-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O9X/KyxVcQvbof93xby40V2ZWJMKwu2F0ITv4iacExtc/bqrq30RI0T8liq+KhF1 uEcVTiuLIEH4Erl7gjE26g== 0000927797-99-000010.txt : 19990129 0000927797-99-000010.hdr.sgml : 19990129 ACCESSION NUMBER: 0000927797-99-000010 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S WIRELESS DATA INC CENTRAL INDEX KEY: 0000895716 STANDARD INDUSTRIAL CLASSIFICATION: CALCULATING & ACCOUNTING MACHINES (NO ELECTRONIC COMPUTERS) [3578] IRS NUMBER: 841178691 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-22848 FILM NUMBER: 99515711 BUSINESS ADDRESS: STREET 1: 2200 POWELL STREET STREET 2: SUITE 450 CITY: EMERYVILLE STATE: CA ZIP: 94608 BUSINESS PHONE: 5105962025 MAIL ADDRESS: STREET 1: 2200 POWELL STREET STREET 2: SUITE 450 CITY: EMERYVILLE STATE: CA ZIP: 94608 10QSB 1 QUARTERLY REPORT FOR SEPTEMBER 30, 1998 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB [X] Quarterly Report under Section 13 or Section 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1998. ------------------- [ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______. Commission File No.: 0-22848 U.S. Wireless Data, Inc. (Exact name of registrant as specified in its charter) Colorado 84-1178691 -------------- --------------- (State of incorporation) (IRS Employer Identification No.) 2200 Powell Street, Suite 800 Emeryville, California 94608 ---------------------------------------- (Address of principal executive offices, including zip code) (510) 596-2025 ------------------------- (Registrant's Telephone Number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes _X_ No ___ As of December 30, 1998 there were outstanding 13,586,124 shares of the Registrant's Common Stock (no par value per share). Transitional Small Business Disclosure Format Yes ___ No _X_ U.S. WIRELESS DATA, INC. TABLE OF CONTENTS PART I FINANCIAL INFORMATION Page ------ Item 1. Financial Statements (Unaudited) Balance Sheets -- September 30, 1998, and June 30, 1998................3 Statements of Operations -- Three Months Ended September 30, 1998 and 1997.......4 Statements of Cash Flows -- Three Months Ended September 30, 1998 and 1997.......5 Notes to Financial Statements...............................6-9 Item 2. Management's Discussion and Analysis........................10-16 PART II OTHER INFORMATION Item 1. Legal Proceedings ..........................................17 Item 2. Changes in Securities.......................................17 Item 3. Defaults Upon Senior Securities.............................18 Item 6. Exhibits and Reports on Form 8-K............................19 2 U.S. WIRELESS DATA, INC.
BALANCE SHEET (Unaudited) September 30, 1998 June 30, 1998 ------------------ ------------- ASSETS Current Assets: Cash $ 331,000 $ 4,000 Accounts receivable, net of allowance for doubtful ........... 147,000 55,000 accounts of $28,000 at September 30, 1998; $22,000 at June 30, 1998 Inventory, net ............................................... 404,000 480,000 Other current assets 891,000 187,000 ------------ ------------ Total current assets .................................... 1,773,000 726,000 Processing units - deployed .......................................... 561,000 517,000 Property and equipment, net .......................................... 238,000 253,000 Other assets ............................................ 357,000 69,000 ------------ ------------ Total assets ......................................................... $ 2,929,000 $ 1,565,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,169,000 $ 1,506,000 Accrued liabilities .......................................... 1,628,000 1,735,000 Borrowings, current portion 1,452,000 452,000 ------------ ------------ Total current liabilities ............................... 4,249,000 3,693,000 Borrowings, long-term portion ........................................ 1,476,000 45,000 ------------ ------------ Total liabilities ....................................... 5,725,000 3,738,000 ------------ ------------ Redeemable common stock .............................................. 232,000 372,000 ------------ ------------ Stockholders' deficit: Preferred Stock, at $1.00 stated value, 15,000,000 authorized, 1,342,000 3,060,000 1,341,667 and 3,060,000 Series A issued and outstanding at September 30, 1998 and June 30, 1998, respectively Common stock, at $1.00 stated value, 40,000,000 .............. 13,445,000 12,195,000 shares authorized; 13,444,713 and 12,195,358 shares issued and outstanding at September 30, 1998 and June 30, 1998, respectively Additional paid-in capital ................................... 12,135,000 10,222,000 Accumulated deficit .......................................... (29,950,000) (28,022,000) ------------ ------------ Total stockholders' deficit ............................. (3,028,000) (2,545,000) ------------ ------------ Total liabilities and stockholders' deficit ............. $ 2,929,000 $ 1,565,000 ============ ============
Accompanying notes are an integral part of the financial statements 3 U.S. WIRELESS DATA, INC.
STATEMENTS OF OPERATIONS (Unaudited) For the three months ended September 30, ---------------------------------------- 1998 1997 ---- ---- Net revenues: Product sales ........................................ $ 166,000 $ 256,000 Services ............................................. 195,000 14,000 ------------ ------------ 361,000 270,000 ------------ ------------ Cost of revenues: ........................................ 108,000 174,000 Product sales ........................................ 159,000 2,000 ------------ ------------ Services ............................................. 267,000 176,000 ------------ ------------ Gross margin ............................................. 94,000 94,000 ------------ ------------ Operating expenses: Selling, general and administrative .................. 1,686,000 1,288,000 Research and development ............................. 80,000 95,000 ------------ ------------ Total operating expense ........................... 1,766,000 1,383,000 ------------ ------------ Loss from operations ..................................... (1,672,000) (1,289,000) Interest income .......................................... 5,000 -- Interest expense ......................................... (116,000) (24,000) Other income ............................................. 190,000 -- ------------ ------------ Net loss ................................................. $ (1,593,000) $ (1,313,000) ============ ============ Basic and diluted loss per share: ........................ $ (0.15) $ (0.17) ============ ============ Weighted average common shares outstanding - basic/diluted $ 12,491,000 $ 7,770,000 ============ ============
Accompanying notes are an integral part of the financial statements 4 U.S. WIRELESS DATA, INC.
