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 DECEMBER 31, 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
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UPGRADE INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Washington 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 February 15, 2001, 21,155,161
shares of common stock, $.0001 par value were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
INDEX
PART I - Financial Information Page
Item 1. Financial Statements
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Consolidated balance sheets at December 31, 2000 and September 30, 2000
Consolidated statements of operations for the three months ended
December 31, 2000 and 1999
Consolidated statement of cash flows for the three months ended December 31,
2000 and 1999
Notes to the Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation
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PART II - Other Information
Item 1. Legal Proceedings
-------- -------------------
Item 2. Changes In Securities and Use of Proceeds
-------- -----------------------------------------------
Item 5. Other Information
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Item 6. Exhibits and Reports on Form 8 - K
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Signatures
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
--------------- --------------
2000 2000
--------------- --------------
CURRENT ASSETS (unaudited)
Cash and cash equivalents $ 398,989 $ 79,395
Restricted deposit 805,687 300,000
Subscriptions receivable 32,725 100,000
Prepaid expenses, deposits and other 121,491 377,607
--------------- --------------
Total current assets 1,358,892 857,002
PROPERTY AND EQUIPMENT - AT COST,
less accumulated depreciation and amortization 1,791,257 2,111,363
EQUIPMENT UNDER CONSTRUCTION 3,301,625 3,301,625
ADVANCES TO THE PATHWAYS GROUP, INC 1,900,825 3,165,780
ADVANCES TO ROCKSTER, INC. - 150,000
OTHER ASSETS
Intangible and deferred assets, net of accumulated amortization 370,206 637,053
Deposits 328,051 343,051
--------------- --------------
Total assets $ 9,050,856 $ 10,565,874
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,993,796 $ 2,778,751
Accrued liabilities 733,241 990,335
Bridge loans 799,177 227,944
Equipment purchase contract payable 2,307,025 2,258,300
Royalty fee payable to CardTech, Inc., net 487,500 650,000
Payable to related parties 175,240 344,607
Notes payable, net of unamortized discount - 358,021
--------------- --------------
Total current liabilities 6,495,979 7,607,958
CONVERTIBLE DEBENTURES, net of unamortized discount 809,043 978,630
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock - $.001 par value, 50,000,000 shares authorized 20,341 20,794
Common stock subscribed 323,640 2,353,257
Additional paid in capital 36,925,837 40,185,588
Receivable from stockholders of subsidiary (266,621) (266,621)
Accumulated development stage deficit (35,257,363) (40,313,732)
--------------- --------------
1,745,834 1,979,286
--------------- --------------
Total liabilities and stockholders' equity $ 9,050,856 $ 10,565,874
=============== ==============
The accompanying notes are an integral part of these statements.
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Cumulative
Three months ended results of
December 31, operations since
----------------------- inception
1999 2000 (February 5, 1997)
----------- ---------- -------------------
Costs and expenses
Research and development $ 759,808 $2,414,425 $ 10,565,097
Purchased in-process research and development 156,200 - 5,971,603
Sales and marketing 742,983 713,837 4,328,800
General and administrative 1,719,244 1,599,790 12,747,797
----------- ---------- -------------------
3,378,235 4,728,052 33,613,297
Other expenses (income)
Equity in losses of UltraCard - - 1,264,316
Interest expense 456,751 303,112 1,267,606
Other, net (40,859) 24,705 266,853
----------- ---------- -------------------
415,892 328,317 2,798,775
----------- ---------- -------------------
Minority interest in losses of subsidiaries (863,570) - (2,115,135)
----------- ---------- -------------------
NET LOSS $2,930,557 $5,056,369 $ 34,296,937
=========== ========== ===================
LOSS PER COMMON
SHARE-BASIC AND DILUTED $ 0.16 $ 0.24 $ 3.03
=========== ========== ===================
The accompanying notes are an integral part of these statements.
