U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 0-27649
-------
Upgrade International Corporation
(Exact name of small business issuer as specified in its charter)
Florida 58-2441311
- ------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 Fourth Avenue - Suite 629 Seattle, Washington 98101
(Address of principal executive offices)
(206) 903-3116
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: As of August 14, 2000, 19,236,717
shares of common stock, $.001 par value were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
INDEX
PART I -- Financial Information Page
Item 1. Financial Statements (unaudited)
- ------- --------------------
Consolidated balance sheets at June 30, 2000 and (audited)
September 30, 1999........................................................ 3
Consolidated statements of operations for the nine months ended
June 30, 2000 and June 30, 1999 and the three months ended June 30, 2000
and June 30, 1999 and cumulative since inception (February 5, 1997)....... 4
Statement of Stockholders' Equity for nine months ended June 30, 2000..... 5
Consolidated statement of cash flows for the nine months ended
June 30, 2000 and June 30, 1999 and cumulative since inception
(February 5, 1997)........................................................ 7
Notes to the Financial Statements......................................... 8
Item 2. Management's Discussion and Analysis or Plan of Operation
- ------- ---------------------------------------------------------
PART II -- Other Information.............................................. 11
Item 1. Legal Proceedings................................................ 13
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Item 2. Changes In Securities and Use of Proceeds........................ 13
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Item 5. Other Information................................................ 13
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Item 6. Exhibits and Reports on Form 8-K................................. 14
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Signatures 15
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
-------------------- -------------------
1999 2000
-------------------- -------------------
CURRENT ASSETS (unaudited)
Cash and cash equivalents $ 4,781,330 $ 223,963
Subscription receivable 165,000 -
Prepaid expenses, deposits and other 209,054 265,581
-------------------- -------------------
Total current assets 5,155,384 489,544
PROPERTY AND EQUIPMENT - AT COST,
less accumulated depreciation and amortization 1,003,381 1,582,650
OTHER ASSETS
Intangible assets, net of accumulated amortization 253,763 343,887
Equipment deposit - 1,200,000
Other deposits 135,032 324,265
-------------------- -------------------
Total assets $ 6,547,560 $ 3,940,346
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,068,769 $ 1,420,537
Accrued liabilities 843,493 581,718
Payable to related parties 370,270 327,993
Loans payable to related parties 237,365 433,180
Other 31,322 23,477
--------------------- --------------------
Total current liabilities 2,551,219 2,786,905
CONVERTIBLE DEBENTURES, net of unamortized discount - 706,168
MINORITY INTEREST 1,792,869 -
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock - $.001 par value, 50,000,000 shares authorized 12,958 19,237
Stock subscriptions 12,344,613 2,100,994
Additional paid in capital 2,082,479 22,334,657
Receivable from stockholders of subsidiary (400,000) (400,000)
Accumulated development stage deficit (11,836,578) (23,607,615)
--------------------- --------------------
2,203,472 447,273
--------------------- --------------------
Total liabilities and stockholders' equity $ 6,547,560 $ 3,940,346
===================== ====================
3
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
Three months ended results of
Nine months ended June 30, June 30, operations since
---------------------------- --------------------------- inception
1999 2000 1999 2000 (February 5, 1997)
----------- ----------- ----------- ----------- ------------------
Costs and expenses (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Research and development $ 835,641 $ 2,523,486 $ 109,378 $ 654,359 $3,839,650
Purchased in-process research
and development 2,904,594 425,800 1,543,484 - 5,971,603
Sales and marketing 11,547 1,115,910 11,547 187,375 2,758,035
General and administrative 1,240,334 8,666,055 850,313 4,276,125 11,043,200
---------- ----------- ---------- ---------- -----------
4,992,116 12,731,251 2,514,722 5,117,859 23,612,488
Other expenses (income)
Equity in losses of UltraCard 578,551 - 309,863 - 1,264,316
Interest expense 8,130 588,858 420 68,214 599,566
Other, net 0 209,299 (119,045) 295,790 245,660
---------- ----------- ---------- ---------- -----------
