<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1998
REGISTRATION NO. 333-38567
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
Registration Statement Under The Securities Act of 1933
---------------------
WORLD WIRELESS COMMUNICATIONS, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Nevada 8911 87-0549700
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
150 Wright Brothers Drive, Suite 560
Salt Lake City, Utah 84116
Telephone: 801/575-6600
Facsimile: 801/576-6621
David D. Singer, CEO and President
150 Wright Brothers Drive, Suite 560
Salt Lake City, Utah 84116
Telephone: 801/575-6600
Facsimile: 801/535-2450
(Name, address and telephone number of agent for service)
---------------------
Copies to:
Joseph Chicco, Esquire
Connolly Epstein Chicco Foxman
Oxholm & Ewing
1515 Market Street - 9th Floor
Philadelphia, PA 19102
Telephone: 215/851-8410
Facsimile: 215/851-8383
---------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
===============================================================================
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Item 501(b)(4) of Regulation S-K
<TABLE>
<CAPTION>
Item Number and Heading Caption in Prospectus
- ------------------------ ----------------------
<S> <C>
1. Forepart of Registration Statement and Outside
Front Cover of Prospectus .......................... Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus ......................................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges ........................ Prospectus Summary -- The Company, -- Risk
Factors, -- Summary Financial Information; Risk
Factors
4. Use of Proceeds .................................... Use of Proceeds
5. Determination of Offering Price .................... Not Applicable
6. Dilution ........................................... Dilution
7. Selling Security Holders ........................... Principal and Selling Stockholders
8. Plan of Distribution ............................... Inside Front Cover; Plan of Distribution
9. Description of Securities to be Registered ......... Description of Capital Stock
10. Interests of Named Experts and Counsel ............. Not applicable
11. Information with Respect To the Registrant ......... Outside Front Cover of Prospectus; Prospectus
Summary; Risk Factors; Selected Consolidated
Historical and Proforma Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Principal and Selling Shareholders;
Organizational and Other Transactions; Financial
Statements
12. Disclosure of Commission Position on
Indemnification For Securities Act of 1933, As
amended, Liabilities ............................... Disclosure of Commission Position on Indemnifi-
cation for Securities Act Liabilities
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
PROSPECTUS -- SUBJECT TO COMPLETION, DATED FEBRUARY 17, 1998
WORLD WIRELESS COMMUNICATIONS, INC.
4,039,664 Shares
Common Stock, $.001 Par Value
This Prospectus relates to the public offering of 3,866,912 outstanding
shares of Common Stock (the "Outstanding Shares") of World Wireless
Communications, Inc. (the "Company") by certain shareholders of the Company
(the "Selling Shareholders"). This Prospectus also relates to the offer and
sale by the Company of up to 172,752 shares of Common Stock (the "Option
Shares") presently reserved for issuance upon the exercise of outstanding
stock options issued in connection with the Company's acquisition of Digital
Radio Communications Corporation in February 1997, and may be used by persons
who acquire Option Shares in the resale of such Option Shares. To that extent,
such persons are included within the term "Selling Shareholders" as used
herein. The Outstanding Shares and the Option Shares, to the extent offered
for resale by persons acquiring them from the Company, are hereinafter
referred to, collectively, as the "Shares".
The Shares may be offered and sold by the Selling Shareholders from time
to time as market conditions permit in transactions in the over-the-counter
market, in negotiated transactions, or a combination of such methods of sale,
at fixed prices which may be changed, at market prices prevailing at the time
of sale, at prices relating to prevailing market prices or at negotiated
prices. The Selling Shareholders may effect such transactions to or through
broker/dealers, and such broker/dealers may receive compensation in the form
of discounts, concessions or commissions from the Selling Shareholders and/or
the purchasers of the Shares for whom such broker/dealers may act as agents or
to whom they sell as principals, or both (which compensation as to a
particular broker/dealer might be in excess of customary commissions). To the
extent required, information regarding the Shares to be offered and sold, the
names of the Selling Shareholders, the public offering price, the names of any
such broker/dealer or agent and any applicable commissions or discount with
respect to any particular offer is set forth herein or will be set forth in an
accompanying Prospectus supplement. See "Plan of Distribution".
None of the proceeds from the sale of the Outstanding Shares by the
Selling Shareholders will be received by the Company. Proceeds, if any, to the
Company from the sale of Option Shares by the Company will be a maximum of
$345,098 based upon an option exercise price of $0.18 with respect to 223
Option Shares, and $2.00 with respect to the remaining 172,529 Option Shares.
The expenses of registering all Shares, estimated to be approximately
$200,000, will be borne by the Company.
THE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. PURCHASERS OF
SHARES SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER "RISK FACTORS"
BEGINNING AT PAGE 5, AND "DILUTION".
The Company's Common Stock is traded "over-the-counter". Dealer "bid" and
"asked" prices for the Common Stock are quoted on the OTC Electronic Bulletin
Board maintained by the National Association of Securities Dealers, Inc. (the
"OTC Bulletin Board") under the symbol "WWWC". On February 13, 1998, the
closing bid and asked prices for the Common Stock were $9.06 and $9.75,
respectively. See "Market Information". The Company intends to apply to have
the Common Stock approved for quotation on the SmallCap Market of The Nasdaq
Stock Market, Inc. under the symbol "WWWC" following the date of this
Prospectus.
The date of this Prospectus is ___________ , 1998.
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
references to and information concerning "the Company" includes World Wireless
Communications, Inc. and its wholly-owned subsidiaries, and historical
information, except for the financial statements, presents the operations of
the Company and its subsidiaries on a combined basis, unless otherwise
indicated.
The Company
World Wireless Communications, Inc. (the "Company") designs, develops and
manufactures wired and wireless communications products, systems and
technology, and provides contract manufacturing services to the electronics
industry. The Company's executive offices are located at 150 Wright Brothers
Drive, Suite 560, Salt Lake City, Utah 84116, and its telephone number at that
address is 801/575-6600.
Through December 31, 1997, substantially all of the Company's business
activities were carried on by three wholly-owned subsidiaries: Digital Radio
Communications Corporation ("DRCC") which was acquired, effective for
accounting purposes, in February 1997; ECA Electronic Contract Assembly, Inc.
("ECA") which was formed in October 1996; and Austin Antenna, Ltd. ("Austin
Antenna"), which was acquired in November 1997. DRCC engaged in the design,
development, manufacture and sale of proprietary wireless products and in
providing design and development services for third parties on a contract
basis. ECA provided manufacturing and assembly services on a contract basis.