STATEMENTS OF CASH FLOWS (Unaudited) For the three months ended September 30, ---------------------------------------- 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ............................................. $(1,593,000) $(1,313,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .................... 71,000 5,000 Non-cash consulting services and warrant extension 609,000 855,000 Non-cash interest expense - debentures ........... 97,000 -- Non-cash variable option / compensation expense . (170,000) -- Debt forgiveness ................................. (192,000) -- Changes in current assets and liabilities: Accounts receivable ........................... (92,000) (88,000) Inventory ..................................... 26,000 (15,000) Other current assets .......................... 12,000 (17,000) Accounts payable .............................. (417,000) 89,000 Accrued liabilities ........................... (20,000) 27,000 ----------- ----------- Net cash used in operating activities ......... (1,669,000) (457,000) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant, and equipment ....... (7,000) -- Processing units - deployed ...................... (81,000) -- (Increase) in other assets 10,000 (11,000) ----------- ----------- Net cash used in investing activities ......... (78,000) (11,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of stock .................. 26,000 514,000 Issuance of note receivable ...................... 1,300,000 -- Principal payment on borrowings .................. (58,000) -- Net proceeds from issuance of debt ............... 1,806,000 16,000 Redemption of preferred stock .................... (1,000,000) -- ----------- ----------- Net cash provided by financing activities ..... 2,074,000 530,000 ----------- ----------- Net increase in cash ..................................... 327,000 62,000 Cash at beginning of period .............................. 4,000 6,000 ----------- ----------- Cash at end of period .................................... $ 331,000 $ 68,000 =========== ===========
Accompanying notes are an integral part of the financial statements 5 U.S. WIRELESS DATA, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) Note 1 -- ACCOUNTING PRINCIPLES The balance sheet as of September 30, 1998, and June 30, 1998,as well as the statements of operations for the three months ended September 30, 1998 and September 30, 1997, and statement of cash flows for the three months ended September 30, 1998 and September 30, 1997 have been prepared by the Company without an audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows at September 30, 1998 and for all periods presented, have been made. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements are read in conjunction with the financial statements and notes thereto included in the Company's Form 10-KSB for fiscal year ended June 30, 1998. The results of operations for interim periods presented are not necessarily indicative of the operating results for the full year. Note 2 -- FINANCIAL CONDITION AND LIQUIDITY The Company continues to have difficulties due to its financial condition and lack of liquidity. The Company has accumulated a deficit of approximately $30 million since inception, including a loss of $1.6 million during the first quarter of fiscal year 1999, and has limited financial reserves. At present, development of the Company's products and services requires immediate and significant additional financing. Due to the change in its distribution strategy to channel product sales and service offerings through existing merchant acquirers, the Company has been able to make significant reductions in its direct sales force and reduce its cash requirements. However, execution of the Company's business plan is dependent on a significant debt or equity-financing event in the immediate future. The Company continues to work both directly and through its consultants to secure such financing which is required to fund operations while a significant recurring revenue stream is developed. There can be no assurance that the Company will be successful with efforts to raise additional capital. The inability of the Company to secure additional financing in the near term could adversely impact the Company's financial position, including its ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities that might be necessary should the Company be unable to continue as a going concern. Note 3 -- NET LOSS PER SHARE Earnings (loss) per common share (EPS) is computed using Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share". SFAS No. 128, establishes standards for the computation, presentation, and disclosure of earnings per share. Basic and diluted net loss per common share are computed by dividing the net loss by the weighted average number of common shares outstanding at the end of the period. Diluted EPS excludes exercisable stock options and warrants from the calculation since their effect would be anti-dilutive. Such stock options and warrants could potentially dilute earnings or losses per share in the future. In the first quarter of fiscal 1999, the net loss available to common shareholders equals the net loss less $335,000 of preferred stock dividends and redemption premium charged to retained earnings. 6 Note 4 -- FINANCINGS As the Company entered the first quarter of fiscal 1999, it continued to face the need for increased liquidity to meet its obligations. In July 1998, the Company completed a private offering of $2,000,000 of 6% convertible subordinated debentures due July 21, 2000 and 100,000 Common Stock Purchase Warrants exercisable at $4.25 per share until July 21, 2001. The shares of Common Stock underlying the 6% Debentures and Warrants carry registration rights. The net proceeds to the Company from the offering were approximately $1.8 million. The Company used approximately $252,000 of the proceeds from the offering to pay off a $250,000 short term bridge loan from one of the investors, which was evidenced by a promissory note executed July 1998, and the balance of the proceeds was used for working capital. In consideration of the bridge loan, the investor received a warrant to purchase 20,000 shares of Common Stock at $4.375 per share, exercisable through September 9, 2001. The warrant contains anti-dilution provisions and "piggyback" registration rights applicable to the Common Stock issuable upon exercise of the warrant. A holder of the Company's Series A Preferred Stock purchased $1,000,000 of the Debentures. In August 1998, the Company obtained effectiveness of a registration statement on Form SB-2 (SEC File No. 333-52625) under which it registered a total of 7,240,356 shares of Common Stock, for resale by certain security holders of the Company (the "August SB-2"). After the August SB-2 was declared effective by the SEC, the National Association of Securities Dealers, Inc. ("NASD") determined that it would undertake a detailed review of the registration statement. Pending the completion of the NASD review, the Company suspended the sale of shares under the registration statement through NASD member firms. Approximately 250,000 of the registered shares were sold under that registration statement before the Company suspended sales under it. During the NASD's review, the Company further determined that the Prospectus contained in the August SB-2 was no longer current and that a "post-effective amendment" would be required to be filed and declared effective by the SEC before additional sales can be made under the August SB-2. On September 22, 1998, the Company entered into an agreement with Liviakis Financial Communications, Inc., a significant shareholder of the Company, for a $1,300,000 debt financing. The note payable is due February 1, 1999, bears interest at 8% per year, and is secured by substantially all available assets of the Company. The Company used $1,000,000 of the proceeds to redeem $833,000 of the approximate $2.3 million balance of its Series A Convertible Preferred Stock. The Company paid 120% of face value for the redemption. The security holders participating in this redemption also agreed to a gated conversion schedule over the following three months. The participating investors, representing approximately 1,342,000 shares of the remaining Series A Preferred agreed to hold their Series A Preferred shares until at least October 15, 1998 at which time one-third of the Series A Preferred shares may be converted to common stock on each of October 15, November 15, and December 15 of 1999, respectively. As an incentive to these investors, the Company has agreed to issue Common Stock purchase warrants exercisable to purchase that number of shares of Common Stock equal to five percent of the number of shares of Series A Preferred Stock held by the participating investor at the end of each period. As of December 31, 1998, the Company is obligated to issue warrants for 78,089 shares exercisable at $2.40 per share through October 15, 2001, 67,084 shares exercisable at $3.36 per share through November 15, 2001, and 67,084 shares exercisable through December 15, 2001. By October 31, 1998, the Company was to file a registration statement for the shares underlying the Warrants as well as additional shares issuable upon conversion of the Series A Preferred Stock, beyond those included in the original SB-2 Registration Statement, due to a decline in the stock price. Penalties similar to those contained in the original Designation of Series A Preferred Stock apply if the Company is late in getting the shares registered. The Company intends to file a registration statement as soon as practicable. As noted above, the Company also has a pending commitment to file a registration statement, which was due October 7, 1998, covering the shares of Common Stock issuable upon conversion of the 6% Debentures. In the event the registration is not effective with the SEC within 120 calendar days of the Initial Issuance Date (which was July 21, 1998), the Company is required to pay a cash penalty of two percent (2%) of the face amount of the 6% Debentures and thereafter an amount equal to three percent (3%) of the face amount for every thirty calendar days (or any fraction thereof) until the registration is effective. If the Company does not obtain effectiveness of a registration statement by January 18, 1999, the holders have the right to require the Company to redeem the 6% Debentures at 120% of face value plus accrued and unpaid interest and penalties to the date of redemption. The Company intends to file a 7 registration statement covering the Common Stock issuable upon conversion of the 6% Debentures as soon as practicable, and will include in that registration statement a sufficient number of shares to cover the additional warrants issued since January 1998 and the 290,000 shares issued to Liviakis Financial Communications, Inc., an affiliate of the