586,681 798,157 191,238 364,004 2,109,542
Minority interest in losses of
subsidiaries (278,014) (1,758,371) (153,014) (71,038) (2,114,415)
---------- ----------- ---------- ---------- -----------
NET LOSS $5,300,783 $11,771,037 $2,552,946 $5,410,825 $23,607,615
========== =========== ========== ========== ===========
LOSS PER COMMON
SHARE-BASIC AND DILUTED $ 0.43 $ 0.64 $ 0.20 $ 0.28 $ 2.38
========== =========== ========== ========== ===========
4
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended June 30, 2000 (unaudited)
Voting common stock Common stock subscribed Additional Receivable from Accumulated
------------------- ------------------------ paid-in stockholders Development
Shares Amount Shares Amount Capital of subsidiary stage deficit Total
---------- ------- ---------- ------------ ----------- --------------- ------------- ----------
Balances at
October 1, 1999 12,957,488 $12,958 5,216,933 $ 12,344,613 $ 2,082,479 $(400,000) $(11,836,578) $2,203,472
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 - - 1,411,733
Issuance of common
stock at $.25 per
share in December
1999 through
exercise of
employee stock
options 90,000 90 - - 22,410 - - 22,500
Common shares issued
for services in
December 1999
at $3.47 per share 70,000 70 - - 242,830 - - 242,900
Allocation of
debenture proceeds
to beneficial
conversion feature - - - - 400,000 - - 400,000
Allocation of
debenture proceeds
to stock warrants - - - - 416,040 - - 416,040
Issuance of common
stock warrants for
services in
January 2000 - - - - 339,500 - - 339,500
Issuance of common
stock at $44.00 per
share in January 2000
through a private
placement, net of
expenses 100,000 100 - - 4,355,900 - - 4,356,000
Issuance of common
stock at $2.50 per
share in February
2000 through
exercise of common
stock warrants 102,546 102 - - 256,263 - - 256,365
Issuance of common
stock at $.25 per
share in February
2000 through
exercise of
common stock
warrants 91,903 92 - - 22,884 - - 22,976
Issuance of common
stock in February
2000 subscribed to
in August 1999 at
$.25 per share
through exercise
of common stock
warrants 27,500 28 (27,500) (71,030) 71,002 - - -
Issuance of common
stock at $.25 per
share in March
2000 through
exercise of
common stock
warrants 100,000 100 - - 24,900 - - 25,000
5
Common stock
subscribed to at
$2.50 per share
in March 2000
granted in
connection with
October 1999
debenture
placement and
November 1999
private placement - - 40,000 100,000 (100,000) - - -
Shares issued in
April 2000 in
connection with
reverse acquisition
of Second CMA, Inc. 45,000 45 - - 1,155 - - 1,200
Grant of stock
options on April
18, 2000 for legal
services - - - - 1,047,670 - - 1,047,670
Common stock
subscribed at $10
per share in May
2000 in connection
with April 2000
private placement
net of placement
costs - - 50,000 450,000 - - - 450,000
Common stock
subscribed to at
$11.31 per share
in June 2000 in
connection with May
2000 private
placement, net of
placement costs - - 80,000 793,259 - - - 793,258
Common stock
subscribed at $2.50
per share in June
2000 through
exercise of common
stock warrants - - 91,878 398,107 (168,412) - - 229,695
Net consolidated loss
for the nine months
ended June 30, 2000 - - - - - - (11,771,037) (11,771,037)
---------- ------- ---------- ------------ ----------- --------- ------------ -------------
Balances at
June 30, 2000 19,236,717 $19,237 405,729 $ 2,100,994 $22,334,657 $(400,000) $(23,607,615) $ 447,273
========== ======= ========== ============ =========== ========= ============ =============
6
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
June 30, Cumulative
-------------------------------- since inception
1999 2000 (February 5, 1997)
-------------- -------------- ------------------
(unaudited) (unaudited) (unaudited)
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $(5,300,783) $(11,771,037) $(23,607,615)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 12,977 159,888 171,855
Amortization of beneficial conversion feature - 400,000 400,000
Amortization of debenture discount - 122,208 122,208
Write off of option cost 76,250 - 76,250
Equity in loss of UltraCard 578,551 - 1,264,316
Purchased in-process research and
development 2,904,594 425,800 5,971,603
Warrants and options issued for services 221,000 339,500 2,301,705
Shares issued for services 103,750 242,900 298,650
Options issued for services - 1,047,670 1,047,670
Expenses incurred through loan assumption 470,005 - 470,005
Stock of subsidiary issued in exchange for
contribution of intellectual property charged to expense 125,000 - 125,000
Minority interest (278,014) (1,758,371) (2,114,415)
Changes in assets and liabilities:
Prepaid expenses, deposits and other 974 (201,264) 412,902
Accounts payable and accrued liabilities 864,420 315,435 730,613