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended December 31, 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
---------- ------- --------- ----------- ------------ --------------- ---------------
Balances at October 1,
2000 20,340,610 20,341 102,609 323,640 36,925,837 (266,621) (35,257,363)
Issuance of shares in
October 2000,
subscribed to in May
2000 102,609 102 (102,609) (323,640) 323,538 - -
Issuance of common
shares at $10.50 per
share in October
2000, net of costs 142,860 143 - - 1,349,857 - -
Shares subscribed to at
$6.00 per share in
October 2000, net
of costs - - 233,333 920,000 (100,000) - -
Allocation of debenture
proceeds to
common stock 167,768 168 444,435
Allocation of debenture
proceeds to
common stock
warrants - - - - 829,551 - -
Allocation of debenture
proceeds to
beneficial
conversion feature - - - - 1,051,096 - -
Allocation of
promissory note
proceeds to
common stock 40,000 40 - - 136,167 - -
Common stock
subscribed to at $4.00
per share in
December 2000 - - 125,000 500,000 - - -
Common stock
subscribed at $2.00
per share in
December 2000,
net of costs - - 464,128 928,257 (102,208) - -
Common stock
subscribed to in
December 2000 at
$0.25 through
exercise of stock
warrants - - 20,000 5,000 - - -
Adjustment to market
of options granted
for services in April
2000 - - - (672,685) - -
Net consolidated loss
for the three months
ended June 30, 2000 - - - - - - (5,056,369)
Balances at Dec. 31,
2000 20,793,847 $20,794 842,461 $2,353,257 $40,185,588 $ ( 266,621) $ (40,313,732)
Total
------------
Balances at October 1,
2000 1,745,834
Issuance of shares in
October 2000,
subscribed to in May
2000 -
Issuance of common
shares at $10.50 per
share in October
2000, net of costs 1,350,000
Shares subscribed to at
$6.00 per share in
October 2000, net
of costs 820,000
Allocation of debenture
proceeds to
common stock 444,603
Allocation of debenture
proceeds to
common stock
warrants 829,551
Allocation of debenture
proceeds to
beneficial
conversion feature 1,051,096
Allocation of
promissory note
proceeds to
common stock 136,207
Common stock
subscribed to at $4.00
per share in
December 2000 500,000
Common stock
subscribed at $2.00
per share in
December 2000,
net of costs 826,049
Common stock
subscribed to in
December 2000 at
$0.25 through
exercise of stock
warrants 5,000
Adjustment to market
of options granted
for services in April
2000 (672,685)
Net consolidated loss
for the three months
ended June 30, 2000 (5,056,369)
------------
Balances at Dec. 31,
2000 $ 1,979,286
============
The accompanying notes are an integral part of this statement.
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended
December 31, Cumulative
-------------------------- since inception
1999 2000 (February 5, 1997)
------------ ------------ -------------------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $(2,930,557) $(5,056,369) $ (34,296,937)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 30,266 140,999 442,851
Amortization of beneficial conversion feature and debenture discount 400,000 263,815 1,072,858
Adjustment to receivable from subsidiary's shareholders - - 133,379
Write off of option cost - - 76,250
Equity in loss of UltraCard - - 1,264,316
Purchased in-process research and
development 156,200 - 5,971,603
Warrants and options issued for services - (672,685) 2,557,805
Shares issued for services 242,900 - 298,650
Expenses incurred through loan assumption - - 470,005
Stock of subsidiary issued in exchange for
contribution of intellectual property charged to expense - - 125,000
Minority interest (863,570) - (2,115,135)
Changes in assets and liabilities:
Prepaid expenses, deposits and other 155,308 (272,516) 586,194
Accounts payable and accrued liabilities (267,518) 1,155,823 2,953,447
------------ ------------ -------------------
Net cash used in operating activities (3,039,851) (4,440,933) (20,459,714)
Cash flows from investing activities
Advances to The Pathways Group, Inc. - (1,264,955) (3,149,955)
Advances to Rockster, Inc. - (150,000) (150,000)
Payments on equipment under construction - - (1,200,000)
Acquisition of property and equipment, net (392,571) (403,144) (1,068,291)
Acquisition of cQue
net of cash acquired - - (1,403,144)
Acquisition of UltraCard, Inc., net of cash acquired (190,000) - (5,571,105)
Acquisition of additional equity interest in EForNet
from a minority shareholder - - (200,000)
Acquisition deposit - (15,000) (15,000)
Additions to intangible assets (611) (55,658) (172,836)
------------ ------------ -------------------
Net cash used in investing activities (583,182) (1,888,757) (12,930,331)
Cash flows from financing activities
Proceeds from sale of common stock and stock subscriptions 1,700,811 3,428,774 29,952,224
Borrowings, net of loan costs 1,000,000 3,107,880 6,779,418
Principal payments on borrowings (314,605) (1,037,245) (3,679,988)
Purchase of collateral on subsidiary's letter of credit - - (805,687)
Proceed from release of collateral on subsidiary's letter of credit - 505,687 505,687
Proceeds from exercise of stock options and warrants - 5,000 717,786
Net cash provided by ------------ ------------ -------------------
financing activities 2,386,206 6,010,096 33,469,440
------------ ------------ -------------------
Net increase (decrease) in cash and cash equivalents (1,236,827) (319,594) 79,395
Cash and cash equivalents at beginning of period 4,781,330 398,989 -
------------ ------------ -------------------
Cash and cash equivalents at end of period $ 3,544,503 $ 79,395 $ 79,395
============ ============ ===================
The accompanying notes are an integral part of these statements.