Austin Antenna designs and engineers radio antenna products. The only revenue
producing activities which the Company engaged in directly (i.e., other than
through its subsidiaries) is the manufacture and sale of SecuriKey(R) hardware
devices and related software, a business that the Company for approximately
$373,000 in January 1998. Also in January 1998, the assets and liabilities of
DRCC and ECA were transferred to the Company, and DRCC and ECA were dissolved.
The activities formerly carried on by those subsidiaries now are carried on
directly by the Company.
The Company was incorporated in Nevada on November 15, 1995, to acquire
from an affiliated company certain assets which previously had been used in
the business of Micro Security, Inc., a publicly traded company which had
undergone reorganization, and eventually was liquidated, in bankruptcy court.
The Company's acquisition of these assets, which related to a computer
hardware device, the SecuriKey(R), that is used to prevent unauthorized use or
duplication of software, was completed in March 1996. Until the last quarter
of 1996, all of the Company's revenues were derived from sales of this device
and related software. As noted above, the Company sold its SecuriKey(R)
business in January 1998.
In October 1996, the Company began offering contract manufacturing
services through ECA. In February 1997, the Company and DRCC agreed in
principle to the terms of the acquisition of DRCC by the Company. That
acquisition was completed in the third quarter of 1997, but was effective for
accounting purposes on February 12, 1997. In November 1997, the Company
completed the acquisition of Austin Antenna.
Since its acquisition of DRCC, the Company's strategy has been to
concentrate on the development, manufacture and sale of proprietary wireless
technology and products. In the nine months ended September 30, 1997, the
Company realized revenues from contract design and development services (45%
of sales), contract manufacturing and assembly services (33%), the sale of
certain wireless technology (13%), sales of SecuriKey(R) related products (6%)
and sales of proprietary wireless products (3%).
The Offering
The Shares being offered hereby consist of (a) 3,866,912 Outstanding
Shares which were acquired by the Selling Shareholders or their predecessors
in interest either in direct private placements by the Company, in exchange
for shares of DRCC in connection with the Company's acquisition of DRCC, upon
the exercise of options granted in connection with the DRCC acquisition in
exchange for previously outstanding DRCC options (hereinafter sometimes
referred to as "DRCC Conversion Options"), or in settlement of
3
<PAGE>
a litigation between the Company and a former co-venturer, and (b) 172,752
shares reserved for issuance upon the exercise of outstanding DRCC Conversion
Options. The Outstanding Shares are being offered and will be sold for the
accounts of Selling Shareholders, and the Company will not receive any
proceeds from sales of the Outstanding Shares. All expenses of registering the
Shares will be paid by the Company. See "Plan of Distribution".
Summary Consolidated Historical and Pro Forma Financial Information
The following table sets forth summary historical financial data of the
Company for the periods indicated and summary pro forma financial data giving
effect to the acquisition of DRCC for the periods indicated. This information
should be read in conjunction with the consolidated financial statements of
the Company and notes thereto and the pro forma consolidated financial
statements and notes thereto contained elsewhere in this Prospectus.
Operating Data:
<TABLE>
<CAPTION>
Pro Forma
--------------------------------
For the Nine For the
Months Ended Year Ended
September 30, December 31
1997 1996
--------------- ---------------
<S> <C> <C>
Sales ......................... $ 2,506,204 $ 2,004,983
Gross profit .................. 570,691 336,433
Net loss ...................... (4,363,386) (4,422,888)
Loss per common share ......... $ (0.45) $ (0.76)
Shares used in per share
calculations ................. 9,748,793 5,806,077
<CAPTION>
Historical
----------------------------------------------------------------
For the
Period From
April 10, 1995
(Date of
For the Nine Months Ended For the Inception
September 30, Year Ended Through
------------------------------ December 31, December 31,
1997 1996 1996 1995
--------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales ......................... $ 2,371,619 $ 452,640 $ 618,505 $ 426,825
Gross profit .................. 513,450 (25,108) (43,679) 189,469
Net loss ...................... (4,956,148) (885,066) (3,236,657) (270,736)
Loss per common share ......... $ (0.52) $ (0.26) $ (0.85) $ (0.26)
Shares used in per share
calculations ................. 9,513,177 3,352,063 3,806,077 1,049,679
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------------
1997 1996 1995
--------------- ----------- --------------
<S> <C> <C> <C>
Working capital ............... $ 381,947 $125,200 $ (155,137)
Total assets .................. 9,621,405 663,042 425,940
Long-term liabilities ......... 49,048 44,808 44,500
Stockholders' equity .......... 8,596,485 414,883 105,344
</TABLE>
Risk Factors
Purchase of the Company's Common Stock involves a high degree of risk.
Persons considering a purchase of Shares should carefully consider all of the
information contained in this Prospectus and, in particular, the facts set
forth under the caption "Risk Factors" below.
4
<PAGE>
RISK FACTORS
Prospective investors should carefully consider all of the information
contained in this Prospectus before deciding whether to purchase Shares and,
in particular, the factors set forth below. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by
the use of forward-looking terminology such as "believes", "expects", "may",
"should" or "anticipates" or the negative thereof or other variations thereon
or comparable terminology or by discussions of strategy. No assurance can be
given that the future results covered by the forward-looking statements will
be achieved. The following factors include, among other things, cautionary
statements with respect to certain forward-looking statements, including
statements of certain risks and uncertainties that could cause actual results
to vary materially from the future results referred to in such forward-looking
statements.
Limited Operating History; History of Operating Losses. The Company has
had a limited operating history, and has an accumulated deficit of $8,463,541
from inception through September 30, 1997. In the first nine months of 1997,
the Company incurred a net operating loss of $4,956,148, including a
nonrecurring charge of $1,258,000 to write-off purchased research and
development in connection with the acquisition of DRCC. The Company also
anticipates reporting a loss from operations in the last quarter of 1997. The
Company's Consolidated Statements of Operations for the nine months ended
September 30, 1997, include the results of operations of DRCC from February
12, 1997, and the nonrecurring charge incurred as a result of the DRCC
acquisition described in the preceding sentence. The Company's Unaudited
Condensed Pro Forma Consolidated Statements of Operations for the nine months
ended September 30, 1997, and year ended December 31, 1996, present the
results of operations of the Company as if the acquisition of DRCC had been
consummated at January 1, 1996, and, accordingly, include the operations of
DRCC during those periods and exclude acquisition related charges. On a pro
forma basis, the Company's loss in the nine months ended September 30, 1997,
was $4,363,386. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
At December 31, 1996, DRCC had a working capital deficiency and a net
capital deficiency, and had incurred a loss from operations and negative cash
flows from operating activities during the year ended December 31, 1996. The
report of DRCC's independent accountants dated March 4, 1997, on DRCC's
consolidated financial statements as of and for the two years ended December
31, 1996, states that these conditions "raise substantial doubt" about DRCC's
ability to continue as a going concern. The report of the Company's
independent accountants dated November 21, 1997, on the Company's Consolidated
Financial Statements as of and for the nine month period ended September 30,
1997, does not include similar explanatory language.
