the expiration date of the letter of credit. As of September 30,
2001, no funds were drawn by the lessor.
NOTE G - SUBSCRIPTIONS RECEIVABLE
As of September 30, 2001 and 2000, the Company had subscriptions receivable of
$500,000 and $32,725, respectively, in connection with private placements
conducted at or near September 30, 2001 and 2000, respectively. All amounts were
collected prior to issuance of the financial statements and, thus, classified as
current assets on the September 30, 2001 and 2000 consolidated financial
statements.
NOTE H - SPUTTERING MACHINE
On February 28, 2000, a subsidiary of the Company entered into an agreement with
an unrelated company (the Supplier) to build a sputtering machine originally for
use in its research and development activities. During the year ended September
30,
2000, the subsidiary paid $1,200,000 to the Supplier and recorded a liability
for the amounts billed but unpaid as of September 30, 2000 equaling $2,307,025.
The liability also included applicable sales tax, rent payments allocation, and
amounts due under a development contract with the Supplier requiring $50,000
monthly payments, which expired prior to September 30, 2000 but was then orally
extended to January 12, 2001. During the year 2001, the Company's management
changed its intent of the use of the machine for internal purposes which
resulted in the Supplier's removing the tax liability of $247,500. As of
September 30, 2001 and 2000, amounts billed but the unpaid relating to the
machine, rent allocations, and the development contract totaled $2,024,748 and
$2,307,025, respectively.
During fiscal year 2001, management decided to subcontract some of the
manufacturing for the UltraCard technology products. The Company believes the
most likely disposition of the sputtering machine will be to sell it to the
manufacturer of the component that the machine is designed for. As result of
this decision, the sputtering machine is classified as held for sale.
Accordingly, the Company has written down its carrying amount to the estimated
fair value of $2,000,000 at September 30, 2001. Fair value was determined based
on management's estimate of the asset's method and likelihood of disposition.
The Company recognized a $1,054,125 impairment loss during the year ended
September 30, 2001. The asset is classified as non-current because of the
uncertainty of the timing of the disposition. The sputtering machine is
collateral for certain convertible debentures described in note L.
NOTE I - PROPERTY AND EQUIPMENT
The composition of property and equipment is as follows as of September 30:
2001 2000
----------- -----------
Equipment $1,338,429 $1,165,284
Software 126,869 124,763
Office furniture and fixtures 146,558 71,310
Corporate condominium 651,353 651,353
Leasehold improvement 376,012 42,262
----------- -----------
2,639,221 2,054,972
Accumulated depreciation and amortization (567,558) (263,715)
----------- -----------
$2,071,663 $1,791,257
=========== ===========
NOTE J - ACCRUED LIABILTIES
Accrued liabilities are comprised of the following as of September 30:
2001 2000
---------- ---------
Salaries, wages and payroll taxes $2,108,184 $ 185,439
Payroll benefits 195,825 110,290
Accrued interest 300,329 89,450
Other 368,375 348,0622
---------- ---------
$2,972,713 $ 733,241
========== =========
NOTE K - BRIDGE LOANS
During the year ended September 30, 2000, the Company periodically borrowed
funds from various third parties on a short-term basis. The borrowings were
generally settled within a period of two to three days. On September 30, 2000,
there were $799,177 in bridge loans payable, which were repaid in early October
2000, along with a finance fee of 5% of the principal amount due.
The Company entered into no such arrangements during the year ended September
30, 2001.
NOTE L - CONVERTIBLE DEBENTURES
In October 1999, the Company issued $1,000,0000 in convertible debentures (2000
debentures). The debentures bear interest at the annual rate of 7%, are
convertible immediately and mature on October 5, 2001. In addition to the
debentures, the holder received 120,000 detachable common stock warrants
expiring on December 31, 2004.
Each debenture is convertible into one share of the Company's common stock at a
rate equal to a 75% of the average bid price for the five trading days
immediately preceding conversion. However, the conversion price cannot exceed
$2.50 per share.
Each warrant can be exchanged into one share of the Company's common stock at a
price of $2.50 per share. The warrants contain cashless exercise provisions,
whereas the number of common stock shares to be received are determined as a
quotient of the number of warrants exercised multiplied by the difference
between the fair value of the stock on the date of exercise and the strike price
of the warrant divided by the fair value of the stock.
In connection with the issuance, the Company allocated $323,640 and $676,360 of
the proceeds to the detachable warrants and beneficial conversion feature,
respectively, based on their relative fair values and computation of the
effective conversion rate. Due to the immediate convertibility provisions of
the debentures, the allocated amount of the beneficial conversion feature was
charged to interest expense. The remaining discount related to the detachable
warrants is being amortized using the effective interest method over two years,
the contractual life of the debentures. During the year ended September 30,
2000, the Company recorded a total of $809,043 of interest expense related to
the amortization of the aforementioned allocated discounts.
In May 2000, all warrants were exchanged for 102,609 shares of the Company's
common stock by means of a cashless exercise. As of September 30, 2001, these
shares are included in total shares subscribed as no certificates were issued
until November 2001.
During the year ended September 30, 2001, all 2000 debentures were converted
into common shares of the Company using conversion terms specified in debenture
agreements.
On November 16, 2000, the Company issued $2,325,250 in convertible debentures.
The debentures bear interest at the annual rate of 8% and can be converted
immediately into "Conversion Shares" at 75% (50% if Company does a private
offering below $5) of the mean closing bid price for the Company's common stock
upon the 5 lowest closing bid prices during 20 consecutive days immediately
preceding the date of conversion, not to exceed $6.00. The debentures are due at
dates ranging from May 16 through May 24, 2002
In addition, upon three days after notice of conversion, the Company agreed to
pay a 1% of the conversion shares per day that the shares certificate is not
received by the holder.
In addition, due to the Company not filing a registration statement by December
15, 2000, each holder was entitled to receive additional penalty shares of
common stock of the Companying in the following amounts: (a) shares equal to two
percent (2%) of the total number of Conversion Shares for each 30-day period (or
partial period thereof) subsequent to December 15, 2000 during which the
registration statement has not been filed, up through February 13, 2001; and (b)
for each 30-day period (or partial period thereof) thereafter during which the
registration statement remains unfiled, Holder shall receive that number of
shares equal to three percent (3%) of the total number of Conversion Shares.
Also, in the event the registration statement covering the Conversion Shares
does not become effective within one hundred fifty (150) days of its filing date
with the SEC, each holder shall be entitled to receive additional shares of
common stock of the Company in the following amounts:
(a) for the first two 30-day periods (or partial period thereof)
following the expiration of 150 days from the filing date during which the
registration statement has not become effective, Holder shall be entitled to
receive that number of shares equal to two percent (2%) of the total number of
Conversion Shares; and (b) for each 30-day period (or partial period thereof)
thereafter during which the registration statement has not become effective,
Holder shall receive that number of shares equal to three percent (3%) of the
total number of Conversion Shares. Notwithstanding the above in no event shall
the Holder be entitled to receive an aggregate number of Penalty Shares in
excess of thirty percent (30%) of the total number of conversion shares.
Each debenture holder was also entitled to a warrant to purchase 12,500 shares
of of the Company's common stock for each $100,000 of original principal amount.
The shares underlying the warrants are subject to the same registration
requirements, including any penalties, as the Conversion Shares. In addition, in
the event the stock certificate is not delivered to the warrant holder within
five business days following the date a duly executed notice of exercise and
full payment of the exercise price are received by the Company, the holder shall
be entitled to receive additional shares of Common Stock equal to one percent
(1%) of the number of warrant shares to which the holder is entitled for each
business day thereafter until the certificate is received.
Each warrant can be exchanged into one share of the Company's common stock at
$6.00 per share. The warrants contain cashless exercise provisions.
In connection with the issuance of the debentures, the Company allocated
$444,603, $829,551, and $1,051,096 of the proceeds to the common stock,
detachable warrants, and beneficial conversion feature, respectively, based on
their relative fair values and computation of the effective conversion rate.
During the year ended September 30, 2001, the Company recorded a total of
$1,291,810 of interest expense related to the amortization of the debenture
discounts and the beneficial conversion feature.
By September 30, 2001, $225,000 of the debentures were converted into common
shares. Subsequent to September 30, 2001, all remaining outstanding debentures
were converted into common shares of the Company.
On March 15, 2001, the Company issued $790,369 in convertible debentures. The
debentures bear 8% annual interest and are convertible immediately at $1.25 per
share. All loan holders received subordinated security interest in the
sputtering machine (see note H). The debentures mature on May 31, 2001, later
extended to August 15, 2001, and then October 15, 2001, with no additional
penalties. Due to effective conversion price on the debentures being
significantly below stock's fair value on the date of the agreement, all
debenture proceeds were allocated to beneficial conversion feature.
On April 1, 2001, some of the holders converted $102,500 in principal into
shares of the Company's common stock at the conversion price specified in the
agreement. On April 9, 2001, the Company sold additional convertible debentures
totaling $35,131 under the same terms as March 15, 2001. Due to effective
conversion price on the debentures being significantly below stock's fair value
on the date of the agreement, all debenture proceeds were allocated to
beneficial conversion feature and expensed prior to September 30, 2001.