UPGRADE INTERNATIONAL CORPORATION AND SUBSIDIARIES
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 (GAAP) 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, 2001. This form
10-QSB should be read in conjunction with the form 10-KSB that includes audited
consolidated financial statements for the year ended September 30, 2000 and
1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended and since inception (February 5,
1997).
NOTE B - BASIS OF PRESENTATION
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 December 31, 2000 and September 30, 2000, reflects the
consolidated financial position of the Company and its subsidiaries
(Subsidiaries) as follows: UltraCard, Inc. (UltraCard); cQue Corporation
(formerly Centurion Technologies, Inc.); 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 three months ended December 31, 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 three months ended December
31, 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.
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 20,966,989 and 18,388,001 for the three
months ended December 31, 2000 and 1999, respectively, and 11,317,056 since
inception (February 5, 1997) through December 31, 2000. Diluted loss per share
for all periods presented equaled basic loss per share due to antidilutive
effect of the potentially dilutive securities. At December 31, 2000 and 1999,
the Company had 5,371,869 and 4,426,543 in additional common stock equivalents.
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 identifying markets and establishing
applications for its technologies. Accordingly, no operating revenues have been
generated. The Company's operations to date have consumed substantial and
increasing amounts of cash. The Company's negative cash flow from operations is
expected to continue and to accelerate in the foreseeable future. The
development of the Company's technology and potential products will continue to
require a commitment of substantial funds. The Company expects that its
existing and expected financings will be adequate to satisfy the requirements of
its current and planned operations until the end of the second quarter of fiscal
year 2001. However, 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.
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.
In October 2000, the Company issued 142,860 shares at $10.50 per share pursuant
to Regulation "S" for aggregate gross proceeds to the Company of $1,500,000. In
November 2000, the Company issued 233,333 shares at $6.00 per share pursuant to
Regulation "S" for aggregate gross proceeds to the Company of $1,399,998.
During November 2000, the Company entered into agreements for the issuance of
convertible subordinated debentures aggregating $2,325,250. The convertible
subordinated debentures provide for 8% interest payable on the principal amount
of the debenture, have a term of 18 months and provide for an additional
compensation comprised of 7% of the principal amount of each debenture in common
stock based upon a $6.00 share price, and warrants with a $6.00 strike price
equaling to 10% of the value of each debenture. Two debentures in the aggregate
amount of $750,000 also provided for finder's fees aggregating 10% of the
debenture, payable 7% in cash and 3% in shares calculated on a $4.50 share
price. Pursuant to the agreements, the Company issued additional compensation
and finder's fees aggregating as follows: cash of $52,500; common stock of
167,768 shares; and five year warrants to acquire 334,406 common shares at a
purchase price of $6.00 per share. Additional compensation equal to 2% to 3% of
the conversion shares is payable in common stock in the event that the common
stock underlying the convertible debentures is not registered by January 1,
2001.
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE D - MANAGEMENT PLANS - Continued
In December 2000, the Company borrowed $400,000 pursuant to the terms of four
promissory notes. The notes have a term of 30 days, and bear interest at a rate
of 10% per annum. In the event that the loans are not repaid on the maturity
date, a penalty charge will be due and payable, comprised of 10% interest,
12.5% warrant coverage at market and 20% warrant coverage at $6.00 per share.
In December 2000, the Company raised an aggregate $1,326,049 in two private
placements.
In January and February 2001, the Company completed subscription agreements for
a further 280,000 shares at $2.50 per share yielding net proceeds to the Company
of $700,000 and a further 766,613 shares at $2.00 per share yielding gross
proceeds to the Company of $1,533,226.
On December 15, 2000 the Company announced a letter of intent to acquire a 57%
interest In Rockster Inc. To date the Company has provided funding in the
amount of US dollars to Rockster provided under the terms of the agreement.
The Company is actively pursuing new investment into the Company. These
financings will take the form of equity, convertible debentures and other types
of debt. The Company expects to close on at least $20 million of these
activities in the second quarter of fiscal year 2001.