Company, which have registration rights. See Note 5, below. Note 5 -- LIVIAKIS FINANCIAL COMMUNICATIONS INC. ("LFC") - CONSULTING On June 30, 1998, the Company and LFC agreed to extend their consulting relationship through the entry of a new consulting agreement covering the period from August 1, 1998 through March 15, 1999 (the "New LFC Agreement"). The terms of the New LFC Agreement are substantially the same as the original LFC Agreement of June 1997. For services to be rendered under the New LFC Agreement, LFC received 290,000 shares of Common Stock, issued as a signing bonus upon execution of the New LFC Agreement. The consulting agreement was valued as $1,078,438 of prepaid consulting services based on the share price on the date of the agreement less a 15% discount, attributable to the fact that the shares were restricted and subject to a "lock-up" provision as described below. The consulting services will be expensed over the term of the agreement. The Common Stock issued to LFC under the new Consulting Agreement carries certain registration rights. In conjunction with the entry of the New LFC Agreement, LFC agreed to a further lock-up of all shares owned by LFC and its affiliates, pursuant to which they will not be able to sell such shares before February 1, 1999, even though certain of those shares were included in the Company's Registration Statement on From SB-2, which became effective August 7, 1998. Note 6 -- LITIGATION Settlement of Claims of Certain Noteholders In April 1998, the Company entered into an agreement with certain Noteholders under which the Company issued shares of Common Stock in settlement of the dispute. Terms of the settlement entitled the Noteholders to certain guarantee or put provisions related to the shares. The guarantee provision of the settlement agreement allows the former Noteholders to recover the difference between the guarantee price (which is $3.00 per share as to the shares that are still entitled to the guarantee) and the gross amount the Noteholder receives upon a sale of the shares. The guarantee is operative at any time during the one year period commencing on the date the shares became saleable under SEC Rule 144. The Company is obligated to pay the amount due within thirty days of receiving a demand, accompanied by documentation confirming the sale. Under the "put" provision of the settlement agreement, the former Noteholders will have a five day period commencing on the date one year from the date the shares become saleable under SEC Rule 144 during which the former Noteholders may "put" any shares remaining unsold by them at the time back to the Company. Upon exercise of the put, the Company must either (1) purchase the shares for the put price of $3.00 per share, or (2) require the shareholder to sell the shares into the market, with the Company making up the difference between the put price and the gross amount received by the shareholder upon such sale, within 15 days after receipt of written notice and documentation confirming the sale. The shares originally issued upon conversion of the notes and the additional shares resulting from the settlement are reflected as Redeemable Common Stock. The originally issued shares are reflected at their conversion value adjusted for the value attributable to the guarantee and "put" provisions. In the event redemption of such shares becomes probable and the actual redemption amount is in excess of the carrying amount, such excess amount will be recorded as litigation settlement expense. The additional shares are reflected at their redemption value. As of September 30, 1998, approximately 128,000 shares subject to the guarantee and "put" provision, with a carrying value of $232,000, remained outstanding and have a maximum redemption value of approximately $384,000 prior to any reduction for amounts the holder may receive upon the sale of such shares. 8 Note 7 -- RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of these derivatives will be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. The Company plans to adopt FAS 133 in the first quarter of fiscal 2000 and has not yet determined the effect, if any, of adopting the new standard. Note 8 -- SUBSEQUENT EVENTS On October 1, 1998, the Company and CSI entered into a non-binding Letter of Intent to form a non-exclusive strategic partnership. CSI may also make an equity investment of $1,000,000 in the Company through a direct purchase of restricted shares of common stock. In a related transaction, an officer and a shareholder of CSI, may make a separate investment of $1,000,000 in the company through direct purchase of restricted shares. The Letter of Intent provides that the shares are to be issued at a discount of 10% from the average three-day closing price ($3.208) prior to the date of entry of the Letter of Intent, assuming the purchase agreements are completed in a timely manner. However, the Company expects that the purchase price will be adjusted to correspond to the price the Company may place additional shares in a contemplated financing. On October 28, 1998, the Company borrowed $500,000 from the CEO and 50% owner of Cardservice International, Inc. The note bears interest at 8% per annum and is payable in full on the earlier of the receipt by the Company of proceeds from the sale of the Company's Common Stock to this individual or March 1, 1999. In consideration for the loan, the Company also agreed to issue a Common Stock Purchase Warrant exercisable to purchase 25,000 shares of Common Stock at $3.038 per share through October 27, 2001. During the second fiscal quarter of 1999, the Company received two bridge loans from Liviakis Financial Communications, Inc. (LFC) totaling $300,000 in the form of 8% Notes Payable due February 1, 1999. In January, the Company received a $100,000 bridge loan in the form of a 8% Note Payable, due March 1, 1999. LFC and the principals of LFC have also agreed to extend their "lock-up" of Company shares held, through the end of calendar year 1999. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS - -------------------------- The Company may, in discussions of its future plans, objectives and expected performance in periodic reports filed by the Company with the Securities and Exchange Commission (or documents incorporated by reference therein) and in written and oral presentations made by the Company, include projections or other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, as amended. Such projections and forward-looking statements are based on assumptions, which the Company believes are reasonable but are, by their nature, inherently uncertain. In all cases, results could differ materially from those projected. Some of the important factors that could cause actual results to differ from any such projections or other forward-looking statements are detailed below, and in other reports filed by the Company under the Securities Exchange Act of 1934, including the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1998 and the Report on Form 8-K filed on August 11, 1998, Reporting an Event of August 3, 1998. The Form 8-K incorporates the Company's Registration Statement on Form SB-2 (SEC File No. 333-52625). History of Losses and Potential Fluctuations in Operating Results: Throughout the Company's history including the first quarter of the fiscal year ending September 30, 1998, the Company has continued to experience significant operating losses. In addition, because the Company generally ships its products on the basis of credit card processing applications or purchase orders, increments to recurring revenue and other component sales in any quarter are highly dependent on orders shipped in that quarter and, accordingly, may fluctuate materially from quarter to quarter. The Company's operating expense levels are based on the Company's internal forecasts for future demand and not on firm customer orders. Failure by the Company to achieve these internal forecasts could result in expense levels that are inconsistent with actual revenues. The Company's results may also be affected by fluctuating demand for the Company's products and by increases in the costs of components acquired from the Company's vendors. Requirement for Additional Capital: At present, the development of the Company's infrastructure, product development initiatives, and transition to the new distribution program requires additional financing. Proceeds from recently completed private placement offerings have allowed the Company to continue operations; however, execution of the Company's business plan is dependent on a more significant debt or equity financing event. The Company continues to work both directly and through its consultants to secure additional debt or equity financing which is required to fund operations while a significant recurring revenue stream is built. While management is confident it can accomplish this objective, there is no guarantee that this additional funding will occur in the required time frame. The failure of the Company to obtain additional financing could have a material adverse impact on the Company, including its ability to continue as a going concern. Distribution Program: The Company has recently executed a Letter of Intent with Cardservice International which outlines CSI's intent to produce its LinkPoint(TM) processing terminals using the Company's proprietary Wireless Express Payment ServiceSM (WEPSSM). Lipman USA Inc. has also announced the availability of its NURIT 2090 terminal using WEPSSM. The Company anticipates that CSI and Lipman will promote these products within their own markets using their respective distribution channels. CSI is also expected to promote the wireless products to other ventures of First Data Merchant Services. The Company also has joint marketing and distribution agreements in place with GTE Wireless, Bell Atlantic Mobile, and Ameritech. These and anticipated additional distribution programs are expected to have a material impact on the Company's future revenue stream. While the Company anticipates it will execute a definitive agreement with CSI and sign distribution agreements with other significant partners, the failure to successfully complete the agreements and execute the specified programs through any of these distributors could have a material adverse effect on the Company. The Company's Dependence on a Single Type of Product and Technological Change: All of the Company's revenue is derived from sales of its credit card transaction services and CDPD enabling products. Demand for these products could be affected by numerous factors outside the Company's control, including, among others, market acceptance by prospective customers, or the introduction of new or superior competing technologies. The Company's success will depend in part on its ability to respond quickly to technological changes through the development and improvement of its products. 