The balance of the debt was converted into shares of the Company's common stock
in October 2001.
On June 15, 2001, the Company issued $239,685 in convertible debentures maturing
October 15, 2001. The debentures bear 8% interest rate and are convertible
immediately into shares of the Company's common stock at $1.50 per share. All
debentures were converted into the Company's common shares during October of
2001. In connection with these debentures, the Company recognized $182,960 as a
beneficial conversion feature (resulting from a differential between the
Company's stock fair value on the date debentures were issued and the effective
conversion price under the agreements) all of which was expensed during the year
ended September 30, 2001.
NOTE M - NOTES PAYABLE
On December 5, 2000 and December 14, 2000, the Company signed four promissory
notes (December 2000 notes) with a group of investors to borrow a total of
$400,000. The notes bear 10% annual interest and matured on January 5 and 14 of
2001. In the event that the loans are not repaid on the maturity date, a penalty
charge became due as explained below:
(a) 10% of the unpaid principal and interest at the maturity date to
be satisfied by issuing common stock, with number of shares
calculated based upon the three lowest closing bid prices during
the thirty trading days immediately preceding loan maturity date.
(b) Warrants to acquire common stock equaling 10% of the unpaid
principal and interest on the loan maturity date with the
exercise price equaling to the three lowest closing bid prices
during the thirty trading days immediately preceding loan
maturity date.
(c) Additional warrants to acquire common stock equaling to 20% of
the unpaid principal and interest on the loan maturity date with
a $3.00 exercise price.
(d) In the event that the loan principal and interest would not be
repaid, after thirty days pass maturity date, an additional
penalty will become due and payable every 30 days following the
maturity date.
No notes have been paid of as of September 30, 2001 resulting in the Company
issuing 447,064 shares and 924,760 warrants (see note Q for breakdown by
exercise price)and recognition of $1,643,809 in additional interest expense.
On June 22, 2001, the Company borrowed an additional $450,000 from the
aforementioned group by signing $250,000 and $200,000 promissory notes (June
2001 notes). The notes were to mature on July 22, 2001, bore 10% interest and
called for penalties identical to the December 2000 notes except for the
following modifications to paragraphs (a) and (b):
- The number of shares to be issued as computed under provisions (a)
above has to be at least 2,500.
- The exercise price of warrants required under provision (b)above
cannot exceed $2.50.
Each note holder was also entitled to 10,000 shares of the Company's common
stock for each $100,000 loaned and 146,250 immediately exercisable cashless
exercise warrants that expire five years from the date of grant.
In addition, in lieu of financing costs, the Company issued a $50,000 note
payable to a loan faciliator together with 5,000 shares of the Company's common
stock and 16,250 cashless exercise warrants exercisable immediately and expiring
five years from the date of grant.
In connection with this transaction, Company recognized $185,000 in expenses
related to debt discount and financing fee amortization and $488,202 in interest
expense related to penalty shares (162,208 shares) and warrants (476,100
warrants). See note Q for breakdown of warrants by exercise price that ranged
from $0.72 to $6.00.
In addition to penalties listed above, if penalty shares and stock certificates
are not delivered to their holders within seven business days from the due date,
the June 2001 notes bear a one percent per day penalty computed as one percent
of the number of shares and warrants due. This penalty is payable for each
business day of the delay and are being issued monthly.
As of September 30, 2001, no June 2001 loans have been repaid.
In December 2000, the Company obtained an equipment loan of $70,409. The loan
bears interest at a rate of 18% per annum, subject to monthly payment of
principal plus interest of $5,500 and was due December 2001, however, no
payments have been made on the loan and both principal and the accrued interest
since inception of the loan are still outstanding. The loan is not subject to
late payment penalties, except additional accrued interest at 18% per annum.
In March 2001, the Company obtained a first mortgage loan of $400,000 on the
corporate condominium located in Los Gatos, CA, that is owned by UltraCard. The
loan bears interest at a rate of 12.5% per annum, subject to interest only
monthly payment of $4,167 with any unpaid accrued interest and principal balance
due April 2002, and is collateralized by the corporate condominium owned by
UltraCard. As of September 30, 2001, the Company was current on its payments.
From August 17, 2001 through August 24, 2001 (August 2001 notes), the Company
signed notes payable with seven individual debtholders for total gross proceeds
to the Company of $257,500. The maturity dates ranged from September 1, 2001
through September 8, 2001. The notes bore no interest if paid at maturity;
however, were to incur 25% per annum interest once in default. In addition, each
debtholder was entitled to warrants in the amount equal to one warrant for each
dollar invested and had one dollar exercise price and three year term. As of
September 30, 2001, no notes were repaid. The Company repaid the August 2001
notes on October 4, 2001.
NOTE N - INCOME TAXES
The differences between financial and tax reporting are comprised primarily of
the timing in the recognition of net operating loss (NOL) and tax credit
carryforwards, vacation expenses and methods used to compute depreciation
expense. The income tax benefits reconciled to the tax computed at the
statutory rate were approximately as follows during the years ended September
30:
2001 2000
------------- ------------
Tax benefit computed at federal statutory rate $(10,030,000) $(7,530,000)
Non-deductible expenses 40,000 1,480,000
Research credit (200,000) (410,000)
Valuation allowance 10,190,000 6,460,000
------------- ------------
$ - $ -
============= ============
Deferred tax assets and liabilities are measured using enacted tax rates that
are expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
recorded for deferred tax assets when it is more likely than not that such
deferred tax assets will not be realized. Deferred income taxes reflect the net
tax effects of temporary differences between the consolidated carrying amounts
of assets and liabilities for financial reporting purposes and the respective
amounts used for income tax purposes. Significant components of the Company's
deferred tax assets are as follows at September 30:
2001 2000
------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 18,680,000 $ 8,920,000
Research credit 950,000 650,000
Equity in losses of UltraCard 430,000 430,000
Options, warrants and other 630,000 500,000
------------- -------------
Total deferred tax asset 20,690,000 10,500,000
Valuation allowance (20,690,000) (10,500,000)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
The Company and its subsidiaries are each required to file their own corporate
federal and, in some instances, state tax returns. As of September 30, 2001, The
Company and Subsidiaries had aggregated NOL carryforwards and tax credit
carryforwards of approximately $58,400,000 and $950,000, respectively, of which,
the majority begin expiring in 2018 for federal and earlier for state purposes.
Included in the NOL carryforward is approximately $5,200,000 in tax deductions
attributable to stock option exercises. If realized, the benefit of these
deductions will be credited to shareholders' equity and will not effect the
Company's income.
Internal Revenue Code Section 382 and similar California rules place a
limitation on the amount of taxable income that can be offset by carryforwards
after a change in control (generally greater than a 50% change in ownership).
As a result of these provisions, utilization of the NOL and tax credit
carryforwards may be significantly limited.
NOTE O - COMMITMENTS AND CONTINGENCIES
1. License Agreements
------------------
a. AMPEX Agreement
Effective October 1, 1999, UltraCard entered into a license agreement with
AMPEX Corporation (AMPEX) to use AMPEX developed proprietary technology,
generally referred to as Keepered Media Technology, for incorporation into
UltraCard's development, use and sale of its core product. The agreement is
scheduled to continue for the life of each Keepered Media patent, for the
life of each Keepered Media patent issued under a patent application, and
for of each license granted under the Keepered Media Technology, in
perpetuity.
Under the terms of the agreement, UltraCard is required to pay royalties
for each sale of the UltraCard's magnetic card product on a per card basis.
Additionally as the Company did not make the required minimum royalty
payment during the year ended September 30, 2001 the contract is
non-exclusive. Either party has a right to terminate all or part of the
agreement with 30 days notice. There were no fees incurred and paid under
the agreement through September 30, 2001.
b. CardTech Agreement
On October 10, 1997, UltraCard licensed the rights to two technology
patents from CardTech, Inc. (CardTech). UltraCard's President is also the
controlling stockholder of CardTech. The license agreement terminates upon
the expiration of the last licensed patent. Because the agreement covers
any new patent applications filed in conjunction with the original
technology patents, the agreement does not have a definite expiration date.
For the year ended September 30, 2001, 2000 and cumulative since inception,
UltraCard recorded minimum royalty fees of $650,000, $650,000 and
$1,600,000, respectively, and recorded capital fees of $24,373, $0 and
$1,034,186, respectively. Through September 30, 2001, UltraCard had paid
$30,000 for an initial licensing fee. Capital fees were paid as part of the
agreement requiring UltraCard to remit to CardTech 12.5% of every dollar
received from equity financing. In October 1997, as required by the license
agreement, UltraCard issued 7,500,000 shares (after effect of 3:1 stock
split) of its common stock, valued at the time of the issuance at $250,000.
Related to the shares issued, UltraCard capitalized as license cost the
amount of $250,000.
As of September 30, 2001, a total of $1,135,000 in royalty fees remained
unpaid for calendar year 2001 and 2000, resulting in UltraCard being past
due on the agreement. CardTech agreed to defer payment of amounts owed to
March 30, 2002. As partial consideration for the deferral, CardTech was
granted a patent mortgage on the intellectual property of UltraCard.