NOTE E - COMMITMENTS
During February 28, 2000, a subsidiary of the Company entered into an agreement
with SciVac, Inc. to build a sputtering machine for use in its research and
development activities in the amount of $3,000,000. As of December 31, 2000,
the subsidiary had paid $1,200,000 and recorded a liability for the amounts
billed but unpaid as of December 31, 2000 equaling $2,307,025, inclusive of
sales tax. The machine is currently being modified to meet the subsidiary's
technical specifications and has not been accepted by the Company.
NOTE F - CONTINGENCIES
The class action lawsuits filed during February and March 2000, in the United
States District Court against the Company and its President alleging securities
violations were dismissed, with prejudice by the United States District Court.
The court further declined to exercise jurisdiction for causes of action brought
under Washington state law and accordingly dismissed those claims without
prejudice.
NOTE G - SUBSEQUENT EVENTS
On September 8, 2000 the Company signed an Agreement and Plan of Reorganization
to acquire 100% of The Pathways Group, Inc. ("Pathways"). It was proposed that
the shareholders of Pathways receive one Upgrade International Corporation share
for each 14.3 shares of Pathways, subject to adjustment. On February 15, 2001
the Company delivered notice to Pathways terminating the merger agreement
between the two companies. As of December 31, 2000, the Company had advanced
$3,165,780 under the terms of the agreement. These advances are secured by a
note agreement and a blanket assignment over the Pathways' assets. Because of
Pathways' unstable financial position, it is possible that some or all of the
aforementioned advances will not be repaid. However, the company believes that
there is sufficient volume the assets of Pathways in orders for the Company to
recover the amount advanced to Pathways. As a result, the Company has not
recorded an allowance for any potential losses that may be incurred to recover
the carrying amount of these advances as of December 31, 2000.
On January 16, 2001, the Company discontinued negotiations with Cards & More
GMBH, for the acquisition of 60% of that Company announced in September 2000.
On January and February of 2001 the Company received proceeds and signed
subscription agreements for the issuances of 250,000 shares at $2.50 per share
yielding net proceeds to the Company of $700,000.
On January 4, 2001 a debenture holder converted $200,000 in debt due by the
Company in exchange for 107,981 shares in the capital stock of the Company.
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 $5.0 million in the first quarter of fiscal 2001 compared
with a $2.9 million net loss for the corresponding period of fiscal 2000. This
reflects a continued and growing level of investment into the Company's
technology, production processes and industrialization opportunities. This
increase in the net loss compared to the prior year is largely attributable to
the operations of the Company's subsidiary, UltraCard, Inc. whose research and
development expenditures increased by $1.6 million over the comparable prior
period. These increasing expenditures reflect the Company's focused efforts upon
completing its research and development initiatives, while at the same time,
establishing production processes and specifications to facilitate the Company
to engage others to produce the UltraCard and its read write device. The other
two significant operating subsidiaries EforNet and cQue (formerly Centurion)
contributed 11.9% of the total loss reflecting expenses associated with
developing software and smart card initiatives. A significant portion of the
increase in research and development expenditures was due to the addition of new
personnel, prototype development and contracts with external research and
development contractors.
During the quarter, EforNet suspended its research and development program,
however the developments achieved prior to the discontinuance of the program are
being maintained and protected and will be further developed within the
Company's developing infrastructure. It is expected that EforNet will reconvene
its efforts during this fiscal year.
For the near future research and development expenditures are expected to be
maintained and to increase to meet the Company's numerous potential market
opportunities. All of the Company's research and development costs are expensed
as incurred.
In an effort to accelerate the Company's market penetration 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.
The marketplace is beginning to recognize the UltraCard as a leader and superior
product in the smart card industry and management's focused upon accelerating
the Company's access to this multi-billion dollar marketplace.
General and administrative expenses have decreased from $1.7 million in the
first quarter of fiscal 2000 to $1.6 million for the corresponding three-month
period ended December 31, 2000. During the current quarter the Company
experienced reduction in administrative costs associated with the discontinuance
of EforNet operations.
Sales and marketing expenditures have remained constant at approximately $0.7
million per quarter. In both years the costs are associated with the Company's
attendance at trade shows and industry awareness programs as the Company builds
market awareness to establish and develop new markets and prepare for effective
product launches for products which are currently under development.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents were approximately $80,000 at December 31, 2000, a
decrease of $320,000 from approximately $400,000 from September 30, 2000. The
Company is managing tight cash flows in providing funding for an aggressive
research and development program at UltraCard while funding acquisitions in the
software development area of business. Cash flows from financing activities of
$6.0 million almost triple the volume experienced in the first quarter of the
preceding year. $4.4 million of the proceeds were used for operations, with the
balance allocated to investing activities associated with then pending
acquisitions. The Company has been successful raising capital for the last three
years since its inception; however, there is no assurance that its fund raising
will continue to be a success.