As a new enterprise, the Company is likely to remain subject to risks and
occurrences which management is unable to predict with any degree of
certainty, and for which it is unable to fully prepare. While the Company
expects its revenues to increase as new products are introduced and contract
design and development services are expanded, significant additional expenses
will be incurred in developing and marketing its products and in providing its
contract services. Growth in the Company's business could be expected to be
accompanied by strains on the Company's administrative, financial and
operating resources. The Company's ability to manage growth effectively will
require it to continue to expand and improve its operational, financial and
management controls, and to train, motivate and manage its employees. In any
event, there is no assurance that the Company will achieve revenue growth
sufficient to offset anticipated increases in costs, nor is there any
assurance that the Company will be successful in overcoming problems
associated with unforeseen costs and competition, technical problems
associated with new products and technology, and other risks which all
business ventures face and which could be especially acute for a relatively
new company attempting to establish and expand its business in a highly
competitive industry characterized by rapid technological development and
change.
For all of the foregoing reasons, as well as the factors described below,
any purchase of Shares should be considered a speculative investment involving
a significant risk of loss.
Need for Additional Capital. The Company has been dependent on equity
funding from outside investors to allow it to conduct operations, and may
require additional funding in the future. Unless the Company is able to
continue to raise funds through such equity or other financing until such
time, if ever, as it is able to operate profitability, the Company could be
required to curtail or cease operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations". There is no
assurance that the Company
5
<PAGE>
will be able to obtain additional financing which may be required in the
future, or as to the terms of any financing which is obtained. In this regard,
prospective purchasers of Shares should note that as recently as August 1997,
the Company sold 500,000 shares of "restricted" (i.e., unregistered) Common
Stock at a price of $2.00 per share, which was substantially below the "bid"
and "asked" prices quoted for the Common Stock in the over-the-counter market
at the time of such sale. See "Organizational and Other Transactions --
Principal Capital Transactions".
One of the Company's potential capital needs within the next 12 to 18
months is related to the possible necessity of increasing its existing
manufacturing capacity. Management believes that the Company's current
manufacturing facilities would not be adequate to handle substantial increases
in demand for its products. Management estimates that between $2 to $5 million
may be required for this purpose. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Outlook".
Dependence on New Products and Technology. A substantial majority of the
Company's revenues through September 30, 1997, on a pro-forma consolidated
basis, have resulted from contract manufacturing services and design and
development engineering services performed for other companies. Revenues from
product sales during this period represented less than 10% of total sales, and
a majority of those sales were derived from a hardware device, the
SecuriKey(R), a product line which the Company sold in January 1998 because it
did not fit the Company's present long term strategy of focusing on technology
and products relating to wireless transmission of voice, video and data. A
substantial portion of the Company's research, development, engineering and
marketing effort in the first nine months of 1997 was devoted to the
development of proprietary wireless products, including a line of products
that are designed for use in short distance (typically under 1,000 feet) and
long distance (up to 20 miles) telemetry, remote data collection, wireless
security and similar applications. The first commercial sales of products in
this line occurred in September 1997. The Company's investment in, and
expectations for, this product line are large relative to the Company's
existing resources and prior revenues, but there is no assurance that the
Company will be able to recoup its investment or generate any profits from
this line of products, or any of its existing or proposed products. See
"Business -- Existing Products" and "-- Proposed Products". In particular,
prospective purchasers of Shares should understand that total sales of the
products described under the caption "Business -- Existing Products" have been
very limited to date, and that the products described under the caption
"Business -- Proposed Products" are still in development and testing stages
and are not available for sale commercially. The Company has received only
limited indications that any of its proposed products will be commercially
acceptable and, even if one or more of such products are offered for sale and
achieve a degree of commercial success, there is no assurance that this will
result in the Company operating profitably.
Major Customers; Non-Recurring Sales. For the year ended December 31,
1996, on a pro forma basis, 41.9% of the sales of the Company, or $840,123,
were to two customers, each of which accounted for 10% or more of total sales.
In the nine month period ended September 30, 1997, also on a pro forma basis,
$1,380,000 (55.1%) of sales were to Kyushu Matsushita Electric Co., including
a technology transfer ($300,000) and contract design and development services
($1,080,000), both of which are non-recurring items. Sales to Infinity Group,
Inc., for contract manufacturing services, represented an additional 13.2% of
sales ($329,956) in the first nine months of 1997. See "Business -- Contract
Design and Development". The loss of either of these customers or failure to
replace contract work which is being completed with new contract work from
these or other customers would have a material impact on the Company's
business. In addition, the Company's dependence on a relatively small number
of large customers poses a financial risk if, for any reason, problems in
collecting accounts receivable from any of such customers should arise. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Competition. The market for wireless communications products is intensely
competitive, with many providers who have greater technical, financial and
marketing resources than the Company, and certain of whom are among the
premier, "high tech" leaders of the industrial world. The Company's strategy
includes entering into license agreements or other forms of "strategic
partnership" arrangements with larger companies in order to exploit their
strengths, rather than to confront them in the marketplace. There is no
assurance that this strategy will succeed, or that the Company will be able to
overcome the competitive disadvantages it faces as a small
6
<PAGE>
company with limited capital and without a history of successfully developing
and marketing proprietary wireless technology, devices or products. In
addition to present "mainstream" competitors, the Company anticipates that
numerous potential competitors with high levels of technical and financial
resources are, like the Company, constantly searching for market niches and
specialty products in the communications industry. See "Business of the
Company -- Competition".
Possible Loss of Services of Officers and Key Employees. The ability of
the Company to successfully conduct its business affairs is dependent upon the
capabilities of current officers and key employees. At the present time, none
of the executive officers and/or key employees of the Company has a fixed term
employment agreement with the Company. If the Company is unable to retain the
services of its key executive and technical employees, its operations could be
adversely affected. There is no assurance that the Company will retain the
services of its key employees, or, if so, as to the terms on which it may be
able to do so. The Company does not presently carry any "key man" insurance on
any employee, and none of its present executive officers or key employees is
subject to any "restrictive covenants" that would prevent such employee from
joining a competitor after leaving the Company's employ. See "Management --
Directors and Executive Officers".