As of September 30, 2001, UltraCard's remaining commitments under the
license agreement are summarized as follows:
- An earned royalty fee of 5% of the gross proceeds generated from
sales, leases or other distributions of products incorporating
the CardTech technology. The minimum annual royalty fee is
payable at $650,000 per calendar year through 2009.
- A capital fee equal to 12.5% of all equity capital invested in
the UltraCard until such time that CardTech has received a total
of $3,000,000 in such fees. The maximum remaining amount of the
commitment is $1,965,814. As of September 30, 2001, the Company
owed $24,373 to CardTech for unpaid capital fees.
2. Agreement with International Funding Corporation
------------------------------------------------
Effective July 1, 1999, the Company entered into an agreement with International
Funding Corporation (IFC). Under the terms of the agreement, IFC provides
various investment banking services and assisted the Company in conducting its
private placement to sell shares at $2.50 in exchange for the following
consideration:
a) Warrant for the purchase of 100,000 shares of common stock at a price
of $0.25 which vest at the time the Company raises $6,000,000. As of
September 30, 2001, the warrant is fully vested; however, it has not
been exercised. It expires September 30, 2004.
b) Cash fee of 7% of the gross proceeds raised through the equity
placement;
c) Fee of 4% of the gross proceeds of the placement payable in the
Company's voting common stock;
d) Fee of 5% of the gross proceeds of the placement payable in common
stock warrants which would vest immediately and expire five years from
the date of grant;
e) Monthly fee of $18,750 through December 2000 and $7,500 per month
through termination of the agreement.
During the year ended September 30, 2000, the Company granted IFC 68,194
warrants, under provision (d) above. No such warrants were granted during the
year ended September 30, 2001. The number of warrants was determined as the
contractual fee of 5% of the funds raised divided by computed fair value of
an individual warrant. The warrants issued were valued using the Black-Scholes
pricing model and the assumptions described in note P. In addition, as of the
year ended September 30, 2001 and 2000, IFC received 18,480 and 40,000 shares,
respectively, of the Company's common stock, along with $65,248 and $105,000 in
cash, respectively, as required under provisions (b) and (c) above. All of the
costs associated with the warrants and cash fees payable were recorded as a
reduction of the proceeds from the offering.
In addition to the aforementioned placement costs, during the year ended
September 30, 2001, 2000 and cumulative since inception, the Company incurred
$37,500, $247,500 and $315,000, respectively, in consulting fees for investor
relation services performed by IFC. At September 30, 2001 and 2000, accounts
payable includes $138,784 and $75,000, respectively, payable to IFC.
The IFC agreement expired on June 30, 2001, and was automatically renewed for an
additional year. In the event of any future private placements conducted through
IFC, fees described in (b)-(d) above are payable by the Company out of the
proceeds raised. In addition, IFC is entitled to a monthly retainer in the
amount of $7,500 and a reimbursement of expenses incurred while providing
services for the Company.
3. Employment and Consulting Agreements
------------------------------------
UltraCard has entered into a number of employment and consulting agreements. The
agreements vary in length from one to three years with total remaining
commitment amounts, excluding shares to be issued, as follows:
Year ending
September 30,
-------------
2002 $ 560,800
2003 87,500
----------
$ 648,300
==========
Certain of the employment and consulting agreements also call for issuance of a
specified number of shares of the Company's common stock. The estimated market
value of these shares issued were charged to expense in the period issued.
During the year ended September 30, 2001, and cumulative since inception, the
Company recorded $29,508 and $1,068,072 of employee compensation and consulting
expenses related to the issuance of these shares of UltraCard's common stock.
No shares were issued for compensation or consulting services during the year
ended September 30, 2000.
During the year ended September 30, 2001, UltraCard issued 300,000 shares of its
common stock to one of its legal counsels in satisfaction of liabilities for
legal services in the amount of $190,000.
4. Funding Agreements
------------------
Upgrade has entered into funding agreements with each of its subsidiaries based
upon budgets and operating projections for one to three years prepared by each
subsidiary and submitted to and approved by the Board of Directors of Upgrade.
Those agreements provide funding commitments to each of those subsidiaries for
aggregate proceeds as follows to finance the expansion of their operations:
Funding Portion Funded through
Company Commitment September 30, 2001
--------- ----------- -----------------------
UltraCard $28 million $ 22.06 million
EforNet $ 5 million $ 3.04 million
cQue $ 3 million $ 2.83 million
Each of these funding arrangements are convertible (or were partially converted)
into common stock in the subsidiary and bear an 8% interest rate.
5. Acquisition of The Pathways Group, Inc.
---------------------------------------
On September 8, 2000 the Company signed an Agreement and Plan of Reorganization
("Agreement") to acquire 100% of the Pathways Group, Inc. The Company loaned
operating capital to Pathways during the course of the acquisition transaction.
During the year ended September 30, 2001 and 2000 the Company advanced funds for
operating capital to Pathways in the amounts of $1,648,955 and $1,900,825,
respectively, for a total of $3,549,780. On February 15, 2001 the Company
delivered notice to The Pathways Group, Inc. terminating the merger agreement
between the two companies. The balance of funds loaned to Pathways by the
Company totaling $3,549,780 is collateralized by a blanket assignment over
Pathways' assets. The Company has filed a claim for the recovery of the amounts
loaned to Pathways. However, as of September 30, 2001, the Company set up an
allowance to offset advances due from Pathways due to the potential that the
funds advanced may not be recoverable. The Company and Pathways are involved in
litigation. See note O(10) for summary of the litigation.
6. Advances to Rockster Group
--------------------------
The Company entered into letters of intent with companies collectively referred
to as the Rockster Group.
On December 11, 2000 the Company entered into a letter of intent for the
acquisition of a majority position in an entertainment distribution technology
developer, Rockster, Inc. (Rockster). Under the terms of the agreement, Upgrade
will acquire an ownership interest of 57% of Rockster for total cash payment of
$5,000,000. The companies are working towards the development of a definitive
agreement. As of September 30, 2001, all payments totaling $854,000 have been
classified as advances to Rockster Group.
On March 6, 2001, the Company entered into letter if intent with Rockster
Records, Inc. (Rockster Records) to acquire 10% of Rockster Records for a total
purchase price of $2,000,000. The payments were to be made on or before April
30, 2001. As the companies were unable to sign a definitive agreement prior to
March 31, 2001, payments of $230,000 made to the Rockster Records by Upgrade are
considered cash advances that are required to be returned to the Company. As of
September 30, 2001, no definitive agreement has been reached and payments are
classified as advances to Rockster Group. The Company believes that the advances
will be recovered through payment or consummated acquisitions. The Company is
subleasing its Los Angeles office (see note O(7)) to Rockster Group companies
rent free and intends to continue doing so until all leasehold improvements are
completed. At that time, the Company intends to enter into a formal sublease
agreement with Rockster Group and negotiate monthly sublease payments.
7. Operating Lease Agreements
--------------------------
The Company and its subsidiaries have entered into operating lease agreements
for its office and engineering facilities located in Washington and California.
The leases have terms varying from monthly to five years, which expire in 2002
to 2011, and one of which provides for a ten year extension. Certain leases
provide for fixed annual increases in base rent and others require adjustments
based on the change in the Consumer Price Index and in facility maintenance
costs. Total minimum operating lease commitments for the Company are
approximately as follows:
Year ending
September 30,
-------------
2002 $ 1,711,000
2003 1,734,000
2004 1,798,000
2005 1,754,000
2006 601,000
Thereafter 3,286,000
-----------
$10,884,000
===========
Consolidated rent expense for the year ended September 30, 2001, 2000 and
cumulative since inception was approximately $1,934,000, $747,000 and
$2,736,000, respectively.
In September 2000, UltraCard entered into a five-year 66,400 square foot
building lease to expand its corporate headquarters and research and development
facilities. Pursuant to the lease terms, UltraCard paid a refundable securities
deposit of $190,313 and entered into a letter-of-credit arrangement described in
the note F. In November 2000, The lease was amended, reducing the amount of
leased space to 41,330 square feet. Pursuant to the same lease amendment, the
letter of credit requirements were reduced to $300,000 with collateral also
replaced by a $300,000 certificate of deposit (see note F).
In August 2001, the Company entered into a ten-year operating lease for office
space located in Los Angeles, California. This facility is being occupied,
rent-free, by Rockster, Inc. The Company intends to sublease all but 3,000
square feet to Rockster, Inc. at the market rate once the leasehold improvements
are completed, which is estimated to be completed within the next nine months.
8. Prime Domain Agreements
On August 16, 2001, the Company entered into a Business Development and
Consulting Services Agreement with Prime Domain International (Prime Domain)
under which Prime Domain is to provide the Company with market development,
strategic planning, technological development and corporate finance. The
companies are currently working on developing a commission agreement covering
fees to be paid in connection with market development, technology development,
and strategic planning. No services have been provided to the Company through
September 30, 2001.