In order for the Company to meet funding requirements from its investee
companies and to meet ongoing operating requirements, it will need to obtain
additional financing. The Company expects that its existing capital resources
will be adequate to satisfy the requirements of the current and planned
operations until the end of the second quarter of the current fiscal year.
However 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.
PART II Other Information
Item 1. Legal Proceedings
-------
In Re Upgrade International Corporation Securities Litigation, U.S. District
Court, Western District of Washington at Seattle, c/a #C00-0298, the class
action against Upgrade and its president, Daniel S. Bland, was dismissed by
court order dated February 9, 2000. The federal claims portions of the
complaint were dismissed with prejudice; the state claims were dismissed without
prejudice.
Item 2. Changes in Securities and Use of Proceeds
-------
A. Recent Sales of Unregistered Securities
During the three months ended December 31, 2000 the Company sold unregistered
securities as follows:
In October 2000, Upgrade completed a private placement offering of 142,860
shares of its common stock at a price of $10.50 per share for total gross
proceeds of $1,500,000. The offer and sale of securities was made pursuant to an
exemption from registration under Regulation S of the Securities Act of 1933
(the "Act"), due to the foreign nationality of the investor.
In October 2000, Upgrade completed a private placement offering of 233,333
shares of its common stock to four investors at a price of $6.00 per share for
total gross proceeds of approximately $1,400,000. The offer and sale of
securities was made pursuant to an exemption from registration under Regulation
S of the Act due to the foreign nationality of the investor.
On November 15, 2000, Upgrade issued a $1,075,250 convertible debenture that
bears 8% simple interest and is due eighteen months from date of issuance. The
debenture is convertible into shares of Upgrade's common stock at the lesser of
75% of the mean closing bid price of the Company's stock based upon the 5 lowest
closing bid prices during the 20 consecutive trading days prior to conversion or
$6.00. These issuances were exempt under Rule 506 under and Section 4(2) of the
Act.
On November 16, 2000, Upgrade issued a $500,000 convertible debenture that bears
8% simple interest and is due eighteen months from date of issuance. The
debenture is convertible into shares of Upgrade's common stock at the lesser of
75% of the mean closing bid price of the Company's stock based upon the 5 lowest
closing bid prices during the 20 consecutive trading days prior to conversion or
$6.00. These issuances were exempt under Rule 506 under and Section 4(2) of the
Act.
On November 24, 2000, Upgrade issued a $250,000 convertible debenture that bears
8% simple interest and is due eighteen months from date of issuance. The
debenture is convertible into shares of Upgrade's common stock at the lesser of
75% of the mean closing bid price of the Company's stock based upon the 5 lowest
closing bid prices during the 20 consecutive trading days prior to conversion or
$6.00. These issuances were exempt under Rule 506 under and Section 4(2) of the
Act.
On November 24, 2000, Upgrade issued a $500,000 convertible debenture to that
bears 8% simple interest and is due eighteen months from date of issuance. The
debenture is convertible into shares of Upgrade's common stock at the lesser of
75% of the mean closing bid price of the Company's stock based upon the 5 lowest
closing bid prices during the 20 consecutive trading days prior to conversion or
$6.00. These issuances were exempt under Rule 506 under and Section 4(2) of the
Act.
In December 2000, the Company completed a private placement offering of 125,000
shares of its common stock at a price of $4.00 per share for gross proceeds of
$500,000. The offer and sale of securities was made pursuant to an exemption
from registration under Regulation S of the Act due to the foreign nationality
of the investor.
In December 2000, the Company completed a private placement of 464,128 shares of
its common stock at a price of $2.00 per share for net proceeds of $826,049.
Item 5. Other Information
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A. Termination of Cards & More Letter of Intent
On January 16, 2001, the Company and Cards & More Plastikkartenvertrieb GmbH
terminated their letter of intent pursuant to which Upgrade would have acquired
60% of Cards & More in a cash transaction.
B. Termination of Pathways Agreement and Plan of Reorganization
On February 15, 2001, the Company terminated the Agreement and Plan of
Reorganization dated September 8, 2000 by and between the Company and The
Pathways Group, Inc. pursuant to which the Company would have acquired 100% of
Pathways in an all-share transaction.
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.
Upgrade International Corporation
Date: February 19, 2001 /s/ Daniel Bland
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Daniel Bland, President and Chief Executive
Officer, and Secretary
/s/ Howard A. Jaffe
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Howard A. Jaffe, Chief Operating
and Financial Officer