10 Competition by Existing Competitors and Potential New Entrants into the Market: The Company has identified several potential competitors attempting to develop CDPD based terminals and solutions. In addition, companies with substantially greater financial, technical, marketing, manufacturing and human resources, as well as name recognition, than the Company may also enter the market. CDPD Resale Agreements Containing Minimum Purchase Obligations: The Company has to date entered into four CDPD service resale agreements, one of which contains minimum obligations which can be characterized as "take or pay" provisions. The agreement with AT&T Wireless Data, Inc. contains such provisions. The Company is obligated to pay for the minimum amount of service stated in the agreement even if it fails to place enough service with merchants to meet the minimums. The failure of the Company to meet these service minimums could have an adverse financial impact upon the Company. Status of Federal Corporate Tax Filings: The Company has not completed federal income tax filings for fiscal years 1996 and 1997. While it is unlikely that the Company will owe any taxes due to the sustained losses during the periods, the Company may be subject to penalties for the delinquency. The Company intends to take the steps required to complete the tax filings as soon as practicable. Dilutive and Other Possible Adverse Effects of Outstanding Options, Warrants and Other Rights to Acquire Common Stock: The Company has a substantial number of outstanding rights to acquire Common Stock in the form of the Series A Preferred Stock, the 6% Convertible Subordinated Debentures, various warrants, options, and contract rights. A substantial number of these rights, plus additional rights in the form of options that have been or may be granted to the Company's officers, directors, employees or consultants under the Company's 1992 Stock Option Plan or otherwise, are exercisable at prices which are less than the present market price for the Common Stock. Under the terms of such rights, the holders thereof are given an opportunity to profit from a rise in the market price of the Common Stock with a resulting dilution in the interests of other shareholders. The terms on which the Company may obtain additional financing may be adversely affected by the existence of such rights. Current Status of Registration Statements: The Company was obligated to file a registration statement with the Securities and Exchange Commission by October 7, 1998, covering the shares of Common Stock issuable upon conversion of the 6% Debentures which the Company sold in July 1998. In September 1998, the Company redeemed a total of 833,000 shares of its Series A Preferred Stock. In conjunction with that redemption, the Company also agreed to issue warrants exercisable to purchase a total of 212,257 shares of Common Stock to the holders of the remaining shares of Series A Preferred Stock. The redemption agreement includes provisions that obligated the Company to file a registration statement by October 31, 1998, covering any additional shares issuable upon conversion of the Series A Preferred Stock. A registration statement to cover these shares has not been filed as of the date of filing of this Report. See "Securities Issuances to Fund Operations" and "Private Offering of 6% Convertible Subordinated Debentures due July 21, 2000" sections of Results of Operations. RESULTS OF OPERATIONS --------------------- U.S. Wireless Data, Inc.(the "Company" or "USWD") was incorporated in the State of Colorado on July 30, 1991. The Company is in the business of providing products and services to enable the use of wireless technology for electronic payment and other transactions. Over the past two and a half years, USWD has focused its product development effort on incorporating Cellular Digital Packet Data (CDPD) technology into its product line. Because of the high speed nature of CDPD technology, and the ability to bypass the public switched telephone network, the Company's new line of CDPD-based terminals have significant performance and communication cost advantages when compared with the traditional dial-up terminals currently being sold in the U.S. market today. In fiscal year 1998, to broaden distribution of the TRANZ Enabler CDPD based product, the Company entered into agreements with large telecommunications carriers for direct distribution of products and services to merchants. The Company signed joint marketing and operating agreements with Bell Atlantic Mobile, Ameritech Mobile Communications, Inc., and GTE Wireless. The agreements contain certain significant 11 operational and financial performance criteria that the company is required to meet. Commencing in the second quarter of fiscal 1998 and continuing into the first quarter of fiscal 1999, USWD made significant investments to support a nationwide deployment of TRANZ Enablers to merchants through GTE's and other telecommunications carriers' national sales forces. Under these deployment programs, the carrier's sales representative introduces USWD's credit card processing solution and TRANZ Enabler to the end user merchant. Upon execution of a credit card processing agreement, a TRANZ Enabler unit(s) was provided to the merchant by USWD. The Company retains a portion of the monthly credit card fees based on the dollar volume and number of transactions processed through the TRANZ Enabler. Market Penetration through Telecommunications Carriers and Revisions to Business Plan ------------------------------------------------------------------------- Placements of TRANZ Enabler units pursuant to the Company's agreements with telecommunications carriers did not develop as rapidly as anticipated and have not reached anticipated (and necessary) levels to pay for the infrastructure to support the programs. Costs to the Company of implementing the joint marketing and distribution agreements with GTE Wireless, Bell Atlantic Mobile and Ameritech have exceeded revenue generated by the programs since they began. The GTE Agreement also required the Company to generate minimum CDPD service billings to GTE Wireless from merchants signed up for GTE Wireless's CDPD service through the Company. GTE Wireless agreed to adjust the commencement date for these obligations so that the start date for the first quarter was February 1, 1998. Actual placements did not allow the Company to meet the renegotiated minimum purchase obligations. To remedy this minimum purchase requirement, the Company and GTE amended the agreement on September 9, 1998 which removed any minimum purchase requirement and established new IP address pricing for merchants acquired under the agreement. Because revenue has not developed as hoped, and expenditures have been outstripping the Company's ability to support its business plan, management began to reexamine the Company' s business plan in the fourth quarter of fiscal 1998 and came to the conclusion that the Company could not continue to function at its current expenditure levels. During the first quarter of fiscal 1999, Roger Peirce, previous Vice President of Operations for Visa and most recently the President of First Data Merchant Services joined the USWD Board of Directors. While acclimating to USWD's business plan and strategy, Mr. Peirce was asked by the Board of Directors to take a more active role in the Company. On August 21, 1998 Mr. Peirce became the Chief Executive Officer of the Company. Mr. Peirce is also a nonvoting member of the Board of Directors of Cardservice International. Inc. ("CSI"), a related party. Mr. Peirce replaced Evon A. Kelly as the Company's CEO and Rod Stambaugh as Chairman. Mr. Kelly resigned as an officer and director of the Company, but remains as an employee of the Company under a one-year employment agreement. Mr. Stambaugh remains as President and a director of the Company. Mr. Peirce identified several areas in the Company's distribution and operational strategy that required redirection. Beginning the last week of August 1998, several changes in the Company's strategy were implemented. The fundamental change in the strategy involves positioning the Company as an enabler of wireless products and services to the marketplace and not as a competitor to the current incumbents. This repositioning of the Company in the marketplace encompasses the discontinuation of soliciting and owning merchant contracts for providing bankcard-processing services. The Company's approach to the market in fiscal 1998 effectively positioned itself as a direct competitor to the major merchant acquirers. The Company's new strategy involves an end-to-end systems approach to enabling the marketplace. The Company is enabling the marketplace with a new service offering - Wireless Express Payment ServiceSM (WEPSSM). WEPSSM includes an expanding set of wireless terminal devices that incorporate the Company's proprietary CDPD modem, a web-based IP address provisioning and terminal activation process that includes real time remote diagnostic capabilities, the CDPD network service, and server technology that delivers wireless transactions to the current front end card processors. The Company is targeting the top 30 merchant acquirers and card processors for this service. The initial response for WEPSSM from the targeted prospects has been very positive. In furtherance of this new strategy, on October 1, 1998, the Company and CSI entered into a non-binding Letter of Intent to form a non-exclusive strategic partnership to jointly exploit payment system opportunities using wireless technologies. Upon entry of a final agreement, CSI will produce its LinkPoint(TM) processing terminals using the Company's proprietary Wireless Express Payment ServiceSM. CSI will promote these products within its own markets using its approximately 2,200-person sales force. In addition, CSI is to 12 promote the wireless products to other ventures of First Data Merchant Services, the fifty-percent owner of CSI. Pursuant to the non-binding Letter of Intent, CSI also agreed to consider making an equity investment of $1,000,000 in the Company through a direct purchase of restricted shares of common stock and Chuck Burtzloff, the chief executive officer and 50 percent owner of CSI, has agreed to consider making a separate investment of $1,000,000 in the Company through direct purchase of restricted shares. The Company intends to coordinate the timing and terms of these investments with a future private offering of equity. Securities Issuances to Fund Operations --------------------------------------- To fund its operating requirements, the Company has had to rely primarily on the issuance of debt or equity securities over a significant part of the last two fiscal years. In August 1998, the Company obtained effectiveness of a registration statement on Form SB-2 (SEC File