Also on August 16, 2001, the Company entered into a Finder Fee agreement under
which Prime Domain was to assist the Company in raising up to $40,000,000 in
exchange for 200,000 common stock warrants for each $1,000,000 in investments.
The warrants would have a $1.16 exercise price and expire three years from the
date of their issuance. As of September 30, 2001, no funds have been raised
through Prime Domain and, thus, no warrants have been issued.
On September 4, 2001, the Company and Prime Domain signed a Retainer Agreement
for services to be provided with a potential $15,000,000 financing. Under the
terms of this agreement, Prime Domain was entitled to a 10% fee payable through
issuance of 1,000,000 shares of the Company's common stock. In the event that
this financing would not close within 90 days from the date of the agreement,
Prime Domain has to return all shares. The shares were issued to Prime Domain
on September 21, 2001.
No funds have been raised through September 30, 2001, and therefore, all shares
issued to Prime Domain were for future services and, thus, the shares were not
included in the total shares outstanding on Statement of Stockholders' Equity
(Deficit). The shares were included in computations of loss per common share.
The Company is currently assessing whether it wants to expend the September 4,
2001 retainer agreement or request return of 1,000,000 shares previously issued.
9. Pending Acquisition of Shares from Minority Shareholders
As of September 30, 2001, the Company recorded $1,758,215 in liabilities due to
minority shareholders of UltraCard in connection with two pending acquisitions
of stock and $1,820,715 of acquisition deposits.
On May 14, 2001, the Company entered into an agreement to acquire 260,052 shares
of UltraCard Common Stock and 10,000 Shares of CardTech for total cash
consideration of $1,500,000. Subsequently, on July 10, 2001, the parties entered
into a Forebearance Compensation Agreement ("Foreberance Agreement") intended to
cure a default due to late payments under the original May 14, 2001 agreement.
The selling shareholders agreed to extend payments in consideration for 10%
annual interest with interest payments on unpaid principal balance to be made
monthly. The Company made three interest payments totaling $37,500 for interest
due in two months in arrears and for the August 2001 interest payment due; after
which the September 2001 payment went unpaid. On October 5, 2001, the parties
entered into Time Payment Agreement that replaced and superceded the
Forebearance Agreement and required the Company to continue 10% annual interest
payments in addition to $100,000 monthly principal payments commencing on or
before October 10, 2001. In the event that total consideration is not paid
within 90 days from October 10, 2001, Forbearance Agreement can be terminated
without further notice and all amounts will become due and payable. The Company
made $157,000 in total payments to the selling shareholders. While currently
under default, the Company is currently in negotiations to further extend the
sale purchase agreement.
On July 30, 2001, the Company entered into agreement with a minority shareholder
of UltraCard to acquire 566,430 shares of UltraCard's common stock for total
consideration of $283,215. The Company paid $25,000 upon execution of this
agreement and made no other payments through September 30, 2001. The remaining
payments were due in five equal monthly commencing with August 2001 and accrue
8% annual interest. The agreement contains no specific default or termination
provisions. The Company and the shareholder have verbally agreed to extend the
agreement until such time the Company's cash flow allows to make payments
required under this agreement. The Company has previously purchased shares from
the same shareholder in December 1999 and January 2000. As of September 30, 2001
recorded a liability of $258,215 and acquisition advances of $283,215.
The fair value of the CardTech and UltraCard stock being acquired will be
allocated upon consumation of the transactions.
10. Legal Proceedings
-----------------
Upgrade, its president, Daniel S. Bland, and chief operating and financial
officer, Howard Jaffe, are defendants in The Pathways Group, Inc. v. Upgrade
International Corporation et al., Superior Court of the State of California in
for the County of Sonoma. The complaint, filed August 3, 2001, alleges breach of
merger and collateral agreements between Upgrade and plaintiff, breach of oral
agreement, fraud, and negligent material misrepresentation, and seeks specific
performance of the agreements, an injunction against exercising provisions
pursuant to the merger agreement whereby Upgrade could obtain control of
Pathways. Specifically, the complaint alleges that Upgrade failed to provide
interim financing to Pathways pending consummation of the proposed merger
transaction, and prevented Pathways from obtaining alternate sources of
financing. Upgrade filed a counterclaim against Pathways, its Board of Directors
and Executive Officers, for moneys due and owing from funds advanced, fraud in
the inducement as well as other misrepresentations made by Pathways to Upgrade.
Upgrade believes that the plaintiff's allegations are without legal or factual
basis and intends to vigorously defend its position. The litigation is in the
discovery stage. The ultimate outcome of the case is uncertain. As a result no,
liability for the case is recorded in the accompanying financial statements.
Upgrade, its President, Daniel S. Bland, and Chief Operating and Financial
Officer, Howard Jaffe, are defendants in Kenneth Donnelly v. Upgrade
International Corporation et al., Superior Court of the State of California in
for the County of Santa Clara, Cause No. CV801537. The complaint, filed
September 18, 2001, alleges breach of employment contract, breach of oral
agreement, and false representations to induce relocation. Specifically,
plaintiff alleges that Upgrade has failed to pay him employment wages. Upgrade
believes that the plaintiff's allegations are without legal or factual basis
and intends to vigorously defend the lawsuit. The ultimate outcome of the case
is uncertain. As a result no liability for the case is recorded in the
accompanying financial statements.
Pursuant to a court order dated May 26, 2000, the three actions previously filed
against Upgrade and its president, Daniel S. Bland, have been consolidated into
one action, In Re Upgrade International Corporation Securities Litigation, U.S.
District Court, Western District of Washington at Seattle, c/a #C00-0298. A
Consolidated and Amended Class Action Complaint was filed July 24, 2000. Six
minority shareholders are named as lead plaintiffs. The complaint alleges that
material misrepresentations and omissions were made by Upgrade and Mr. Bland in
violation of the Securities Exchange Act of 1934. The consolidated complaint
seeks class certification and payment of unspecified damages and attorneys fees.
Upgrade filed a motion to dismiss the complaint, which was affirmed by the court
on February 9, 2001. Plaintiffs appealed the court's order to dismiss, and the
defendants filed a cross appeal seeking sanctions. The parties entered into a
stipulated agreement to dismiss their appeals, which closed this case.
NOTE P - STOCK OPTION PLAN
In January 1999, the Company established the 1999 Stock Option Plan (1999 Plan).
The 1999 Plan allowed the Company to grant options to employees, consultants,
and directors for up to 1,550,000 shares of common stock. On September 30,
1999, the Company implemented the 2000 Stock Option Plan (2000 Plan) allotting
an additional 800,000 shares for grants to employees and contractors. On March
27, 2001, the Company's shareholders approved the 2000 Omnibus Stock Option Plan
(2000 Omnibus Plan) allotting 4,800,000 for future grants under the amended plan
and rolling all options previously issued under the old 2000 Plan into the new
2000 Omnibus Plan. Option prices are generally equal to the fair market value
of the shares of the Company's common stock on the date of grant. Options,
generally, vest immediately or over a four-year period and expire five to ten
years from the date of the grant.
The following is a summary of the employee stock option information for the
years ended September 30, 2001 and 2000:
Weighted Average
Shares Exercise Price
---------- -----------------
Options outstanding at September 30, 1999 2,250,000 1.07
Options granted 100,000 12.50
Options exercised (90,000) 0.25
Options forfeited (75,000) 2.50
---------- -----------------
Options outstanding at September 30, 2000 2,185,000 1.52
Options granted 1,175,000 1.82
Options exercised - -
Options forfeited (185,000) 2.85
---------- -----------------
Options outstanding at September 30, 2001 3,175,000 $ 1.79
========== =================
* The Company has 1,215,000 options available for future grant as of
September 30, 2001.
The following table summarizes information about options outstanding at
September 30, 2001:
Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Exercise Remaining Number Exercise
Exercise Prices Outstanding Price Contractual Life Exercisable Price
---------------- ----------- --------- ---------------- ----------- ---------
0.25 1,300,000 $ 0.25 2.30 1,300,000 $ 0.25
2.50 - $3.19 1,850,000 2.72 7.05 1,433,240 2.71
12.50 25,000 12.50 3.94 25,000 12.50
---------- ----------
3,175,000 2,758,240
========== ==========
The weighted average fair value of the options granted during the years ended
September 30, 2001 and 2000 was $4.32 and $12.13, respectively.
On December 28, 2000, the Board granted 575,000 options to an officer and to a
director under the 2000 Plan. The options were to expire in ten years from the
date of grant and had an exercise price of $2.50 per share. Out of total
options granted, 375,000 were exercisable immediately and the remaining 200,000
were to vest over a three-year period in equal increments of 8.33% every three
months commencing on March 28, 2001.
Prior to December 2000 grants, the 2000 Plan had used all shares allotted for
future grants. Therefore, these options were not considered approved until the
March 27, 2001 stockholders' meeting that adopted the 2000 Omnibus Plan which
increased the amount of available options. Therefore, March 27, 2001, was
considered to be measurement date for the purposes of measuring compensation
expense. On March 27, 2001, the closing price of the Company's stock was $4.44.