-------------- -------------- ---------------
(10,677,271) (12,329,253)
Net cash used in operating activities (221,276)
Cash flows from investing activities
Acquisition of property and equipment, net (98,160) (687,348) (754,843)
Deposits - (1,225,000) (1,225,000)
Acquisition of Centurion Technologies, Inc.,
net of cash acquired (650,000) - (650,000)
Acquisition of additional equity interest in eForNet
from a minority shareholder - (200,000) (200,000)
Acquisition of UltraCard, Inc., net of cash acquired (3,180,900) (260,300) (5,571,105)
Additions to intangible assets - (71,927) (71,927)
-------------- -------------- ---------------
Net cash used in investing activities (3,929,060) (2,444,575) (8,472,875)
Cash flows from financing activities
Borrowings 127,652 1,000,000 1,218,438
Loan costs - (70,000) (70,000)
Borrowing from an officer - 270,000 270,000
Repayments of payables to related parties (149,026) (367,319) (927,518)
Proceeds from sale of common stock and stock subscriptions 5,465,032 7,731,798 20,535,171
-------------- -------------- ---------------
Net cash provided by
financing activities $ 5,443,658 $ 8,564,479 $ 21,026,091
-------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents $ 1,293,322 $ (4,557,367) $ 223,963
Cash and cash equivalents at the beginning of the period 3,697 4,781,330 -
-------------- -------------- ---------------
Cash and cash equivalents at the end of the period $ 1,297,019 $ 223,963 $ 223,963
============== ============== ===============
Non - cash disclosures
During the three months ended March 31, 2000, the Company issued 53,282 common
stock warrants to two consultants for services performed in connection
with October 1999 issuance of convertible debentures and November 1999
private placements. At the time of the issuance, the warrants were valued
$125,000 using Black-Schooles pricing model. In addition to warrants, the
same consultants were granted 40,000 shares of the Company's common stock
included in total shares subscribed at March 31, 2000.
On April 6, 2000, the Company acquired Second CMA, Inc., a reporting issuer
under the Securities Exchange Act of 1934, through a merger whereby Upgrade was
the surviving entity. In connection with the transaction, the Company issued
45,000 shares of its voting common stock. The shares were valued at $1,200,
which was the estimated fair value of Second CMA's net tangible assets.
7
UPGRADE INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A - FINANCIAL STATEMENTS
The unaudited consolidated financial statements of the Company and its
subsidiaries have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles (GAPP) have been
condensed or omitted pursuant to such rules and regulations. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire fiscal year ending September 30, 2000. This Form 10-
QSB should be read in conjunction with the Form 8-K that includes audited
consolidated financial statements for the year ended September 30, 1999 and the
1998 and unaudited financial statements for the three month period ended
December 31, 1999 and 1998.
NOTE B - BASIS OF PRESENTATION
On April 6, 2000, the Company acquired Second CMA, Inc., a reporting issuer
under the Securities Exchange Act of 1934, through a merger whereby Upgrade was
the surviving entity. In connection with the transaction, the Company issued
45,000 shares of its voting common stock. The shares were valued at $1,200,
which is the estimated fair value of shell's net tangible assets. In addition,
the Company paid $300,000 to the stockholders of Second CMA, Inc. This amount
was expensed and included in Other Expenses for the three months ended June 30,
2000.
The Company consolidates all companies in which it has a controlling financial
interest. This generally occurs when the Company owns more than 50% of the
outstanding voting shares of the company. 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 as of June 30, 2000 and September 30, 1999, reflects the
consolidated financial position of the Company and its subsidiaries
(Subsidiaries) as follows: UltraCard, Inc. (UltraCard); Centurion Technologies,
Inc. (Centurion); CTI Acquisition Corporation (CTI); Global CyberSystems, Inc.
(Global); EforNet Corporation (EforNet); Global Cybersystems SA. (GCSA) and
Global Cybersystems PLC (GCPLC). The statements of operations and cash flows for
the nine months ended June 30, 1999, reflect the consolidated results of
operations and cash flows of the Company and the results of the subsidiaries
beginning on the dates the Company acquired control. The statements of
operations and cash flows for the nine months ended June 30, 2000 include the
consolidated results of the Company and its Subsidiaries. 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.