No. 333-52625) under which it registered a total of 7,240,356 shares of Common Stock, for resale by certain security holders of the Company (the "August SB-2"). The August SB-2 was filed to honor the registration rights of the holders of the Company's Series A Preferred Stock and one previously issued 50,000 share Warrant. After the August SB-2 was declared effective by the SEC, the National Association of Securities Dealers, Inc. ("NASD") determined that it would undertake a detailed review of the registration statement. Pending the completion of the NASD review, the Company suspended the sale of shares under the registration statement through NASD member firms. Approximately 250,000 of the registered shares were sold under that registration statement before the Company suspended sales under it. During the NASD's review, the Company further determined that the Prospectus contained in the August SB-2 was no longer current and that a "post-effective amendment" would be required to be filed and declared effective by the SEC before additional sales can be made under the August SB-2. In September 1998, the Company negotiated a partial redemption of its outstanding Series A Preferred Stock with several of the security holders. The Company borrowed $1,300,000 from Liviakis Financial Communications, Inc. and used $1 million of that money to redeem $833,000 face value of the Series A Preferred Stock. The Company paid 120% of face value for the redemption. The note payable to LFC is due February 1, 1999 and bears interest at 8% per year. The security holders participating in this redemption also agreed to a gated conversion schedule over the following three months. The participating investors, representing approximately 1,342,000 shares of the remaining Series A Preferred agreed to hold their Series A Preferred shares until at least October 15, 1998. Following October 15, 1998, one-third of the Series A Preferred shares may be converted to common stock on each of October 15, November 15, and December 15 of 1998, respectively. As an incentive to these investors, the Company agreed to issue Common Stock purchase warrants exercisable to purchase that number of shares of Common Stock equal to five percent of the number of shares of Series A Preferred Stock held by the participating investor at the end of each period. The warrants are to be exercisable for three year terms, at a per share price equal to 110% of the average of the closing bid price over the five days prior to the effective date of each warrant. The Company has also agreed to increase the dividend rate from 4% to 8% on the balance of the unconverted Series A Preferred Stock balance and to register with the SEC for public resale a sufficient number of shares of Common Stock to cover all conversions of the Series A Preferred stock plus the shares of Common Stock underlying the warrants. The registration statement was to be filed by October 31, 1998, and penalties similar to those contained in the original Designation of Series A Preferred Stock apply if the Company is late in getting the shares registered. As of the date of this Report, the Company has not yet filed this registration statement. Private Offering of 6% Convertible Subordinated Debentures due July 21, 2000. --------------------------------------------------------------------------- On July 27 1998, the Company completed a private offering of $2,000,000 principal amount of 6% Convertible Subordinated Debentures due July 21, 2000 (the "6% Debentures") and Common Stock Purchase Warrants Exercisable to Purchase 100,000 shares of Common Stock exercisable at $4.25 per share until July 21, 2001 (the "Warrants"). The net proceeds to the Company from the offering were approximately $1,810,000, after paying finder's fees of $190,000, but before paying additional expenses of the offering, which were approximately $20,000. The Company used $251,537 of the proceeds from the offering to pay off a $250,000 short term bridge loan from one of the participating investors, which was evidenced by a promissory note dated June 26, 1998, and used the balance of the proceeds as working capital and to repay existing obligations. The purchaser of 1,600,000 shares of the Company's Series A Cumulative Convertible Redeemable Preferred Stock, purchased $1,000,000 of the 6% Debentures. JW Genesis Securities, Inc. of Boca Raton, Florida, acted as the primary finder in the transaction and the Company paid JW Genesis a 13 finder's fee equal to seven percent (7%) of the amount raised from the sale of the 6% Debentures, which amounted to $140,000. In addition, JW Genesis received a three-year, 60,000 share Common Stock purchase warrant exercisable at $4.50 per share. The shares underlying the Warrant are entitled to piggyback registration rights, with the registration expenses to be paid by the Company. The Company also paid a finder's fee to Liviakis Financial Communications, Inc. ("LFC") in the amount of 2.5% of the amount raised on the sale of the 6% Debentures, which amounts to $50,000, under the consulting relationship between the Company and LFC. Messrs. John M. Liviakis and Robert B. Prag, who are affiliates of LFC, are significant shareholders of the Company. The 6% Debentures are convertible into shares of Common Stock at the option of the holders at the lesser of: 80% of the average closing bid price of the Common Stock over the five trading days prior to conversion; or $4.25 per share (the "Fixed Conversion Price"). Fifty percent of the 6% Debentures held by any holder become convertible on the earlier of effective registration of the underlying shares with the SEC or 120 days after the Initial Issuance Date. The remaining 50% of the 6% Debentures become convertible 150 days after the Initial Issuance Date. Subject to certain adjustments described below, the 6% Debentures cannot be converted below a "floor" price, which is $2.125 per share. The floor is eliminated 180 days after the Initial Issuance Date. If the Company issues any other security convertible into shares of Common Stock within 180 days of the Initial Issuance Date with a floor price less than that of the 6% Debentures, the Debenture floor price is reduced to that lesser amount. Any conversion restrictions (both time and price) are eliminated upon the announcement of a consolidation, merger or other business combination of the Company in which the Company is not the surviving entity. Once the underlying Common Stock has been registered with the SEC for at least 90 days and the Common Stock has traded at or above $8.50 for at least 20 consecutive trading days (based on the average closing bid price over such period), the Company can require conversion of the 6% Debentures, subject to certain restrictions if the stock is suspended from trading or the registration of the underlying Common Stock is suspended. Any 6% Debentures that have not been converted to Common Stock as of the maturity date, or upon a merger, consolidation or other sale of the Company or its assets in which the Company is not the surviving entity, are to either be converted into Common Stock at the conversion price then in effect or, at the option of the holders, must be redeemed by the Company. The Company committed to file a registration statement covering the shares of Common Stock underlying the 6% Debentures by October 7, 1998 (which it did not). Since the registration was not effective with the SEC within 120 calendar days of the Initial Issuance Date, the Company became obligated to pay a cash penalty of two percent (2%) of the face amount of the 6% Debentures and thereafter an amount equal to three percent (3%) of the face amount for every thirty calendar days (or any fraction thereof) until the registration is effective. Because the Company failed to obtain effectiveness of a registration statement by January 18, 1999, the holders have the right to require the Company to redeem the 6% Debentures at 120% of face value plus accrued and unpaid interest and penalties to the date of redemption. The Company intends to file a registration statement covering the Common Stock issuable upon conversion of the 6% Debentures as soon as practicable, and will include in that registration statement a sufficient number of shares to cover the additional warrants issued since January 1998 and the 290,000 shares issued to an affiliate of the Company which have registration rights. The Company may also include additional shares of Common Stock to cover the conversion of shares of Series A Preferred Stock for which a sufficient number of shares were not included in the August SB-2 owing to a decline in the Market Price for the Common Stock subsequent to the time the August SB-2 was filed. The Company is in discussion with various holders of the Series A Preferred Stock and the 6% Debentures regarding a possible restructuring or redemption of these securities. Current Financing Initiatives ----------------------------- The Company has several initiatives that it is currently pursuing to raise additional capital. On October 1, 1998, the Company entered into a non-binding Letter of Intent with Cardservice International, Inc. to form a non-exclusive strategic partnership involving joint- product and distribution initiatives. The Letter of Intent also includes a provision pursuant to which a $2,000,000 direct equity investment in USWD by CSI and its chief executive officer may be made if the terms of a definitive agreement can be reached. The parties are working on the completion of definitive agreements. 