The Company accounts for its stock-based compensation plan in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock
Issued to Employees, under which no compensation is recognized in connection
with options granted to employees unless such options are granted below the
underlying stock's fair value on the date of grant. Therefore, the Company
recorded $1,114,062 in compensation expense. During the year ended September 30,
2001, the Company recognized $823,437 as expense for options vested and deferred
$290,625 to be recognized ratably over the remaining vesting period.
Also on March 27, 2001, the Company granted 600,000 options to officers and to
board members with a $3.19 exercise price and ten-year contractual life. Of all
options granted, 400,000 options were vested immediately and the remaining
options were to vest in equal increments every three months commencing on June
30, 2001. On March 27, 2001, the closing price of the Company's stock was $4.44.
Therefore, the Company recorded $748,501 as compensation expense. During the
year ended September 30, 2001, it recognized $540,567 as expense for options
vested and deferred $207,934 to be recognized ratably over the remaining vesting
period.
No options were granted with a strike price below the stock's market value on
the date of grant during the year ended September 30, 2000.
The Company adopted the disclosure requirements SFAS No. 123, Accounting for
Stock-Based Compensation. Accordingly, the Company is required to calculate and
present the pro forma effect of all awards granted. For disclosure purposes,
the fair value of each option granted to an employee has been estimated as of
the date of grant using the Black-Scholes option pricing model with the
following assumptions for the years ended September 30, 2001 and 2000,
respectively: risk-free interest rate of 6.00% and 4.50%, dividend yield 0% and
0%, and volatility of 130% and 189%, and expected lives of 4 to 10 years.
Based on the computed option values and the number of the options issued, had
the Company recognized compensation expense, the following would have been its
effect on the Company's net loss:
Year ended Year ended
Net loss September 30, 2001 September 30, 2000
-------------- ------------------- -------------------
As reported $ 30,169,897 $ 17,403,990
Pro forma 34,186,977 18,689,702
Loss per share
As reported $ 1.35 $ 0.94
Pro forma 1.52 1.01
On September 30, 1999, the Company granted 40,000 options to non-employee
consultants. Options were granted at an exercise price of $2.50 per share which
at the time was equal to the private placement price of the underlying Company's
common stock. The options expire five years from the date of grant and vest
over a four-year period. The Company recorded $98,720 in compensation expense
in connection with the options granted to non-employees. At September 30, 2001
and 2000, 40,000 and 3,336 of these options became exercisable. On April 18,
2001, the Company granted 195,000 options to one of its legal counsels, as
described in note E.
As of September 30, 1999, UltraCard adopted a stock option plan of up to
3,000,000 shares of its common stock and granted 841,998 options to its
employees, as adjusted for UltraCard's April 12, 200, 3:1 stock split. The pro
forma effect on the consolidated loss was not material.
During the year ended September 30, 2001 and 2000, UltraCard granted 442,000 and
289,500 additional options, respectively. Also, during the year ended September
30, 2001 and 2000, 113,500 and 88,750 options, respectively were forfeited due
to employment terminations. The net pro forma effect of the subsidiary's options
was not material for the year ended September 30, 2001 and 2000.
As of September 30, 2001 and 2000, certain other subsidiaries had established
stock option plans. However, none of the plans had significant activities
material to the consolidated financial statements or for pro forma disclosure
purposes.
NOTE Q - WARRANTS
During the years ended September 30, 2001 and 2000, the Company granted
4,043,034 and 753,422 warrants, respectively, to investors, investment bankers,
consultants and other service providers as follows:
- In October 1999, the Company issued 100,000 warrants with a $0.25 strike
price in lieu of a payment for public relation services performed. The
warrants were valued at $339,500 on the date of grant (October 15, 1999)
using the Black-Scholes pricing model and the following assumptions:
volatility of 218%, risk free rate of 6% and a fair value of each
underlying share of $3.562. The warrants vested immediately and were
exercised in May 2000.
- In October 1999, in connection with a placement of convertible debentures,
the Company issued 120,000 warrants with a $2.50 strike price.
- Also in connection with the October 1999 debenture and the November 1999
equity placement, the Company issued 68,194 warrants in lieu of placement
fees. The number of warrants was determined as a placement contractual fee
of 5% of the funds raised ($125,000) divided by computed fair value of an
individual warrant. The value of a warrant was determined using the
Black-Scholes option pricing model with assumptions as follows: volatility
of 218%, and risk free rate of 6%, dividend yield of 0% and the fair value
of the underlying stock of $2.50 per share (price received in the November
placement). Each warrant has a $2.50 strike price. The warrants are
scheduled to expire in five years from the date of issuance.
- Due to not registering certain securities, on August 16, 2000, the Company
distributed 465,228 warrants to stockholders that acquired shares at $2.50
per share in a private placement during September and October 1999. One
warrant was issued for each 10 shares acquired through the aforementioned
placement. On the date of the grant, the stock was traded at $15 per share.
The warrants have a strike price of $10 and an expiration date of August
16, 2002. All warrants vested immediately. The aggregate fair value of the
warrants issued were determined using the Black-Scholes pricing model with
an 189% volatility and 6% risk free rate was $6,016,795 and was recorded as
a distribution on the date of the grant.
- In October 2000 the company issued 102,260 warrants to acquire common stock
at a price of $8.50 per share to individuals as compensation for finders
fees on private placements made by the Company.
- On December 22, 2001, the Company issued 50,000 warrants to purchase common
shares at a price of $6.00 per share to an investor in conjunction with a
private placement for an equal number of shares at $6.00.
- In November and December 2000 the Company issued 81,250 warrants to
acquire common shares at prices ranging from $3.00 to $6.00 and for terms
ranging from 3 to 5 years to individuals, paid as finders fees on private
placements entered into by the Company. See further information in notes
L and K.
- During the month of December 2000 and June 2001, the Company entered into a
number of loan agreements for net proceeds to the Company of $950,000. The
loan agreements provided for the issuance of shares and warrants paid as
interest on the loans and. See further information in note K.
- In conjunction with the loans referred to above, the Company issued 521,167
warrants as finders fees on the loans. The warrants have a strike prices
ranging from $2.00 to $3.00 per share, have a five year term and cashless
exercise feature.
- During the year ended September 31, 2001 the Company entered into certain
convertible debenture agreements. (See note L) Pursuant to the terms of
those convertible debenture agreements the Company issued 365,656 warrants
to acquire common stock at prices ranging from $3 to $6, with a five year
term and cashless exercise feature.
- In December 2000 the Company issued 125,000 warrants at an exercise price
of $4.00 per share and 201,667 warrants at an exercise price of $6.00 per
share as finders and investor relations fees. The warrants have a three
year term and cashless exercise feature.
- In February 2001 the Company issued 266,688 warrants to acquire common
stock at a price of $2.00 per share to an investor. In conjunction with an
investment into the Company for 616,721 shares at a price of$2.00 per
share. The warrants have a three year term and cashless exercise feature.
- In February 2001 the Company issued 205,000 warrants to acquire common
stock at a price of $2.00 per share to an investor and related party
pursuant to the issuance of a private placement for the purchase of 205,000
shares at $2.00. The warrants issued have a three year term and cashless
exercise feature.
At September 30,2001, there were 5,171,042 warrants outstanding, summarized as
follows.
Exercise price Number of warrants
$ 0.25 880,000
$ 0.72 136,842
$ 0.81 51,624
$ 1.00 257,500
$ 1.09 50,780
$ 1.13 39,479
$ 1.27 38,290
$ 1.76 14,321
$ 1.78 28,772
$ 1.88 22,000
$ 2.00 571,688
$ 2.08 16,030
$ 2.24 11,701
$ 2.25 11,666
$ 2.32 11,120
$ 2.40 10,836
$ 2.49 10,375
$ 2.50 248,008
$ 2.60 29,120
$ 2.61 9,978
$ 2.74 9,278
$ 3.00 915,634
$ 4.00 125,000
$ 6.00 1,103,512
$ 8.50 102,260
$ 10.00 465,228
---------
5,171,042
=========
NOTE R - FOURTH QUARTER ADJUSTMENTS
As disclosed in the note O, on December 28, 2000, the Board granted 575,000
options to officers and directors that were granted in excess of Plan's original
capacity. Therefore, these options were issued subject to shareholder approval
at the Company's annual meeting on March 27, 2001. The shareholders approved the
new plan on that date which triggered the options measurement date. As the
options were granted at $2.50 and the fair value of the Company's stock based on
March 27, 2001 closing price was $4.44, this transaction resulted in
compensation expense to reflect the excess of fair value over the exercise
price.
On March 27, 2001, the Company granted 600,000 options to directors and officers
at a $3.19 exercise price. This transaction resulted in compensation expense
to reflect the excess of fair value over the exercise price.
The Company did not record and disclosed these transactions and related expenses
in its March 31, 2001 10-QSB filing. For the six and three months ended March
31, 2001, the Company reported net loss totaling $12,878,386 and $7,822,017,
respectively, which resulted in net loss per share of $0.62 and $0.37,
respectively. After taking into the effect the aforementioned transactions, the
Company should have reported net loss for the six and three months ended March
31, 2001 of $14,138,206 and $9,081,837, which would have resulted in the net
loss per share of $0.68 and $0.43 for the corresponding periods.