Intellectual Property Rights. The Company presently has two United States
patents covering antenna technology which were acquired as part of the Austin
Antenna acquisition, and one United States patent application pending which
covers technology relating to, among other technical matters, a method and
apparatus for de-modulating "spread spectrum" wireless signals. See "Business
- -- Patents and Trademarks"). At the present time, the Company has no other
patents or patent applications pending. The Company's spread spectrum
de-modulation technology patent application was the subject of litigation in
the State of Utah, Salt Lake County Court, in which a former joint venturer
with the Company claimed, among other things, an ownership interest in the
technology. That action was settled in November 1997. The terms of the
settlement provide, among other things, for equal co-ownership by the Company
and its former co-venturer of the technology covered by the patent
application.
See "Business -- Patents and Intellectual Property."
The Company uses confidentiality agreements with its customers and other
parties to protect trade secrets and other proprietary data, and claims
copyrights on circuit boards and software used in its products. The use of
such agreements and other measures employed by the Company to protect
sensitive information may not be sufficient, however, to prevent other persons
from obtaining and using the Company's technology or developing other
technology which embodies the Companys' technology.
To the extent the Company does not have patents on its products, there
can be no assurance that another company will not replicate one or more of the
Company's products, nor is there any assurance that any patents that are
obtained will provide meaningful protection or significant competitive
advantages over competing products. There can be no assurance that any patent
rights that the Company has or may obtain in the future will provide the
Company with competitive advantages or will not be challenged by other
companies or individuals. Furthermore, there can be no assurance that other
companies or individuals will not independently develop similar products,
duplicate the Company's products or design around any of the Company's
patents.
The Company presently holds a number of trademarks and/or services marks
relating to the SecuriKey(R) product line. The Company intends to pursue
registration of trademarks associated with its key products as they are
developed and become available for general commercial use, and to protect its
legal rights concerning the use of its trademarks. The Company intends to rely
upon common law trademark rights to protect any unregistered trademarks.
Common law trademark rights, however, do not provide the Company with the same
level of protection afforded by a United States federal registration of a
trademark. For example, unlike a registered trademark, common law trademark
rights are limited to the geographic area in which the trademark is actually
used.
Product Liability and Other Possible Future Claims. The Company may be
subject to substantial product liability costs if claims arise out of problems
associated with the products which it manufactures. The Company is insured
against such contingencies, but there can be no assurance that the coverage
provided by such policies ($1 million per occurrence, $2 million total) would
be adequate to cover all potential product liability claims and costs in the
future.
In addition, in providing its contract design and development services,
the Company typically is required to warrant that the technology that it
develops under contract will not infringe upon the intellectual property
7
<PAGE>
rights of third parties, and to indemnify its customers from any loss or
exposure arising from any such infringement. Since the technology developed
under the Company's design and development contracts could be incorporated
into products which are mass produced and distributed, the potential loss in
the event of an infringement could be very high, and the Company has no
insurance which would cover any such loss or damages. The Company has not had
an indemnification claim made against it under any of these contracts, but
there is no assurance that such a claim will not be made in the future.
Government Regulations. The Company's wireless communications products
are subject to compliance with regulations pertaining to transmission as
adopted by the Federal Communications Commission ("FCC"). Currently, the
Company's product line operates under Part 15 of the FCC Telecommunications
Code, which allows companies to transmit data without a license in certain
radio frequencies, or an exemption granted by the FCC. None of the products
that the Company presently offers or is in the process of developing would
require a user of the product to obtain a license from the FCC. The
availability of Part 15 to wireless communications products requires that the
product undergo testing by an independent laboratory for such criteria as
non-interference with other communications products, physical antennae
hook-up, non-intentional radiation and transmission power, a process that can
be expected to take 30 to 60 days and cost approximately $20,000. At the
present time, none of the Company's radios has been tested by an independent
laboratory for compliance with Part 15. See "Business -- Regulation".
Possible Delisting -- Penny Stock Regulations. At the present time, the
Company's Common Stock is not listed on The Nasdaq Stock Market, Inc. or on
any exchange. Although dealer prices for the Company's Common Stock are listed
on the OTC Bulletin Board, trading has been limited since such quotations
first appeared in October 1996. See "Market Information". The Company intends
to apply to have its Common Stock approved for quotation on the Nasdaq
SmallCap Market following the date of this Prospectus. There is no assurance,
however, that approval will be received or, if received, that the Company will
meet the requirements for continued listing on the SmallCap Market. Under
Nasdaq rules, in order to maintain a listing on the Nasdaq SmallCap Market, a
company must have, among other things, either $2,000,000 in net tangible
assets, a market capitalization of $35,000,000 or more, or $500,000 net income
in its last fiscal year or two of its last three fiscal years. In addition,
the listed security must have a minimum bid price of $1.00 per share. Further,
Nasdaq reserves the right to withdraw or terminate a listing on the Nasdaq
SmallCap Market at any time and for any reason in its discretion. If the
Company were unable to obtain or to maintain a listing on the Nasdaq SmallCap
Market, quotations, if any, for "bid" and "asked" prices of the Common Stock
would be quoted in the "pink sheets" published by the National Quotation
Bureau, Inc. or on the NASD's OTC Electronic Bulletin Board where the Common
Stock has been quoted prior to the date of this Prospectus. In such event, an
investor could find it more difficult to dispose of or to obtain accurate
quotations of prices for the Common Stock than would be the case if the Common
Stock were quoted on the Nasdaq SmallCap Market.