14 The Company is also exploring similar initiatives with several other potential strategic partners as well as continuing efforts to raise capital from other debt or equity sources. Year 2000 Issues ---------------- The Company has completed a review of the impact of the Year 2000 issue on the Company's business. This issue concerns the potential problems and liabilities faced by all users and persons dependent on computers that might result from software or system failure or malfunctions if the systems fail to properly recognize the date change between 1999 and 2000. The Company's internal business systems have been evaluated, and with the exception of the accounting system, are Year 2000 compatible. The Company intends to replace the accounting software during fiscal year 1999. The cost of conversion is not expected to be material. The engineering staff has made an assessment of USWD products and is not aware of any complications regarding the products the Company delivers to the end users. The Company is reliant on the electronic payments infrastructure utilized by credit card processors, banks and financial institutions within the United States, and could be subject to unresolved issues which impact this infrastructure. The Company could be adversely, materially affected, both operationally and financially, to the extent third parties with which it interfaces, either directly or indirectly, have not properly addressed their Year 2000 issues. Fiscal 1999 Compared to Fiscal 1998 Net Revenue ----------- Revenue of $361,000 for the first quarter of fiscal 1999 increased 33% from revenue of $270,000 generated during the first quarter of fiscal 1998 as the Company continued the shift from a per-unit sales approach to a recurring revenue model. Product sales of POS-50, POS-500 and other equipment sales decreased by approximately $90,000 while service revenue, which includes application fees, transaction processing, and repair revenue increased by approximately $181,000. In the latter part of the first quarter of fiscal 1999, the Company embarked on a significant shift in its product and distribution strategy. This involves the integration of the Company's WEPSSM modem and server technology into the product offerings of other terminal manufactures and development of distribution agreements with the major merchant card acquirers and card processors. The Company anticipates that this transition will take several months as new products, services and distribution capabilities are introduced to the market. Gross Profit ------------ Gross profit of $94,000 in the first quarter of fiscal 1999 was even with the prior year's quarter, although the profit margin decreased as a percent of revenue to 26% in the current quarter from 35% in the prior quarter. This was attributable to a shift in revenue from a higher margin product component to a lower margin services component. The Company expects the margin relationships to switch as the new business model is implemented. The Services cost structure in the first quarter reflects the dynamics of the previous business model which includes ongoing TRANZ Enabler amortization for processing units deployed. Efforts are also underway to eliminate underutilized CDPD addresses from the CDPD carrying cost. The new WEPSTM Service is expected to improve the margin relationships as it becomes a more predominate component of the Services offering. Operating Expenses ------------------ Selling, general and administrative expense increased from $1,288,000 in the first quarter of fiscal 1997 to $1,686,000 in the first quarter of fiscal 1998. Of the approximate $400,000 net increase, the significant increase in Company headcount from 18 at September 1997 to 53 in September 1998, increased salary, commission and benefit expense by $672,000, including severance expense of approximately $100,000. This was partially offset by a quarterly adjustment for a variable stock option resulting in a $266,000 non-cash credit to reflect the change in the carrying value of the option due to the change in the Company's stock price during the quarter. Non-cash consulting expense, including a charge resulting from a warrant extension in the prior year's first 15 quarter, decreased by $246,000 in the current quarter. Other operating expenses increased by $233,000 due primarily to increased travel, rent, and communication expense related to the increase in headcount, particularly in the sales organization, and increase in professional services expense. Research and development expenses decreased slightly from $95,000 in the first fiscal quarter of 1998 to $80,000 in the first quarter of 1999. This decrease was due to a reduction in materials expense. Interest Expense and Other Income --------------------------------- Interest expense of $116,000 in the current quarter included a $97,000 non-cash charge related to the July Convertible Debenture financing. The convertible features of the debenture include an "in-the-money" convertible option that allows the holder to obtain shares of common stock at a discount off of fair market value. The value of the in-the-money provision has been allocated to stockholder equity. Other income of $190,000 resulted from the successful restructuring of a note payable to a former terminal equipment supplier. This note had previously been reported in a default status. FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY ---------------------------------------------------- The Company continues to have significant problems due to its financial condition and lack of liquidity. While management is optimistic with its medium and long term opportunities, the Company is constrained by its immediate financial condition and requirement for increased liquidity. The Company has accumulated a deficit of approximately $30 million since inception to September 30, 1998, with a working capital deficit of approximately $2,476,000 at September 30, 1998, versus a deficit of $2,967,000 in the prior year. The Company has several immediate financial obligations in the form of notes payables, commitments on the 6% Convertible Debentures, and several key vendor payables. The Company believes that it will be able to restructure these commitments as necessary while it completes an anticipated financing event designed to satisfy its obligations and fund the business plan, although no assurance can be given that this will be the case. With the implementation of the new distribution strategy adopted in the latter part of the first quarter of fiscal 1999 (see "Market Penetration through Telecommunication Carriers and Revisions to Business Plan," above), the Company has taken steps to reduce spending. With the new focus on distribution through large merchant acquirers, the Company has reduced headcount from 60 at June 30, 1998, to 39 as of October 31, 1998, with most of the reduction occurring in the direct sales force. With the appointment of Roger Peirce as CEO, the Company has been able to avail itself of the services of several key senior level personnel, engaged under consulting contracts with remuneration in the form of options rather than cash. Based on current staffing levels, the Company's expenditures are running at a monthly rate of approximately $325,000 versus $450,000 per month in the fourth quarter of fiscal 1998. However, execution of the Company's current business plan is dependent on a significant debt or equity financing event in the immediate future. The Company continues to work both directly and through its consultants in an effort to secure additional debt or equity financing which is required to fund operations while a significant recurring revenue stream is built. While management is confident it can accomplish this objective, the inability of the Company to secure additional financing in the near term could adversely impact the Company's financial position, including its ability to continue as a going concern. 16 PART II ITEM 1 - LITIGATION Settlement of Claims of Certain Noteholders In April 1998, the Company entered into a settlement agreement with certain Noteholders under which the Company issued shares of Common Stock in settlement of the dispute. Terms of the settlement entitled the Noteholders to certain guarantee or put provisions. The guarantee provision of the settlement agreement allows the former Noteholders to recover the difference between the guarantee price (which is $3.00 per share as to the shares that are still entitled to the guarantee) and the gross amount the Noteholder receives upon a sale of the shares. The guarantee is operative at any time during the one year period commencing on the date the shares became saleable under SEC Rule 144. The Company is obligated to pay the amount due within thirty days of receiving a demand, accompanied by documentation confirming the sale. Under the "put" provision of the settlement agreement, the former Noteholders will have a five day period commencing on the date one year from the date the shares become saleable under SEC Rule 144 during which the former Noteholders may "put" any shares remaining unsold by them at the time back to the Company. Upon exercise of the put, the Company must either (1) purchase the shares for the put price of $3.00 per share, or (2) require the shareholder to sell the shares into the market, with the Company making up the difference between the put price and the gross amount received by the shareholder upon such sale, within 15 days after receipt of written notice and documentation confirming the sale. The shares originally issued upon conversion of the notes and the additional shares resulting from the settlement are reflected as Redeemable Common Stock. The originally issued shares are reflected at their conversion value adjusted for the value attributable to the guarantee and "put" provisions. In the event redemption of such shares becomes probable and the actual redemption amount is in excess of the carrying amount, such excess amount will be recorded as litigation settlement expense. The additional shares are reflected at their redemption value. As of September 30, 1998, approximately 128,000 shares subject to the guarantee and "put" provision, with a carrying value of $232,000 remained outstanding and have a maximum redemption value of approximately $384,000 prior to any reduction for amounts the holder may receive upon the sale of such shares. ITEM 2 - CHANGES IN SECURITIES Recent Issuances of Unregistered Securities: During the fiscal quarter ended September 30, 1998, the Company sold the following securities without registering the securities under the Securities Act of 1933, as amended (the "Act"). July 21, 1998: $2,000,000 of 6% Convertible Debentures due July 21, 2000. The Convertible Debentures are convertible into shares of Common Stock at the lesser of 80% of the closing bid price over the last five trading days prior to conversion, or $4.25 per share. The Debenture Agreement is filed as Exhibit 4.17 to the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1998. Amounts payable to holders of the 6% Debentures will diminish amounts payable to holders of the Company's Common Stock as dividends or upon liquidation; July 21, 1998: 20,000 Common Stock purchase warrants issued to RBB Bank, exercisable at $4.375 through July 21, 2001; July 21, 1998: 60,000 Common Stock purchase warrants issued to JW Genesis Securities, Inc. exercisable at $4.50 through July 21, 2001; July 21, 1998: 100,000 Common Stock purchase warrants issued to the purchasers of the 6% Convertible Debentures, exercisable at $4.25 through July 21, 2001; September 3 - 9, 1998: 300,000 non-qualified Common Stock purchase options, with strike prices between $2.38 and $2.72, issued to three consultants for management services in lieu of salary; 17 September 8, 1998: 290,000 shares of Common Stock issued to Liviakis Financial Communications, Inc., an affiliate of the Company, as consideration for a new consulting agreement entered into as of June 30, 1998; September 11, 1998: 8,333 Common Stock purchase warrants issued to entrenet Group, LLC, exercisable at $2.40 through September 11, 2003. The Company relied upon the registration exemption contained in Section 4(2) of the Securities Act of 1933 for these transactions. None of the transactions involved a public offering. Representations were received from the purchasers of the securities to the effect that the purchasers were taking for investment purposes only and not with a view to distribution; "restricted securities" legends were or will be imprinted on all stock certificates; and stop-transfer instructions were lodged with the Company's transfer agent as to all shares of common stock issued in the transactions. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 6% Convertible Subordinated Debentures Due July 21, 2000 Pursuant to the Debenture Agreement relating to the Company's 6% Convertible Subordinated Debentures due July 21, 2000, the Company committed to file a registration statement with the Securities and Exchange Commission by October 7, 1998, covering the shares of Common Stock issuable upon conversion of the 6% Debentures which the Company sold in July 1998. That registration statement has not been filed as of the date of filing of this Report. The security required effective registration of the underlying shares within 120 days of July 21, 1998, with the following cash penalties for failure to obtain effectiveness by that time: 2% of the face amount of the Debentures at 120 days; and 3% of the face amount of the Debentures for each additional 30 day period (or any part of any 30-day period) during which the registration statement remains ineffective. The holders also have the right to require the Company to redeem the Debentures for 120% of face value plus accrued interest if the shares were not registered by January 17, 1999. The initial interest payment through December 31, 1998, of approximately $55,000, was due and payable by January 15, 1999. The Company has not made the penalty or interest payments as of the date of filing this Report, and does not presently have the resources to do so. The holders also have the right to accelerate the payment of all amounts due and owing under the Debentures if an "Event of Default" (as defined in the Debenture Agreement) is not cured within 45 days of its occurrence. Failure to pay the penalties and/or interest within the periods required by the Debenture Agreement may constitute "Events of Default." Series A Preferred Stock In September 1998, the Company redeemed a total of 833,000 shares of its Series A Preferred Stock. In conjunction with that redemption, the Company also agreed to issue warrants exercisable to purchase a total of 212,257 shares of Common Stock to the holders of the remaining shares of Series A Preferred Stock. The redemption agreement includes provisions that obligated the Company to file a registration statement by October 31, 1998, covering any additional shares issuable upon conversion of the Series A Preferred Stock (beyond those included in the original SB-2 Registration Statement that was declared effective as of August 7, 1998, which, because of a declining stock price, included an insufficient number of shares to cover conversion of all of the outstanding shares of Series A Preferred Stock), plus the shares issuable upon exercise of the warrants. The Company has not filed this registration statement as of the date of filing of this report, and penalties similar to those contained in the original Designation of Series A Preferred Stock apply if the Company is "late" in getting the shares registered. 18 ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits required by Item 601 of Regulation S-B 4.1 Non-Qualified Stock Option issued to Roger Peirce effective November 23, 1998 (1) 10.1 Extension of Promissory Notes issued to Liviakis Financial Communications, Inc., dated January 1, 1999 10.2 Lock-up Agreement between the Company and Liviakis Financial Communications, Inc. dated January 1, 1999 10.3 Extension of Promissory Note issued to R. Chuck Burtzloff, dated January 1, 1999 27 Financial Data Schedule ___________________________ (1) This exhibit constitutes a "Management Contract, Compensatory Plan or Arrangement" required to be filed as an Exhibit to this Report. b) Reports on Form 8-K On July 31, 1998, the Company filed a report on Form 8-K reporting an event of July 16, 1998. The report contained disclosures under Item 5 - Other Events, relating to the filing of Amendment No. 1 to its Registration Statement on Form SB-2 (SEC File No. 333-52625) with the United States Securities and Exchange Commission. The number of shares being registered was decreased from 7,324,106 included in the initial filing to 7,240,356 shares of Common Stock. None of the Shares are being sold by the company and the Company will not receive any proceeds from sales of the shares. On August 11, 1998, the Company filed a report on Form 8-K reporting an event of August 3, 1998. The report contained disclosures under Item 5 - Other Events, relating to the filing of Amendment No. 2 to its Registration Statement on Form SB-2 (SEC File No. 333-52625) with the United States Securities and Exchange Commission. On September 14, 1998, the Company filed a report on Form 8-K reporting an event of August 21, 1998. The report contained disclosures under Item 5 - Other Events, relating to changes in management. On August 21, 1998, Mr. Roger Peirce became the Chief Executive Officer and Chairman of the Board of the Company, and on September 1, 1998, Charles T. Russell became a member of the Company's Board of Directors. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. U.S. WIRELESS DATA, INC. Registrant Date: January 28, 1999 By: /s/ Roger Peirce --------------------------- -------------------------- Chief Executive Officer January 28, 1999 By: /s/ Robert E. Robichaud --------------------------- -------------------------- Chief Financial Officer EX-4.1 2 NON-QUALIFIED STOCK OPTION - PEIRCE - 11/1998 EXHIBIT 4.1 THIS OPTION AND THE STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND CAN BE TRANSFERRED ONLY IN COMPLIANCE WITH THE ACT AND APPLICABLE STATE SECURITIES LAWS. THIS OPTION AND SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT, UNLESS, IN THE OPINION OF COUNSEL FOR THE COMPANY OR COUNSEL FOR THE REGISTERED HOLDER (WHICH SHALL BE IN FORM AND FROM SUCH COUNSEL AS SHALL BE REASONABLY SATISFACTORY TO THE COMPANY), SUCH REGISTRATION IS NOT THEN REQUIRED. NO REGISTRATION RIGHTS HAVE BEEN GRANTED WITH RESPECT TO THIS OPTION AS OF ITS ORIGINAL DATE OF ISSUANCE. U.S. WIRELESS DATA, INC. NONQUALIFIED STOCK OPTION CERTIFICATE U.S. Wireless Data, Inc., a Colorado corporation ("Company"), for good and valuable consideration, including the incentive to the Optionee to remain as an employee of the Company as a result of ownership or increased ownership of the Company's no par value common stock ("Common Stock"), the receipt and sufficiency of which consideration hereby is acknowledged, irrevocably grants to the Optionee the option ("Option") to purchase the following number of shares of Common Stock: Optionee Number of Shares -------- ---------------- Roger L. Peirce 1,260,984 The effective date of this grant is November 23, 1998 ("Date of Grant") and is subject to the following terms and conditions: 1. EXERCISE PRICE. The purchase price ("Exercise Price") for shares of Common Stock purchasable pursuant to this Option shall be Two and 563/1000 Dollars ($2.563) per share, which shall be paid in full in cash at the time of exercise; provided, however, that the Board of Directors of the Company may in its sole discretion permit payment to be made with shares of the Company's Common Stock owned by Optionee or shares purchasable by Optionee pursuant to exercise of this Option in such a manner that Optionee shall not have to surrender any cash to exercise this Option (a "Cashless Exercise"). The Exercise Price represents the fair market price of the Company's Common Stock as of the date this Option is granted. Optionee shall have no rights with respect to dividends or have any other rights as a shareholder with respect to shares subject to this Option until Optionee has given written notice of the exercise of the Option and has paid in full for such shares. 2. TIME OF EXERCISE. This Option may be exercised as to all or any portion of the total shares covered by this Option immediately on the Date of Grant, and shall expire on the later of September 1, 2002, or one year after cessation of the Executive's relationship with the Company in any capacity, including service provided to the Company as an employee, officer, director or consultant. The period of time during which the Option may be exercised is referred to herein as the "Option Period." 3. COMPANY'S REPURCHASE RIGHTS. The shares purchased upon exercise of this Option shall be subject to the right of the Company to repurchase such shares at the same price paid for them by the Optionee; provided that the Company's repurchase rights shall terminate incrementally in 48 equal monthly installments commencing on the date of grant of this Option, irrespective of the date of actual exercise of the Option. The repurchase rights of the Company shall terminate completely (thereby vesting Optionee's rights in and to 100% of the shares) in the event of a change in control of the Company, which shall be defined for purposes hereof as: (1) a transaction involving the sale or transfer (in one or more related transactions) of a sufficient quantity of the voting securities of the Company such that upon completion of the transaction(s), the holders of such securities have the right to elect a majority of the Board of Directors of the Company; (2) a merger, acquisition or other reorganization of the Company by another entity (other than a parent or subsidiary of the Company) in which the Company is not the surviving entity; or (3) the sale of all or substantially all assets of the Company other than in the ordinary course of business. 4. NUMBER OF SHARES PURCHASABLE AT ANY ONE TIME. This Option may be exercised only for at least 100 shares of Common Stock or a multiple thereof or for the full number of shares for which the Option is then exercisable. 5. DEATH OF OPTIONEE. If Optionee dies during Optionee's employment with the Company, this Option shall be exercisable only as to that portion exercisable as of the date of death and within one year after Optionee's death, or the last day of the Option Period, whichever is earlier, by the personal representative or administrator of Optionee's estate, or by any trustee, heir, legatee or beneficiary to whom Optionee's rights under this Option shall pass by will or the laws of descent and distribution to the extent that Optionee was entitled to exercise this Option at the time of Optionee's death. 