NOTE S - SUBSEQUENT EVENTS
Subsequent to September 30, 2001 the Company has continued to fund operations
through the issuance of both equity and debt securities. During the period
October 2001 to December 2001 the Company received $1,108,705 from investors
pursuant to Regulation "S", private placement offering documents for the
issuance of 2,217,410 shares at a price of $0.50 per share. In addition warrants
to acquire 1,567,410 shares at $0.50 per share were issued in conjunction with
the offerings.
From October 2001 through November 2001 the Company received proceeds
aggregating $618,734 from a number of investors pursuant to both Regulation "S"
and Rule 506 private placement offering documents for the issuance of 680,608
shares at a price of $0.91 per share. The Regulation "S" offerings represent
66,275 shares with the balance of 614,333 being issued pursuant to Rule 506. In
addition warrants to acquire an equal number of shares at $0.91 per share were
issued in conjunction with the offering.
During the period October to December 2001 the Company received proceeds
pursuant to notes payable aggregating $488,500. The notes have a term of 30
days, and bear interest at a rate of 10% per annum. In the event that the loans
are not repaid on the maturity date, a penalty charge will be due and payable as
follows; 10% of the unpaid principal and interest at the maturity date will be
issued in common stock to the lender, calculated based upon the average trading
price of the common stock of the Company on the loan maturity date.
Warrants to acquire common stock will be issued equal to 10% of the unpaid
principal and interest at the loan maturity date issued at a strike price of the
average trading price of the Companies common stock on the maturity date.
Additional warrants to acquire common stock will be issued equal to 20% of the
unpaid principal and interest at the loan maturity date calculated at the
current market issued at a strike price of $3.00.
In the event that the loan principal and interest is not repaid, an additional
penalty will become due and payable every 30 days following the maturity date.
In November 2001, the Company issued 500,000 shares of stock to an individual
for finders fees related to a private placement of securities.
The Company continues to actively pursue new financings in the Company. These
financings can takes the form the equity, convertible debentures and/or debt.
In October 2001, the Company formed a wholly-owned subsidiary, UltraCard China.
UltraCard China was formed for the purpose of developing and marketing of
applications utilizing UltraCard technology in China.
56
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS OF THE REGISTRANT
The following table sets forth the names and ages of, and all positions and
offices held by, each of Upgrade's directors and its executive officers, Mr.
Bland and Mr. Jaffe, and certain key employees of Upgrade's subsidiaries. Also
set forth are the dates Upgrade's directors were initially elected to the Board
of Directors, a summary of each identified person's business experience during
the last five years and any directorship(s) held in other companies with
securities registered under Section 12 or subject to the requirements of Section
15(d) of the Securities Exchange Act of 1934, as amended. Directors are elected
at Upgrade's annual meeting of shareholders and hold office for staggered terms
of three ears until their successors are elected at the next annual meeting and
qualify. Officers hold office at the pleasure of the Board of Directors.
DIRECTORS AND EXECUTIVE OFFICERS
Director
Name Age Since Position(s)
------------------ --- -------- ------------------------------
Daniel S. Bland 43 12/11/97 President, Secretary,
Chief Executive Officer and
Director of Upgrade
Howard A. Jaffe 48 1/3/01 Executive Vice President,
Chief Operating and Financial
Officer & Director of Upgrade
Malcolm P. Burke 59 6/30/98 Director of Upgrade
Ronald P. Erickson 57 8/15/98 Director of Upgrade
57
EXECUTIVE OFFICERS OF AFFILIATE COMPANIES (Including Transaction In-Process)
Name Age Position(s)
---- --- -----------
Daniel Kehoe 56 President & Director of
UltraCard
John A. French 58 President & Director of
cQue
Marco Garibaldi 46 President & Director of
Rockster, Inc. (Transaction In-Process)
Daniel S. Bland is the founder of Upgrade and has served as its President since
1997. He also was a founder, and from 1993 to 1996 served as a director and the
chief executive officer of, Empyrean Diagnostics Ltd., a reporting company in
British Columbia under the British Columbia Securities Commission.
Howard A. Jaffe, joined the Company in October 2000 as a consultant and in
January 2001 as the Chief Operating and Financial Officer. Mr. Jaffe is a
business and financial professional with substantial experience in mergers and
acquisitions and other capital market transactions. During the prior five years
Mr. Jaffe was the Executive Vice President and Chief Financial Officer of MB
Financial and Manufacturers Bank a $1.4 billion financial institution.
Malcolm P. Burke is the founder, and since 1998 to present has been the
president and chief executive officer, of Primary Ventures Corp., a Vancouver,
British Columbia company providing financial and strategic consulting services
to start-up companies. He also is president of Sopio Investments Ltd., a family
holding company. From 1992 to 1998 Mr. Burke was president and chief executive
officer of Interactive Entertainment Limited, an NASD Small Cap Market company.
Ronald P. Erickson has served as a director and senior executive officer
(currently chairman of the board of directors) of eCharge Corporation, a Seattle
based provider of Internet billing solutions, from October 1997 to present.
From January 1996 through August 1998, Mr. Erickson was chairman of the board of
directors and chief executive officer of GlobalTel Resources, Inc., an
international provider of telecommunications services, messaging and intranet
solutions. From September 1994 to January 1996, Mr. Erickson was managing
director of GlobalVision LLC, a consulting firm. Mr. Erickson also was a
co-founder of Egghead Software, a leading software retailer, where he was
variously chairman, vice chairman, president and chief executive officer from
1992 to 1994.
Daniel Kehoe has held the position of President and director of UltraCard Inc.
since 1997. Prior thereto, from 1994 to 1997 Mr. Kehoe operated as an
independent consultant to various technology companies specializing in strategic
business development. Mr. Kehoe has a degree from Northwestern School of Law.
58
John A. French has been the President of cQue Corporation since 1996, a
subsidiary of Upgrade which specializes in the development and implementation of
online Web Access software products for instant data retrieval featuring the
latest products in IT technology, including the smart card. Prior to that Mr.
French worked as a business consultant with Horizon Resources/2000 specializing
in the software and smartcard development business.
Marco Garibaldi has been involved in the technology business his whole
professional career. He received his degree in computer sciences in 1974. Mr.
Garibaldi worked with Burroughs Worldwide Business Machines and Host
International holding a sucession of programming, technical and financial
positions. Later, Mr. Garibaldi founded InterComm, Inc., a think-tank company,
(which developed the online shopping cart, bookstore online, the auction server,
just to name a few) where he served as President and CEO. Mr. Garibaldi later
joined Maximum Precision, an aerospace manufacturing company, where during his
tenure served as President and CEO. Mr. Garibaldi left Maximum Precession to
commence operations at Rockster.
Upgrade is not aware of any arrangements or understandings pursuant to which its
directors or executive officers are nominated or selected, other than
arrangements or understandings with directors or officers of Upgrade acting
solely in their capacities as such.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based on a review of Forms 3, 4 and 5 filed with the Company and inquiry of the
Company's directors and officers, the Company believes that all required forms
were timely filed.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Executive officers of the Company currently do not receive any remuneration in
their capacity as Company executive officers. The following table sets forth
information concerning the compensation of the Named Officers for services in
all capacities to the Company or its affiliates for the years ended September
30, 2001, 2000 and 1999.
SUMMARY COMPENSATION TABLE
NAME AND FISCAL ANNUAL LONG TERM COMPENSATION ALL OTHER
PRINCIPAL POSITION YEAR COMPENSATION AWARDS COMPENSATION($)
------------------ ---- ------------ ------ ---------------
OPTIONS/
SALARY BONUS RESTRICTED STOCK WARRANTS
($)(2) ($)(3) AWARD(S)($)(4) (#)(5)
--------- --------- ------------------ ---------
Daniel S. Bland 2001 $250,000 $125,000 $ - 250,000 -
President and Chief Executive 2000 175,000 - - 1,750,000 -
Officer 1999 115,000 - - -
Howard A. Jaffe (1) 2001 $250,000 $125,000 - 905,000 -
Executive Vice President and 2000 - - - - -
Chief Operating & Financial Officer 1999 - - - - -
59
-----------------
(1) Mr. Jaffe was hired as a consultant in October 2000 and as an executive officer in January
2001.
(2) Salary for 2001 represents amount accrued, but unpaid.
(3) Payment for bonuses awarded may be received in cash or stock (at $1.00 per share) at the
discretion of the recipient. Election must be made prior to September 30, 2002.
(4) Represents restricted stock issued.
(5) Represents warrants, or incentive and non-qualified stock options granted pursuant to the
Company's Stock Option Plans. All options were granted at or above the market price of the stock
on the date of the grant and vest up to three years.
STOCK OPTIONS
The following table sets forth certain information with respect to stock options
granted to the Named Officers during the fiscal year ended September 30, 2001.