Irrespective of whether or not the Common Stock is included in the Nasdaq
system, there is no assurance that the public market for the Common Stock will
become more active or liquid in the future. In that regard, prospective
purchasers should consider that this offering is being made without
underwriting arrangements typically found in an initial public offering of
securities. Such arrangements generally provide for the issuer of the
securities to sell the securities to an underwriter which, in turn, sells the
securities to its customers and other members of the public at a fixed
offering price, with the result that the underwriter has a continuing interest
in the market for such securities following the offering.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection
with trades in any stock defined as a "penny stock". Commission regulations
generally define a penny stock to be an equity security that has a market
price of less than $5.00 per share and is not listed on The Nasdaq Stock
Market, Inc. or a major stock exchange. The regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risks associated therewith. The
Company now anticipates that, following the offering, the Common Stock will
meet one or both of the principal exceptions to "penny stock" classification,
i.e., the exceptions applicable to Nasdaq-listed securities and to securities
with a bid price in excess of $5.00. If the Common Stock does not meet an
exception to these regulations, i.e., if the Common Stock should fail to
qualify for quotation on Nasdaq and fail to maintain a price of $5.00 or more
per share, the Company's securities would become subject to Rule 15g-9
promulgated under the Securities Exchange Act of 1934. Under such rule,
broker/dealers who
8
<PAGE>
recommend such securities to persons other than established customers and
accredited investors (generally, individuals with net worth in excess of
$1,000,000 or annual incomes exceeding $200,000 or $300,000 together with
their spouses) must take a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. In such event, the market liquidity for the Shares could be adversely
affected because the regulations on penny stocks could limit the ability of
broker/dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the
secondary market.
Market Overhang. As of February 13, 1998, the Company had 10,378,974
shares of Common Stock outstanding, of which approximately 7,818,214 shares,
or approximately 75% of the total outstanding, were "restricted securities"
which had not been registered with the Securities and Exchange Commission or
any state securities agency and as to which future sales were restricted. The
remaining shares of the Company's outstanding Common Stock are not restricted
and are immediately saleable, by their owners, although persons who are deemed
"affiliates" of the Company are required to comply with certain numerical and
"manner of sale" limitations in sales of their shares. The sale of Shares
offered hereby will increase, and if all Shares were sold would increase
dramatically (i.e., from 2,560,760 shares to 6,600,424 shares), the number of
shares available for immediate public resale. A substantial increase in the
number of shares available for public resale could negatively impact the
market price for the Company's Common Stock.
In addition to the possible sale of shares in this offering, a
substantial portion of the Company's restricted securities are saleable under
Rule 144, promulgated by the Securities Exchange Commission under the
Securities Act of 1933, upon the seller's compliance with the holding period,
manner of sale and other conditions and limitations of that Rule. Rule 144
also requires that specified information concerning the Company must be
available at the time any such sale is made. Following this offering, the
Company will be subject to reporting requirements of the Securities Exchange
Act of 1934, compliance with which also will satisfy Rule 144 "public
information" requirements. See "Market Information -- Shares Saleable Under
Rule 144".
Increases in Operating Costs: Availability of Supplies. An increase in
operating costs could adversely affect the ability of the Company to achieve
profitability. Factors such as inflation, increased labor and employee benefit
costs and the availability of qualified management and hourly employees may
adversely affect operation costs. Many of these costs are beyond the control
of the Company. In addition, the dependence on frequent deliveries of
materials, such as electronic component pieces, could subject the Company to
shortages or interruptions, which could adversely affect its business. See
"Business -- Raw Material and Supplies".
NASD Inquiry. On August 5, 1997, the Company was notified by NASD
Regulation, Inc., the market regulation arm of the National Association of
Securities Dealers, Inc. (the "NASD"), that it was reviewing trading activity
in the Company's Common Stock. Based upon the information which NASD
Regulation has requested, and conversations between the Company's counsel and
NASD Regulation's representatives, the Company believes that the NASD review
relates to trading in the Company's Common Stock in the first quarter of 1997,
and that the principal purpose of the review is to determine whether any of
such trading involved purchases or sales of Common Stock by persons who, at
that time, had material, non-public information. The Company is cooperating
with NASD Regulation in its inquiry. At this point, the Company cannot
determine what effect, if any, this inquiry will have on the Company or the
market for its Common Stock.
Limited Liability of Officers and Directors. The Articles of
Incorporation and the Bylaws of the Company limit a director's personal
liability to the Company or its shareholders for monetary damages for any
actions taken or any failure to take action to the fullest extent permitted by
Nevada law or any other applicable law as now in effect or as it may hereafter
be amended. Furthermore, the Company is obligated under its Articles of
Incorporation and Bylaws to indemnify its directors, officers' employees,
agents or fiduciaries to the fullest extent permitted or required by Nevada
law. Each of these provisions could reduce the legal remedies available to the
Company and its shareholders against such individuals. See "Disclosure of
Commission Position on Indemnification for Securities Act Liabilities".
Future Issuance of Stock by the Company. The Company has 50,000,000
shares of Common Stock authorized, of which 10,378,974 shares were outstanding
at February 13, 1998, and an additional 1,367,796 shares have been reserved
for issuance upon the exercise of outstanding options. The Company also has
authorized 1,000,000 shares of Preferred Stock, none of which are presently
outstanding. Although the Board of
9
<PAGE>
Directors of the Company has no present intention to do so, it has the
authority, without action by the shareholders, to issue authorized and
unissued shares of Common Stock or Preferred Stock. Preferred Stock, if and
when issued, could have rights superior to those of the Common Stock,
particularly in regard to voting, the payment of dividends and upon
liquidation of the Company. See "Description of Capital Stock".
Factors Inhibiting Takeover. Certain provisions of the Company's Articles
of Incorporation and the Nevada General Corporation Law may be deemed to have
"anti-takeover" effects in that they could delay, defer or prevent a takeover
attempt that a shareholder might consider to be in the Company's or the
shareholder's best interests. For example, the ability of the Company's Board
of Directors to designate series of Preferred Stock without any vote or action
by the Company's stockholders could be considered an "anti-takeover" device,
since the terms of Preferred Stock which might be issued could contain terms
which could contain special voting rights or increase the costs of acquiring
the Company. See "Description of Capital Stock -- Anti-Takeover Provisions".
DILUTION
At September 30, 1997, the net tangible book value of the Company's
Common Stock was approximately $0.17 per share. To the extent that a purchaser
pays more than $0.17 per share of Common Stock, without giving effect to any
capital transactions or results of operations of the Company after September
30, 1997, the purchaser will incur dilution in the net tangible book value of
his/her investment equal to the difference between the price paid for the
shares and $0.17. For example, if Shares were purchased at the "asked" price
quoted for the Company's Common Stock on February 13, 1998, (i.e., $9.75), the
dilution in the purchaser's investment would be approximately $9.58 or
approximately 98%. Similarly, purchasers of Option Shares from the Company
will incur dilution in their investment equal to the difference between their
DRCC Conversion Option exercise price and $0.17 per share.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Outstanding
Shares. If all Option Shares are sold, the Company will receive total proceeds
of $345,098 (average price of $2.00 per share). Such proceeds, if received,
would be added to the Company's general corporate funds.