8
NOTE C - 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 18,323,267 and 12,227,349 for the nine
months ended June 30, 2000 and 1999, respectively, 13,467,876 and 7,883,551 for
the years ended September 30, 1999 and 1998, respectively and 9,909,614 since
inception (February 5, 1997) through June 30, 2000. Diluted loss per share for
all periods presented equaled basic loss per share due to antidilutive effect of
the potentially dilutive securities.
NOTE D - 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 establishing applications for its existing
technologies and further developing products from the technology. 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 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 rate at
which the Company expends its resources is variable, may be accelerated, and
will depend on many factors. 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 or through licensing
arrangements. The Company has commenced private placements on a best efforts, no
minimum basis. In August 2000 the Company completed a further private placement
of 160,000 shares at $10.48 for gross proceeds to the Company of $1,676,800. In
addition the Company is negotiating licensing arrangements and the possible sale
of a minority interest in Subsidiaries. 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 E - COMMITMENTS
As of June 30, 2000, Ultracard has equipment purchase commitments of
approximately $3,500,000 of which $1,200,000 has been paid as a deposit.
On March 30, 2000, Ultracard entered into a five year facility lease that
commences on August 1, 2000. The lease requires monthly payments of
approximately $163,000 accelerating annually to approximately $190,000. In
addition, Ultracard is required to make a lease deposit of $996,000, of which
$190,000 has been paid, and prepaid rent of $163,000 which has also been paid.
Ultracard plans to move into the facility in September 2000.
NOTE F - CONTINGENCIES
During February and March 2000, the Company was notified that a series of class
action lawsuits were filed in United States District Court against the Company
and its President alleging securities violations. These have been consolidated
into a single suit. The Company is unable to assess the ultimate outcome of
these matters. Therefore, the accompanying financial statements do not include a
liability, if any, with regard to these matters. Counsel has been engaged to
defend the Company against these lawsuits the terms of which are outlined in
note "G".
9
NOTE G - STOCK OPTIONS
On April 18, 2000, the Company granted 195,000 options to a law firm as a
retainer for services to be provided from the date of grant through June 30,
2001. The options vest in three equal blocks of 65,000 with the first block
vesting immediately, the second block vesting on July 1, 2000, and the last
block vesting on January 1, 2001. All options expire in five years from the date
of grant and are nonforfeitable unless the firm resigns voluntarily.
The Company valued the options using the Black-Scholes option pricing model and
the following assumptions: estimated volatility of 184%, risk free rate of 6%,
dividend rate of 0%, and estimated useful lives equaling service periods
associated with each block. The Company recorded legal expense of $1,047,670,
which is the fair value if the first vested block of options as measured on the
date of grant. The fair value of the remaining two non-vested blocks as of June
30, 2000 was estimated at $1,270,100. This amount has not been recorded as
prepaid legal fees as it will be subject to variable option accounting and will
be expensed over the contractual term of the agreement.
NOTE H - SUBSEQUENT EVENTS
On July 11, 2000 the Company signed a letter of intent to acquire 100% of The
Pathways Group, Inc. in an all-share transaction. It is proposed that the
stockholders of The Pathways Group, Inc. receive one share of common stock of
the company for each 14.3 shares of The Pathways Group, Inc. The acquisition is
subject to further negotiation of a definitive agreement and shareholder
approval. Pursuant to the letter of Intent, Upgrade is providing interim
financing to Pathways of approximately $375,000 every two weeks beginning July
28, 2000.
10
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-QSB, 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 this Quarterly Report and in other documents we file with the
Securities and Exchange Commission.
Net losses aggregated $5.4 million in the third quarter of fiscal 2000 resulting
in a loss for the first nine months of fiscal 2000 of $11.7 million. This
compares with a $5.3 million net loss for the first nine months of fiscal 1999,
reflecting a continued and growing level of investment into the subsidiary
companies' technologies, production processes and industrialization
opportunities. This increase in the net loss compared to the prior year is, in
the most part attributable to the operations of the Company's subsidiary,
UltraCard Inc., whose results of operations for the nine months ended June 30,
1999 were recorded using the equity method as opposed to being consolidated for
the nine months ended June 30, 2000. The other two significant operating
subsidiaries EforNet and Centurion contributed 23.5% of the total loss for the
nine months ended June 30, 2000 reflecting the results of those entities in
developing software and smart card initiatives. All of these entities are
expanding their staff and scale of operations level and losses are expected to
be incurred for the foreseeable future.