In addition to providing the number of options granted in the Summary
Compensation Table, the following table discloses the range of potential
realizable values at various assumed appreciation rates. The table discloses for
the Chief Executive Officer and other Named Officers the gain or "spread" that
would be realized at the end of the option term for the options granted during
2001, if the price of the Common Stock appreciates annually by the percentage
levels indicated from the market price on the date of grant.
OPTION GRANTS IN 2001
% OF TOTAL
OPTIONS
GRANTED TO POTENTIAL REALIZABLE VALUE AT
EMPLOYEES EXERCISE ASSUMED ANNUAL RATES OF
OPTIONS IN FISCAL PRICE PER EXPIRATION STOCK PRICE APPRECIATION FOR
NAME GRANTED 2001(1) SHARE DATE OPTION TERM
--------------- ------- ----------- ---------- ---------- -------------- --------------
5.00% 10.00%
-------------- --------------
Daniel S. Bland 250,000 20.4% $ 3.19 04/02/11 -0- $ 10,000
Howard A. Jaffe 400,000 32.6% $ 2.50 10/25/10 -0- $292,000
100,000 8.2% $ 3.19 04/02/11 -0- $ 4,000
The following table sets forth information with respect to shares of the Common
Stock acquired in 2001 through the exercise of stock options, including the
value realized upon the exercise, and the value of all stock options held at
September 30, 2001.
OPTION EXERCISES, HOLDINGS AND VALUES TABLE
SHARES NUMBER OF VALUE OF UNEXERCISED
ACQUIRED VALUE UNEXERCISED OPTIONS "IN-THE-MONEY" OPTIONS
NAME ON EXERCISE REALIZED AT SEPTEMBER 30, 2000 AT SEPTEMBER 30, 2001 (1)
---- ----------- -------- --------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------- ------------ --------------
Daniel S. Bland -0- -0- 1,200,000 -0- $ 672,000 $ -0-
Howard A. Jaffe -0- -0- 500,000 -0- -0- -0-
-------------
(1) Represents the difference between the closing price of the Common Stock on
September 30, 2001 ($1.37 per share) and the exercise price of the stock
options.
60
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 8, 2002, certain information as to
the beneficial ownership of Common Stock by: (i) those persons or entities known
by management to beneficially own more than 5% of the Company's outstanding
shares of Common Stock; (ii) the Company's Chief Executive Officer, its Chairman
of the Board and the other executive officers of the Company (the "Named
Officers"), and (iii) all directors and executive officers of the Company as a
group.
SHARES
BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED (1) CLASS
--------------------------------------------------------------------------------
Daniel S. Bland (2) 6,476,100 15.69%
Chief Executive Officer, President, Secretary and
Director
Howard A. Jaffe (3) 1,224,333 2.97
Executive Vice President and Chief Operating and
Financial Officer and Director
Malcom P. Burke (4) 393,000 0.95
Director
Ronald P. Erickson (5) 650,000 1.57
Director
Upgrade International Corporation (6) 2,000,000 4.85
Directors and executive officers as a group 10,743,433 26.03%
(4 persons and the Company)
--------------
(1) Includes shares held directly, in retirement accounts, in a fiduciary
capacity or by certain affiliated entities or members of the named
individuals' families, with respect to which shares the named individuals
and group may be deemed to have sole or shared voting and/or dispositive
powers.
(2) Comprised of 4,000,000 shares and 800,000 warrants (exercisable at $0.25
per share and expiring 1/20/2004) owned by the Bland Family Trust, as to
which Mr. Bland, as trustee, has sole voting and investment powers, 476,100
shares owned by International Internet Corporation, which Mr. Bland
controls, and 1,200,000 options (600,000 exercisable at $0.25 per share and
expiring 1/20/2004; 350,000 options exercisable at $2.50 per share and
expiring 09/30/04; 250,000 exercisable at $3.19 per share and expiring
04/02/11) owned directly by Mr. Bland.
(3) Comprised of 286,000 shares and 555,000 warrants (205,000 exercisable at
$2.00 and expiring 02/15/06; 200,000 exercisable at $.75 and expiring
09/15/06; and 150,000 exercisable at $1.00 and expiring 01/08/07), and
500,000 options (200,000 shares at a price of $2.50 per share fully vested
and expiring 10/25/10; 200,000 options to acquire shares at a price of
$2.50 vesting quarterly over a period of three years and expiring 10/25/10;
100,000 shares at a price of $3.19 per share fully vested and expiring
04/02/11) owned directly by Mr. Jaffe.
(4) Comprised of 7,500 shares and 450,000 options (150,000 exercisable at $0.25
per share fully vested and expiring 1/20/2004; 200,000 vesting quarterly
over a three year period at $2.50 per share and expiring 09/30/04; and
100,000 shares vesting quarterly over a three year period at a price of
$3.19 and expiring 04/02/11) owned directly by Mr. Burke. In addition
10,500 shares owned by Primary Ventures Corporation, a company controlled
by Mr. Burke.
(5) Comprised of 750,000 options (550,000 exercisable at $0.25 per share fully
vested and expiring 1/20/2004; 100,000 vesting quarterly over a three year
period at $2.50 per share and expiring 09/30/2004; and 100,000 shares
vesting quarterly over a three year period at a price of $3.19 and expiring
04/02/11) owned directly by Mr. Erickson.
(6) Shares assigned to the Company, and pledged as collateral for loan
outstanding.
There are no arrangements known to the Company that may result in a change in
control of the Company.
61
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the rules of the SEC Mr. Bland is considered a promoter of the Company.
His interests in the Company are disclosed in Items 10 and 11, above.
On October 10, 1997, UltraCard licensed the rights to two technology patents
from CardTech, Inc. (CardTech). UltraCard's President Daniel Kehoe is also the
controlling stockholder of CardTech. The license agreement terminates upon the
expiration of the last licensed patent. Because the agreement covers any new
patent applications filed in conjunction with the original technology patents,
the agreement does not have a definite expiration date.
As of September 30, 2001, UltraCard's remaining commitments under the license
agreement are summarized as follows:
- An earned royalty fee of 5% of the gross proceeds generated from sales,
leases or other distributions of products incorporating the CardTech
technology. The minimum annual royalty fee is payable at $650,000 per
calendar year through 2009.
- A capital fee equal to 12.5% of all equity capital invested in the
UltraCard until such time that CardTech has received a total of $3,000,000
in such fees. The maximum remaining amount of the commitment is $1,990,187.
Royalty fees are due on January 1 of each calender year. As of September 30,
2001, $1,300,000 for both the calendar year 2000 and 2001 royalty fees remained
unpaid, causing Ultracard to be past due on the agreement. Cardtech has
deferred the required payments to March 31, 2002.
In July, 2001, the Company received from its President and Chief
Executive Officer, Daniel S. Bland, funds in the amount of $1,210,000 as a loan
to the company. The Company's Board of Directors as of November 1, 2001,
converted the $1,210,000 loan into equity by issuing 2,000,000 shares of common
stock to Bland in full satisfaction of the company's loan obligation to him. As
part of this transaction, Upgrade assumed the obligations of Bland, as borrower,
under Bland's loan agreements with International Mercantile Holding Group, Inc.
(IMHG), the original lender of the funds. Under the terms of the loan
agreements, repayment of the loan amount is secured by collateral in the form of
2,000,000 shares of Upgrade, which have been pledged by Bland to IMHG, which are
now assigned to the Company. Upon repayment of the loan and return of the
collateral, Upgrade intends to cancel the 2,000,000 shares of stock. The term of
the loan is five years.
62
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------
A. Exhibits
Exhibit
Number Description
-------- -------------------------------------------------------------------------------------------------
3.1(3) Articles of Incorporation
-------- -------------------------------------------------------------------------------------------------
3.2(6) Articles of Merger
-------- -------------------------------------------------------------------------------------------------
3.3(3) Bylaws
-------- -------------------------------------------------------------------------------------------------
4.1(1) Specimen Stock Certificate
-------- -------------------------------------------------------------------------------------------------
4.2(6) 1,000,000 Subordinated Debenture
-------- -------------------------------------------------------------------------------------------------
4.3(6) Form of Warrant
-------- -------------------------------------------------------------------------------------------------
4.4(6) Form of Warrant (with Cashless Exercise)
-------- -------------------------------------------------------------------------------------------------
10.1(6) Merger Agreement by and between Upgrade and The Pathways Group, Inc.
-------- -------------------------------------------------------------------------------------------------
10.2(1) Upgrade Form of 2000 Stock Option Plan
-------- -------------------------------------------------------------------------------------------------
10.3(1) Upgrade Form of 1999 Stock Option Plan, as Amended and Restated
-------- -------------------------------------------------------------------------------------------------
10.4(4) Upgrade Form of Stock Option Agreement
-------- -------------------------------------------------------------------------------------------------
10.5(6) UltraCard Inc. Employee Stock Option Plan
-------- -------------------------------------------------------------------------------------------------
10.6(6) UltraCard, Inc. Stock Purchase, Voting and Cancellation Rights and Redemption Agreement
-------- -------------------------------------------------------------------------------------------------
10.7(6) Option Agreement by and between Upgrade and UltraCard for acquisition of UltraCard stock, as
amended
-------- -------------------------------------------------------------------------------------------------
10.8(6) License Agreement between AMPEX Corporation and UltraCard Inc. for Keepered Media technology
-------- -------------------------------------------------------------------------------------------------
10.9(6) Agreement by and between SciVac and UltraCard for development of vacuum system
-------- -------------------------------------------------------------------------------------------------
10.10(2) Funding Agreement by and between Upgrade and UltraCard, Inc.