10
<PAGE>
SELECTED CONSOLIDATED PRO FORMA AND HISTORICAL FINANCIAL DATA
The following tables set forth selected consolidated pro forma and
historical financial data of the Company. The pro forma financial data gives
effects to the acquisition of DRCC. The selected historical financial data for
the nine months ended September 30, 1997, for the year ended December 31, 1996
and for the period from April 10, 1995 (date of inception) through December
31, 1995 are derived from audited financial statements of the Company. The
historical data for the nine months ended September 30, 1996 are derived from
unaudited financial statements and include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the data for the period. The results of operations for the nine
months ended September 30, 1997, are not necessarily indicative of the results
to be expected for the entire year. This data should be read in conjunction
with the consolidated financial statements and notes thereto and other
financial information which are included elsewhere in this Prospectus.
The unaudited pro forma consolidated financial statements present the
acquisition of DRCC by the Company using the purchase method of accounting as
if the acquisition had been consummated at January 1, 1996. Such information
is derived from, and should be read in conjunction with the separate
historical consolidated financial statements of the Company and DRCC and notes
thereto and to the other financial information appearing elsewhere herein. The
unaudited pro forma consolidated statements of operations have been included
for comparative purposes only and do not purport to be indicative of the
results of operations which actually would have been obtained if the
acquisition had been consummated at January 1, 1996 or the results of
operations which may be obtained in the future.
Pro Forma Operating Data:
<TABLE>
<CAPTION>
For the Nine For the
Months Ended Year Ended
September 30, December 31,
1997 1996
--------------- ----------------
<S> <C> <C>
Sales ......................................... $ 2,506,204 $ 2,004,983
Cost of sales ................................. 1,935,513 1,668,550
------------ ------------
Gross profit .................................. 570,691 336,433
------------ ------------
Research and development ...................... 1,304,599 533,057
General and administrative .................... 2,412,291 2,879,725
Amortization of goodwill ...................... 1,182,761 --
Interest expense .............................. 34,426 1,346,539
------------ ------------
Total operating expenses ...................... 4,934,077 4,759,321
------------ ------------
Net loss ...................................... $ (4,363,386) $ (4,422,888)
============ ============
Loss per common share ......................... $ (0.45) $ (0.76)
============ ============
Shares used in per share calculations ......... 9,748,793 5,806,077
============ ============
</TABLE>
11
<PAGE>
Historical Operating Data:
<TABLE>
<CAPTION>
For the Period
For the Nine Months April 10, 1995
Ended September 30, For the Year Ended (Date of Inception)
-------------------------------- December 31, through
1997 1996 1996 December 31, 1996
---------------- ------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Sales .............................. $ 2,371,619 $ 452,640 $ 618,505 $ 426,825
Cost of sales ...................... 1,858,169 477,748 662,184 237,356
------------ ---------- ------------- ----------
Gross profit ....................... 513,450 (25,108) (43,679) 189,469
------------ ---------- ------------- ----------
Research and development ........... 2,239,143 -- 92,932 --
General and administrative ......... 2,210,395 452,286 1,789,904 386,612
Amortization of goodwill ........... 985,634 -- -- --
Interest expense ................... 34,426 407,672 1,310,142 73,593
------------ ---------- ------------- ----------
Total operating expenses ........... 5,469,598 859,958 3,192,978 460,205
------------ ---------- ------------- ----------
Net loss ........................... $ (4,956,148) $ 885,066 $ (3,236,657) $ (270,736
============ ========== ============= ==========
Loss per common share .............. $ (0.52) $ (0.26) $ (0.85) $ (0.26)
============ ========== ============= ==========
Shares used in per share
calculations ..................... 9,513,177 3,352,063 3,806,077 1,049,679
============ ========== ============= ==========
</TABLE>
Historical Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------------
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
Cash ............................................. $ 723,463 $ 37,278 $ 29,682
Receivables ...................................... 201,297 131,392 30,621
Inventory ........................................ 433,060 159,881 60,656
------------ ------------ ----------
Current Assets ................................ 1,357,820 328,551 120,959
Equipment, net ................................... 1,042,379 327,022 300,840
Investments ...................................... 222,500 -- --
Goodwill, net .................................... 6,899,442 -- --
Other assets ..................................... 99,265 7,469 4,141
------------ ------------ ----------
Total Assets .................................. $ 9,621,406 $ 663,042 $ 425,940
============ ============ ==========
Trade accounts payable ........................... $ 261,894 $ 61,997 $ 31,256
Accrued liabilities .............................. 150,909 55,788 827
Checks written in excess of cash in bank ......... 103,678 -- --
Notes payable -- current ......................... 54,788 85,566 244,013
Non-compete obligation ........................... 81,148 -- --
Accrued settlement obligation .................... 323,456 -- --
------------ ------------ ----------
Current Liabilities ........................... 975,873 203,351 276,096
------------ ------------ ----------
Long-term notes payable .......................... 49,048 44,808 44,500
------------ ------------ ----------
Common stock ..................................... 10,035 5,663 1,132
Additional paid-in capital ....................... 17,049,991 3,916,613 374,948
Accumulated deficit .............................. (8,463,541) (3,507,393) (270,736)
------------ ------------ ----------
Total Stockholders' Equity .................... 8,596,485 414,883 105,344
------------ ------------ ----------
Total Liabilities and
Stockholders' Equity ........................... $ 9,421,406 $ 663,042 $ 425,940
============ ============ ==========
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When used in this discussion, the words "expect(s)", "feel(s)",
"believe(s)", "will", "may", "anticipate(s)" and similar expressions are
intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties, which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, and are urged to carefully
review and consider the various disclosures elsewhere in this Prospectus which
discuss factors which affect the Company's business, including the discussion
under the caption "Risk Factors".
General
The Company was incorporated in November 1995. In March 1996, it
completed the acquisition of the assets of a limited liability company, which
related to a computer hardware device used to prevent unauthorized duplication
or use of software. This device, the SecuriKey(R), and related software
products accounted for substantially all sales of the Company prior to October
1996, and the results of operations of the Company prior to March 1996 include
the results of operations of the limited liability company from which the
Company acquired the SecuriKey(R) assets.
In October 1996, the Company commenced contract manufacturing operations
and, in February 1997, acquired Digital Radio Communications Corporation
("DRCC"). The Company's results of operations for the nine month period ended
September 30, 1997, includes purchased research and development costs and
amortization of goodwill incurred in connection with the acquisition of DRCC,
and the results of contract manufacturing and DRCC operations (from February
12, 1997, in the case of DRCC operations), while prior periods do not.