Direct research and development expenditures of $2.5 million for the first nine
months of the current fiscal year represents an increase of $1.7 million over
the corresponding period in the prior year. This increase represents the
increased cost incurred in establishing production equipment, facilities and
processes within UltraCard. The increase is also comprised in part of refining
and expanding upon the consolidated groups core support technologies to
establish a base of products for production. The costs also reflects a focused
effort at the establishment of an operating system by Efornet that will form the
standard for the UltraCard product. A significant portion of the increase was
due to the addition of new personnel, prototype development and contracts with
external research and development contractors. For the near future research and
development expenditures are expected to be maintained and increase to meet the
Company's anticipated market opportunities. All of the Company's research and
development costs are expensed as incurred.
In an effort to establish the Company's market with the UltraCard and related
products, and in order to augment internally developed research and development
initiatives, the Company will license technology from other businesses, engage
others to develop components and/or acquire other businesses as an alternative
to internal research and development and marketing efforts.
General and administrative expenses have increased from $1.0 million to $8.6
million for the corresponding nine month periods ending June 30, 1999 and 2000.
Included in this increased general and
11
administrative expense is a non-cash compensation of $1.65 million of legal
expenses incurred in connection with defending the company against outstanding
class action lawsuits and financing costs. In addition, over the comparative
periods the Company has acquired a growing number of subsidiary companies for
which it consolidates the operating results. These costs are expected to
continue to grow as the subsidiaries commercialize their products and develop
more extensive infrastructures.
Sales and marketing expenditures of $1.1 million for the nine months ended June
30, 2000 represent costs associated with the Company's attendance at trade shows
as the Company builds market awareness in preparation for product launches for
products which are currently under development.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents were $0.22 million at June 30, 2000, a decrease from $4.5
million from September 30, 1999. The decrease is primarily the result of
increased research and development and administrative expenses as well as
investment during the period into production equipment - $1.7 million, and
investment in UltraCard and EforNet - $.46 million. Cash flows from financing
activities of $8.6 million fell short of net cash used in operating activities
by $2 million during the nine month period ended June 30, 2000. A further $1.7
million was raised subsequent to June 30, 2000. The Company's ability to
implement its business plan depends upon its continued success raising capital
on an ongoing basis.
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
company and submitted to and approved by the Board of Directors of Upgrade.
Those agreements provide to each of those subsidiaries funding commitments for
aggregate proceeds as follows to finance the expansion of their operations;
Company Funding Portion funded
Commitment to June 30, 2000
UltraCard Inc. $28 million $12.2 million
EforNet Corporation $ 5 million $ 2.2 million
Centurion Technologies Inc. $ 3 million $ 2.1 million
Each of these funding arrangements are convertible or have been converted into
common stock in the subsidiary.
In order for the Company to meet these funding requirements and to meet ongoing
operating requirements, it will have to raise additional financing. The rate at
which the Company expends its resources is variable, may be accelerated, and
will depend on many factors. 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, or through the licensing of
its technology. 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.
The Company has entered into a Letter of Intent dated July 11, 2000 to acquire
all of the outstanding stock of The Pathways Group, Inc. Pursuant to the Letter
of Intent, Pathways' shareholders will receive one share of Upgrade common stock
for each 14.3 shares of Pathways common stock. Pursuant to the Letter of Intent,
Upgrade is providing interim financing to Pathways approximately $375,000 every
two weeks beginning July 28, 2000.
12
PART II Other Information
Item 1. Legal Proceedings
- -------
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 has
engaged the firm of Cohen, Milstein, Hausfeld & Toll, P.L.L.C. as defense
counsel. Upgrade's answer is due on August 23, 2000. Counsel for Upgrade intends
to file a motion to dismiss the consolidated complaint prior to the deadline for
filing an answer.
Item 2. Changes in Securities and Use of Proceeds
- -------
(c) Recent Sales of Unregistered Securities
---------------------------------------
1. On April 6, 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. Please see the
Company's Form 8-K filed April 6, 2000. The shares were exempt from
registration under Rule 506 of Regulation D under and Section 4(2) of the
U.S. Securities Act as amended.
2. On June 9, 2000, the Company concluded an offering of 50,000 shares at
$10.00 per share for total gross proceeds of $500,000 to Gambit Investments
Ltd. The offer and sale of shares were exempt from registration pursuant to
Regulation S promulgated under the U.S. Securities Act of 1933, as amended
(the "Securities Act"). In addition, the shares were exempt from
registration under Rule 506 of Regulation D under and Section 4(2) of the
Securities Act.