-------- -------------------------------------------------------------------------------------------------
10.11(6) Exclusive License Agreement by and between UltraCard and CardTech, Inc.
-------- -------------------------------------------------------------------------------------------------
10.12(6) Sub-Distribution Agreement by and between Global CyberSystems, Inc. and Financial Electronic
Systems, Inc.
-------- -------------------------------------------------------------------------------------------------
10.13(6) Letter of Intent by and between National CacheCard Company and Upgrade to purchase Smart Card
assets
-------- -------------------------------------------------------------------------------------------------
10.14(6) Assignment Of Intellectual Property Rights By Work Product Investment Trust and David Zucker to
EforNet Corporation
-------- -------------------------------------------------------------------------------------------------
10.15(6) Funding Agreement by and between Upgrade and EforNet Corporation
-------- -------------------------------------------------------------------------------------------------
10.16(6) Loan Agreement by and between Upgrade and EforNet Corporation
-------- -------------------------------------------------------------------------------------------------
10.17(6) Voting Trust Agreement by and between Upgrade and Work Product Investment Trust
-------- -------------------------------------------------------------------------------------------------
10.18(4) UltraCard Los Gatos Lease
-------- -------------------------------------------------------------------------------------------------
10.19(6) Acquisition of Centurion Technologies which contains funding agreement by and between Centurion
and Upgrade
-------- -------------------------------------------------------------------------------------------------
10.20(6) Joint Development and Supply Agreement for Card Substrates by and between UltraCard and
Colorado Plasticard
-------- -------------------------------------------------------------------------------------------------
10.21(4) Design Agreement for UltraCard Writer/Reader Devices by and between UltraCard and PEMSTAR
INC.
-------- -------------------------------------------------------------------------------------------------
10.22(2) Stock Purchase Agreement between Upgrade and Zucker
-------- -------------------------------------------------------------------------------------------------
10.23(6) Letter of Intent by and between Upgrade and Cards & More, Inc.
-------- -------------------------------------------------------------------------------------------------
10.24(6) Letter of Intent by and between Upgrade and Rockster, Inc. (12/11/00)
-------- -------------------------------------------------------------------------------------------------
10.25 Komag Incorporated Card Substrate Agreement
-------- -------------------------------------------------------------------------------------------------
10.26 Shanghai G-Pro Technology Co., Ltd. Purchase Order
-------- -------------------------------------------------------------------------------------------------
10.27 Common Stock Resale Limitation Agreement
-------- -------------------------------------------------------------------------------------------------
10.28 Letter of Intent by and between Upgrade and Rockster Records, Inc. (3/6/01)
-------- -------------------------------------------------------------------------------------------------
16.1(5) Letter on Change of Certifying Accountant
-------- -------------------------------------------------------------------------------------------------
21.1(6) Subsidiaries
-------- -------------------------------------------------------------------------------------------------
(1) Incorporated by reference from our Form 8-K filed with the Securities and
Exchange Commission on April 6, 2000.
(2) Incorporated by reference from our Form 10-QSB filed with the Securities
and Exchange Commission on May 15, 2000.
(3) Incorporated by reference from our Definitive Proxy Statement filed with
the Securities and Exchange Commission July 24, 2000.
(4) Incorporated by reference from our Form 10-QSB filed with the Securities
and Exchange Commission on August 14, 2000.
(5) Incorporated by reference from our Form 8-K filed with the Securities and
Exchange Commission on September 22, 2000.
(6) Incorporated by reference from our Form 10-KSB filed with the Securities
and Exchange Commission on January 16, 2001.
B. Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UPGRADE INTERNATIONAL CORPORATION
/s/ Daniel S. Bland
--------------------------------------------
By Daniel S. Bland, President
/s/ Howard A. Jaffe
--------------------------------------------
By Howard A. Jaffe, Executive Vice President
Dated: January 14, 2002
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Daniel S. Bland President, Chief Executive Officer, Secretary and 1/14/02
---------------------- Director -------
Daniel S. Bland (Date)
/s/ Howard A. Jaffe Executive Vice-President, Chief Operating and 1/14/02
---------------------- Financial Officer, and Director --------
Howard A. Jaffe (Date)
/s/ Malcolm P. Burke Director 1/14/02
---------------------- --------
Malcolm P. Burke (Date)
/s/ Ronald P. Erickson Director 1/14/02
---------------------- --------
Ronald P. Erickson (Date)
EXHIBIT INDEX
Exhibit
Number Description
-------- -------------------------------------------------------------------------------------------------
3.1(3) Articles of Incorporation
-------- -------------------------------------------------------------------------------------------------
3.2(6) Articles of Merger
-------- -------------------------------------------------------------------------------------------------
3.3(3) Bylaws
-------- -------------------------------------------------------------------------------------------------
4.1(1) Specimen Stock Certificate
-------- -------------------------------------------------------------------------------------------------
4.2(6) 1,000,000 Subordinated Debenture
-------- -------------------------------------------------------------------------------------------------
4.3(6) Form of Warrant
-------- -------------------------------------------------------------------------------------------------
4.4(6) Form of Warrant (with Cashless Exercise)
-------- -------------------------------------------------------------------------------------------------
10.1(6) Merger Agreement by and between Upgrade and The Pathways Group, Inc.
-------- -------------------------------------------------------------------------------------------------
10.2(1) Upgrade Form of 2000 Stock Option Plan
-------- -------------------------------------------------------------------------------------------------
10.3(1) Upgrade Form of 1999 Stock Option Plan, as Amended and Restated
-------- -------------------------------------------------------------------------------------------------
10.4(4) Upgrade Form of Stock Option Agreement
-------- -------------------------------------------------------------------------------------------------
10.5(6) UltraCard Inc. Employee Stock Option Plan
-------- -------------------------------------------------------------------------------------------------
10.6(6) UltraCard, Inc. Stock Purchase, Voting and Cancellation Rights and Redemption Agreement
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10.7(6) Option Agreement by and between Upgrade and UltraCard for acquisition of UltraCard stock, as
amended
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10.8(6) License Agreement between AMPEX Corporation and UltraCard Inc. for Keepered Media technology
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10.9(6) Agreement by and between SciVac and UltraCard for development of vacuum system
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10.10(2) Funding Agreement by and between Upgrade and UltraCard, Inc.
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10.11(6) Exclusive License Agreement by and between UltraCard and CardTech, Inc.
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10.12(6) Sub-Distribution Agreement by and between Global CyberSystems, Inc. and Financial Electronic
Systems, Inc.
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10.13(6) Letter of Intent by and between National CacheCard Company and Upgrade to purchase Smart Card
assets
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10.14(6) Assignment Of Intellectual Property Rights By Work Product Investment Trust and David Zucker to
EforNet Corporation
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10.15(6) Funding Agreement by and between Upgrade and EforNet Corporation
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10.16(6) Loan Agreement by and between Upgrade and EforNet Corporation
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10.17(6) Voting Trust Agreement by and between Upgrade and Work Product Investment Trust
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10.18(4) UltraCard Los Gatos Lease
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10.19(6) Acquisition of Centurion Technologies which contains funding agreement by and between Centurion
and Upgrade
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10.20(6) Joint Development and Supply Agreement for Card Substrates by and between UltraCard and
Colorado Plasticard
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10.21(4) Design Agreement for UltraCard Writer/Reader Devices by and between UltraCard and PEMSTAR
INC.
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10.22(2) Stock Purchase Agreement between Upgrade and Zucker
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10.23(6) Letter of Intent by and between Upgrade and Cards & More, Inc.
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10.24(6) Letter of Intent by and between Upgrade and Rockster, Inc. (12/11/00)
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10.25 Komag Incorporated Card Substrate Agreement
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10.26 Shanghai G-Pro Technology Co., Ltd. Purchase Order
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10.27 Common Stock Resale Limitation Agreement
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10.28 Letter of Intent by and between Upgrade and Rockster Records, Inc. (3/6/01)
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16.1(5) Letter on Change of Certifying Accountant
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21.1(6) Subsidiaries
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(1) Incorporated by reference from our Form 8-K filed with the Securities and
Exchange Commission on April 6, 2000.
(2) Incorporated by reference from our Form 10-QSB filed with the Securities
and Exchange Commission on May 15, 2000.
(3) Incorporated by reference from our Definitive Proxy Statement filed with
the Securities and Exchange Commission July 24, 2000.
(4) Incorporated by reference from our Form 10-QSB filed with the Securities
and Exchange Commission on August 14, 2000.
(5) Incorporated by reference from our Form 8-K filed with the Securities and
Exchange Commission on September 22, 2000.
(6) Incorporated by reference from our Form 10-KSB filed with the Securities
and Exchange Commission on January 16, 2001.