6. RETIREMENT OF OPTIONEE. If Optionee's employment with the Company terminates by reason of retirement, the Option shall be exercisable within the one year period following Optionee's retirement as described above, but not later than the last day of the Option Period, and then only to the extent to which the Option was exercisable at the time of such termination of employment by retirement. However, if Optionee dies within three months after termination by retirement, the Option, to the extent it was exercisable at the time of Optionee's death, shall thereafter be exercisable for one year after the date of Optionee's death, but not later than the last day of the Option Period. -2- 7. DISABILITY OF OPTIONEE. If Optionee becomes permanently and totally disabled, and at the time of such disability Optionee is entitled to exercise one or more installments under this Option, Optionee shall have the right to exercise this Option within one year after such disability provided Optionee exercises this Option within the Option Period and then only to the extent to which this Option was exercisable at the time of such disability. For purposes of this Section 7 an Optionee shall be considered to be totally and permanently disabled if a qualified medical physician approved by the Company certifies to the Company that such Optionee is unable to be gainfully employed by the Company by reason of a diagnosed and determinable physical or mental impairment which can be expected to result in death or has lasted and can be expected to last for a continuous period of not less than 12 months. 8. NONTRANSFERABILITY OF OPTION. This Option may not be transferred by Optionee otherwise than by will or the laws of descent and distribution. During Optionee's lifetime, this Option shall be exercisable only by Optionee. 9. LEAVE OF ABSENCE. For purposes of this Option, (i) a leave of absence, duly authorized in writing by the Company, for military service or sickness, or for any other purpose approved by the Company, if the period of such leave does not exceed 90 days, and (ii) a leave of absence in excess of 90 days, duly authorized in writing by the Company, provided Optionee's right to reemployment is guaranteed either by statute or by contract, shall not be deemed a termination of employment. 10. CHANGES IN CAPITAL; CERTAIN REORGANIZATIONS. If the outstanding Common Stock of the Company which is subject to this Option shall at any time be changed or exchanged by declaration of a stock dividend, split-up, subdivision or combination of shares, recapitalization, merger, consolidation or other corporate reorganization in which the Company is the surviving corporation, the number of and kind of shares subject to the Option and the Option Price shall be appropriately and equitably adjusted so as to maintain the proportionate number of shares without changing the aggregate option price. In the event of a dissolution or liquidation of the Company, or a merger, consolidation, sale of all or substantially all of its assets, or other corporate reorganization in which the Company is not the surviving corporation, or in which the Company is the surviving corporation but holders of Common Stock receive securities of another corporation, this Option shall terminate as of the effective date of such event, provided that immediately prior to such event, Optionee shall have the right to exercise this Option as to all shares underlying this Option, irrespective of the number of Options actually vested at the time. 11. MANNER OF EXERCISE. (a) This Option may be exercised in whole or in part at any time and from time to time within the Option Period, subject to the terms and conditions contained herein, by the delivery of written notice of exercise to the Chief Financial Officer of the Company, as required by subsection (c) of this Section 11, accompanied by: (i) full payment, in cash or certified or bank check, payable to the Company, or, (ii) if permitted by the Company's Board of Directors, shares of the Company's Common Stock having a fair market value equal to the -3- aggregate exercise price for the number of shares purchased. This Option may also be exercised by "cashless exercise," as described below. (b) Certificates for the shares of Common Stock purchased upon exercise of this Option shall be delivered by the Company to the Purchaser within five (5) business days after the Exercise Date. However, if the Purchaser has elected to make a "cashless exercise," the Company shall deliver certificates for the number of shares that results from subtracting, from the total number of shares otherwise deliverable upon exercise, the number of shares whose value, calculated using the Market Price, is equal to the value of the payment otherwise required for exercise by Paragraph (a)(iv) of this Subsection 2.2. For purposes of this section, "Market Price" means the average of the closing prices of sales on the principal domestic securities exchange on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the bid and asked prices quoted on Nasdaq as of the close of trading in New York City on such day, in each such case averaged over a period of five (5) consecutive days consisting of the business day immediately preceding the day as of which Market Price is being determined and the four (4) consecutive business days prior to such day; provided that if such security is listed on any principal domestic securities exchange or quoted on Nasdaq, the terms "business day" and "business days" means a day or days, as applicable, on which such exchange or Nasdaq is open for trading or quotation, as the case may be, notwithstanding whether any quotation is available on any particular business day and, if not, then the Market Price shall be determined based upon those remaining days during the aforesaid 5-day period for which quotations are available. If the shares are not so listed or traded on any principal domestic securities exchange or quoted on Nasdaq, the Market Price shall be the fair value thereof, as determined in good faith by the Board of Directors of the Company. (c) The notice of exercise (i) shall state the election to exercise the Option, (ii) shall state the number of shares in respect to which the Option is being exercised, (iii) shall state Optionee's address, (iv) shall state Optionee's social security number, (v) shall contain such representations and agreements concerning Optionee's investment intent with respect to such shares of Common Stock as shall be satisfactory to the Company's counsel, and (vi) shall be signed by Optionee. As a further condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. (d) Unless this Option has expired or all of the purchase rights represented hereby have been exercised, the Company shall, in addition to certificates for Common Stock issued upon exercise of this Option, prepare upon exercise of this Option, a new Option representing the rights formerly represented by this Option that have not expired or been exercised. The Company shall, within five (5) business days after the Exercise Date, deliver such new Option to the Optionee designated for delivery in the Exercise Agreement. 12. AMENDMENT AND ADMINISTRATION. The Board of Directors shall have the authority to interpret the Plan this Option, and generally to conduct and administer the -4- exercise of this Option and to make all determinations in connection herewith which may be necessary or advisable, and all such actions of the Board shall be final and conclusive for all purposes and binding upon Optionee. 13 MISCELLANEOUS. This Option shall inure to the benefit of and be binding upon each successor of the Company. All obligations imposed upon and all rights granted to the Optionee and all rights reserved by the Company under this Option shall be binding upon and inure to the benefit of Optionee, Optionee's heirs, personal representatives, administrators and successors. Unless the context requires otherwise, words denoting the singular may be construed as denoting the plural, and words of the plural may be construed as denoting the singular and words of one gender my be construed as denoting such other gender as is appropriate. IN WITNESS WHEREOF, this Option has been issued by the Company effective as of the Date of Grant, which is November 23, 1998. U.S. WIRELESS DATA, INC. Accepted by Optionee: a Colorado corporation By /s/ Rod L. Stambaugh /s/ Roger L. Peirce -------------------- ------------------- Rod L. Stambaugh Roger L. Peirce President Attest: By /s/ Robert E. Robichaud ----------------------- Robert E. Robichaud Secretary -5- EX-10.1 3 NOTE PAYABLE EXTENTION - LIVIAKIS EXHIBIT 10.1 U.S. WIRELESS DATA, Inc. NOTE PAYABLE EXTENTION This agreement is entered into and agreed upon as of January 1, 1999 between U.S. Wireless Data, Inc. ("USWD"), and John Liviakis of Liviakis Financial Communications, Inc. WHEREAS, John Liviakis has provided provide bridge financing to USWD under Notes Payable of $1,300,000 dated September 22, 1998, $150,000 dated November 27, 1998, and $150,000 dated December 14, 1998. THEREFORE, John Liviakis agrees to: 1) Extend the due date of the three Notes Payable to February 1, 1999. 2) All other terms of the Notes Payable remain in effect as specified in each of the Note Payable agreements. U.S. Wireless Data, Inc. Liviakis Financial Communications, Inc. /s/ Robert E. Robichaud /s/ John Liviakis - ----------------------- ----------------- By Robert E. Robichaud By John Liviakis Chief Financial Officer President EX-10.2 4 CONFIRMATION LETTER - 12-23-98 EXHIBIT 10.2 December 23, 1998 Mr. Roger Peirce U.S. Wireless Data, Inc. 2200 Powell Street, Suite 800 Emeryville, CA 94608-1876 Dear Roger: This letter will serve as confirmation that U.S. Wireless Data shares issued and held in the name of Liviakis Financial Communications, Inc., John M. Liviakis, and Robert B. Prag will be under "lock up" until December 31, 1999 Sincerely, /s/ John M. Liviakis /s/ Robert B. Prag - ------------------------ ------------------ John M. Liviakis Robert B. Prag President Sr. Vice President EX-10.3 5 NOTE PAYABLE EXTENTION - BURTZLOFF EXHIBIT 10.3 U.S. WIRELESS DATA, Inc. NOTE PAYABLE EXTENTION This agreement is entered into and agreed upon as of January 1, 1999 between U.S. Wireless Data, Inc. ("USWD"), and Chuck Burtzloff. WHEREAS, Chuck Burtzloff has provided provide bridge financing to USWD under a Notes Payable for $500,000 dated October 28, 1998. THEREFORE, Chuck Burtzloff agrees to: 1) Extend the due date of the Note Payable to March 1, 1999. 2) All other terms of the Note Payable remain in effect as specified in the Note Payable agreement. U.S. Wireless Data, Inc. /s/ Robert E. Robichaud /s/ Chuck Burtzloff - ------------------------- --------------------- By Robert E. Robichaud By Chuck Burtzloff Chief Financial Officer EX-27 6 FDS --
5 1 U.S. 12-MOS JUN-30-1999 JUL-01-1998 SEP-30-1998 1 331,000 0 175,000 (28,000) 404,000 1,773,000 1,243,000 444,000 2,929,000 4,249,000 0 0 1,342,000 13,445,000 (17,815,000) 2,929,000 0 361,000 267,000 2,033,000 (190,000) 0 111,000 (1,593,000) 0 (1,593,000) 0 0 0 (1,593,000) (0.15) (0.15)
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