Pro forma financial information in this discussion and elsewhere in the
Prospectus is presented as if the acquisition of DRCC had been consummated at
January 1, 1996. Thus, the Company's results of operations on and after
January 1, 1996, when presented on a pro forma basis, include the operations
of DRCC and exclude nonrecurring expenses incurred by the Company in
connection with the acquisition of DRCC.
In November 1997, the Company acquired certain business assets of Austin
Antenna, Ltd. and acquired a related corporation, and presently operates those
assets in a subsidiary corporation using the name Austin Antenna, Ltd. The
subsidiary is not considered a material subsidiary for accounting purposes.
Purchased research and development costs incurred in connection with the
acquisition will be reflected in the Company's results of operations for the
fourth quarter of 1997, and operations of Austin Antenna, Ltd. will be
included in the Company's consolidated results of operations from the date of
the acquisition.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and respective notes thereto, Selected
Consolidated Pro Forma and Historical Financial Data, Unaudited Condensed Pro
Forma Consolidated Statements of Operations and respective notes thereto, as
well as the Summary Consolidated Historical and Pro Forma Financial
Information and the Consolidated Financial Statements of Digital Radio
Communications Corporation, and respective notes thereto, which are set forth
elsewhere in this Prospectus.
Results of Operations
Nine Months ended September 30, 1997 and Year Ended December 31, 1996 (Pro
Forma)
On a pro forma basis, sales in the nine month period ended September 30,
1997, were $2,506,204, compared to $2,004,983 during all of 1996. This
increase is the result of increased revenues from contract design and
development services ($1,080,000 in 1997 compared to $251,411 in 1996) a
decrease in contract manufacturing and assembly services ($781,707 in 1997
compared to $1,135,067 in 1996) a decrease in SecuriKey(R) sales ($144,903 in
1997, compared to $452,286 in 1996); a one time sale of technology in the 1997
period ($300,000), and the Company's initial sale of proprietary wireless
communications products in the third quarter of 1997 ($78,500). Design and
development service revenues in the nine months ended September 30, 1997,
arose under a single contract in the amount of $1,296,000.
Cost of sales for the nine months ended September 30, 1997 decreased in
comparison to sales over the year ended December 31, 1996, from $1,668,550 or
approximately 83% of sales in the year ended December 31,
13
<PAGE>
1996, to $1,935,513, approximately 77% of sales in the 1997 period. The
related gross profit for the nine months ended September 30, 1997 was $570,691
or 23% of sales compared to $336,433 or 17% of sales in 1996. The improvement
in gross profit was the result of the design and development contracts during
1997.
In addition to the $1,258,000 purchased research and development
discussed above, the Company incurred research and development costs of
$1,304,599 during the nine months ending September 30, 1997, relating to
projects for customers for which there were no present contracts and
additional resources were expended for the development of World Wireless' own
proprietary technology.
General and administrative expenses decreased to $2,412,291
(approximately 96% of sales) in the nine months ended September 30, 1997, from
$2,879,725 (approximately 144% of sales) in the annual 1996 period. On an
annualized basis, general and administrative expenses will increase by an
estimated 12% during 1997 compared to 1996 due to increases in sales personnel
and duplicate administrative facilities and related administrative expenses.
Management anticipates the elimination of a portion of its duplicate
administrative facilities during 1998.
The Company incurred amortization of goodwill relating to the acquisition
of DRCC, as discussed above, of $1,577,015 in 1996 compared to $1,182,761 for
the nine months ended September 30, 1997. Goodwill is being amortized using
the straight line method over a five year period.
Interest expense also was reduced in the 1997 period, by $1,312,113 (from
$1,346,539 in the year ended December 31, 1996, compared to $34,426 in the
1997 period). Interest expense in 1996 included $1,279,465 relating to
discounts on the convertible debentures fully amortized during 1996.
The Company's pro forma net loss of $4,363,386 in the nine months ended
September 30, 1997 is a reduction from the net loss of $5,999,903 in the 1996
annual period, for the reasons discussed above.
Nine months ended September 30, 1997 and 1996 (Actual)
For the nine months ended September 30, 1997, the Company's sales
increased to $2,371,619 from sales of $452,640 in the nine month period ended
September 30, 1996. The increase was primarily attributable to the inclusion
of DRCC operations from February 12, 1997, in the 1997 results, and revenues
derived from contract assembly services. 1996 results do not include any
revenues from DRCC. Sales of the SecuriKey(R) device and related software
products were $144,903 in the nine months ended September 30, 1997 compared to
$452,640 during the comparable nine month period of 1996. This decrease was
due to the Company's business focus shifting to other products and services.
The Company's net loss of $4,956,148 in the nine months ended September
30, 1997, includes a non-recurring charge of $1,258,000 for the write-off of
purchased research and development. The amortization of goodwill in the amount
of $985,634 in 1997 was the result of the DRCC acquisition in February 1997.
General and administrative expenses for 1997 were $2,210,395 compared to
$452,286 for 1996. The Company experienced substantial increases in cost of
sales and general and administrative expenses in the nine months ended
September 30, 1997, compared with the year earlier period primarily as a
result of the inclusion of DRCC costs and expenses in 1997 results. These
costs and expenses are discussed above in the discussion of pro forma results
of operations.
Year Ended December 31, 1996 and the period from April 10, 1995 through
December 31, 1995 (Actual)
The Company's sales of $618,505 for the year ended December 31, 1996,
represented an increase of $191,680 over sales in 1995. The increase in sales
was primarily due to 1996 being a full twelve month operating year and the
commencement of contract manufacturing services in October 1996. The Company's
net loss in 1996 reflects a $2,965,921 increase over 1995, from $270,736 in
1995 to $3,236,657 in 1996. The increase in net loss was primarily
attributable to increases in cost of sales, general and administrative expense
and interest expense, which are discussed below.
Cost of sales increased from $237,356 (approximately 56% of sales) in
1995 to $662,184 (approximately 107% of sales) in 1996. This increase resulted
from changes in the Company's corporate strategy from only SecuriKey(R) sales
in 1995 to contract manufacturing and assembly services beginning in October
of 1996. These additional services required costs not fully absorbed by sales.
Research and development began during the year ended December 31, 1996.
The Company recognized $92,932 of research and development expense during that
period.