3. On June 9, 2000, the Company concluded an offering to Devon
Properties, Ltd. of 50,000 shares pursuant to an offering memorandum at
$11.31 per share for total gross proceeds of $565,500. The offer and sale
of shares were exempt from registration pursuant to Regulation S
promulgated under the Securities Act. In addition, the shares were exempt
from registration under Rule 506 of Regulation D under and Section 4(2) of
the Securities Act.
4. On June 19, 2000, the Company concluded an offering to Devon
Properties Ltd. of 30,000 shares pursuant to an offering memorandum at
$11.31 per share for total gross proceeds of $339,300. The offer and sale
of shares were exempt from registration pursuant to Regulation S
promulgated under the Securities Act. In addition, the shares were exempt
from registration under Rule 506 of Regulation D under and Section 4(2) of
the Securities Act.
5. In June 2000, the Company issued 91,878 shares of its common stock at
$2.50 per share for the exercise of warrants.
6. On April 18, 2000, Upgrade issued options to purchase 195,000 shares
of its common stock at a price of $10.00 per share to its legal counsel,
Cohen, Milstein, Hausfeld & Toll, P.L.L.C., for payment of legal services.
The shares were exempt from registration under Rule 506 of Regulation D
under and Section 4(2) of the U.S. Securities Act as amended.
Item 5. Other Information
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A. Reincorporation. A definitive proxy statement was filed with the
Securities and Exchange Commission on July 24, 2000, regarding a special
shareholders meeting to be held August 16, 2000 to approve the reincorporation
of the Company from Florida into Washington.
B. Proposed Acquisition. On July 11, 2000, the Company executed a letter of
intent with The Pathways Group, Inc. ("Pathways") (NASD: PTHW) pursuant to which
Upgrade would acquire 100% of Pathways in an all-share transaction. Upgrade
proposes that each stockholder of Pathways receive one share of Upgrade common
stock for each 14.3 shares of Pathways common stock held by such stockholder.
The acquisition is subject to the negotiation of a definitive merger agreement,
the receipt of all regulatory approvals and stockholder approval. Please see the
Company's Form 8-K filed July 21, 2000.
Item 6. Exhibits And Reports On Form 8-K
- ------
A. Exhibits
--------
Exhibit No. Description
----------- -----------
2.1* Agreement and Plan of Merger (Reincorporation)
4.1 Stock Option Agreement
10.1 Design Agreement for UltraCard Writer/Reader Devices
10.2 UltraCard Los Gatos Lease
27.1 Financial Data Schedule
*Incorporated by reference from our Definitive Proxy Statement filed with
the Securities and Exchange Commission July 24, 2000.
B. Reports on Form 8-K
-------------------
The Company filed two Forms 8-K during the three months ended June 30, 2000:
Form 8-K for Period April 6, 2000, in which the Company announced the
merger between Upgrade International Corp., and Second CMA Inc., pursuant
to which Upgrade International Corp. was the surviving entity. The Company
reported under Item 1 that a change in control occurred as a result of the
merger. Under Item 2, the Company reported the total consideration paid in
conjunction with the merger with Second CMA. Under Item 5, the Company
reported that it became the successor issuer to Second CMA for reporting
purposes under the Securities Exchange Act of 1934 and elected to report
under the Act effective April 6,2000. The Company also filed audited
financial statements for the years ending September 30, 1998 and 1999,
and unaudited financial statements for the quarters ending December 31,
1998 and 1999.
In its Form 8-K filed June 2, 2000 the Company reported under Item 5 that
its reports filed through EDGAR before June 2, 2000 may be accessed under
the Central Index Key ("CIK") of its predecessor, Second CMA.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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Upgrade International Corporation
Date: August 14, 2000 /s/ Daniel Bland
--------------------------------------------
Daniel Bland, President and Chief Executive
Officer, and Secretary
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1* Agreement and Plan of Merger (Reincorporation)
4.1 Stock Option Agreement
10.1 Design Agreement for UltraCard Writer/Reader Devices
10.2 UltraCard Los Gatos Lease
27.1 Financial Data Schedule
*Incorporated by reference from our Definitive Proxy Statement filed with
the Securities and Exchange Commission July 24, 2000.
16