14
<PAGE>
General administrative expense increased from $386,612 in 1995 to
$1,789,904 in 1996. The major components of the increase included $782,688 of
non-cash compensation relating to the acquisition of ECA and $441,180 of
non-cash compensation relating to the grant of stock options. Additional
increases were the result of hiring a full time CEO, administrative and sales
personal and managers for the Company's contract manufacturing operations.
Substantially all of these increases occurred during the fourth quarter 1996.
Interest expense increased from $73,593 in 1995, to $1,310,142 in 1996.
As discussed above, 1996 interest expense included $1,279,465 relating to
discounts on the convertible debentures fully amortized during 1996, as
compared to $34,935 in 1995.
Digital Radio Communications Corporation
Sales for DRCC decreased 15.4% from $1,638,559 during 1995 to $1,386,478
during 1996, or $252,081. The decrease resulted from management's decision to
concentrate on developing its own proprietary technology versus contract
design and development services for customers. This change in corporate
strategy resulted in less design and development revenue over the near future.
The resulting development of DRCC's proprietary technology has generated
substantial contracts in 1997 for World Wireless Communications, Inc.
Research and development expense increased $323,044 in 1996 over 1995
which reflects DRCC's development efforts towards its own proprietary
technology. General and administrative expense increased 219% from $341,427 in
1995 to $1,089,821 in 1996 from depreciation of additional equipment,
increased costs from efforts to raise additional capital, additional expenses
relating to increased administrative personnel, increased administrative
compensation costs, increased facility costs, and expenses relating to the
administration of a contract which was finalized in 1997. These increased
administrative expenses are anticipated to continue in 1997 and 1998 to meet
the demands of performing contracts signed in 1997.
DRCC's liabilities increased from $1,440,764 on December 31, 1996, to
$1,581,412 at February 12, 1997. This increase was due principally to an
increase in accrued payroll and related payroll taxes.
Liquidity and Capital Resources
The Company's financial condition at September 30, 1997, though improved
from its financial condition at December 31, 1996, remains tentative. The
improvement is a result of the Company's issuance of Common Stock for
$4,196,218 during the nine months ended September 30, 1997, which is the
source of the $686,185 net increase in cash at September 30, 1997, compared to
December 31, 1996.
The Company used $2,688,395 of cash in operations during the nine months
ended September 30, 1997 compared to $533,085 during the same period in 1996.
The increase in the use of cash in operations was primarily due to an increase
of $981,143 in research and development expense and an increase of
approximately $1,707,252 in general and administrative expense. The use of
cash for research and development activities is expected to continue through
the fourth quarter of 1997. Research and development will continue in 1998 at
the same level in order to maintain a competitive edge in the market, but will
become a smaller percentage of sales as the large contracts signed in 1997
mature. Marketing expenses, which have been included in general and
administrative expense, are anticipated to increase during 1998. Net of the
effects of the Company's acquisition of DRCC, trade accounts receivable
decreased $148,666, accounts payable decreased $186,415 and accrued
liabilities decreased $402,257 during the nine months ended September 30,
1997. The decrease in accounts receivable was the result of a shift in the
Company's business away from contract manufacturing to developing its own
products. The decreases in accounts payable and accrued liabilities were the
result of the Company's payment of liabilities, including liabilities assumed
in the DRCC acquisition.
Cash in the amount of $224,764 was used for the DRCC and Austin Antenna,
Ltd. acquisitions during the nine months ended September 30, 1997, with no
expenditures of a similar nature during the comparable period for 1996.
Equipment purchases, net of proceeds from sales of equipment, used $555,951
during the nine months ended September 30, 1997 compared to $89,598 used
during the comparable 1996 period. Cash used to reduce debt and capital lease
obligations, net of checks written in excess of cash in bank, was $40,923 and
$205,255 during the nine months ended September 30, 1997 and 1996,
respectively. Future uses of cash for equipment purchases and debt reduction
are anticipated to continue.
15
<PAGE>
During the year ended December 31, 1996, the Company used $758,730 of
cash in operations, compared to $31,127 used during 1995. Investing activities
consisted of $340,000 used to acquire assets from Micro Security Systems, Inc.
during 1995 and equipment purchases of $90,544 and $49,691 during 1996 and
1995, respectively. Financing activities generated cash in the amount of
$856,870 and $450,500 during 1996 and 1995, respectively. As a result of these
activities, cash increased $7,596 and $29,682 during 1996 and 1995,
respectively.
Through September 30, 1997, the Company's sales and gross profitability
are not at a level which will provide the funds necessary for its operations
and capital expenditures that would be required to support substantial
increases in the scope of the Company's operations. Substantially all cash on
hand at September 30, 1997, has been used in operations. In order to sustain
operations, the Company has borrowed $1,125,000 under the terms of short-term
promissory notes, including $125,000 borrowed from an executive officer.
However, in management's opinion, the Company will not be able to satisfy its
needs for additional capital through borrowing, and will be able to meet these
needs only by issuing additional equity securities. There is no assurance that
management will be able to obtain any additional capital.
In November, 1997, the Company engaged PaineWebber Incorporated
("PaineWebber") to perform such general investment banking services as
PaineWebber and the Company may from time to time agree upon. The terms of the
engagement do not require any performance by PaineWebber relative to financing
for the Company. The Company has paid an initial fee of $25,000 to
PaineWebber, and is required under the terms of the engagement, to pay an
additional $200,000 to PaineWebber in $50,000 monthly installments beginning
January 1, 1998.
On December 19, 1997, the Company received initial orders for equipment
from Williams Telemetry, a Williams company. The orders cover a variety of
products, such as the WinGate(TM), radio transmitters and receivers and spread
spectrum transceivers. These radio products were designed by and, with the
WinGate, will be manufactured by the Company and will be used by Williams
Telemetry through its information gathering system. The delivery schedule
established by the orders calls for initial shipments to begin in 1998 and
increase significantly during calendar 1999. Total shipments under the
contract are expected to be completed in full by the end of the year 2000. If
all expectations are met, sales under the orders would potentially reach $70
million. Order quantities and shipping dates, however, are subject to
adjustment by Williams upon 90-day notice prior to the scheduled delivery
date, if its customers or other factors beyond its control make such
adjustment necessary. At the present time, therefore, the orders can be
considered "firm" as to quantities and delivery dates only with respect to
units scheduled for shipment in the first quarter of 1998.
The Company also contracted with Williams for project management and
engineering design and support services relative to the Williams Telemetry
network on a fee-for-service basis.
Outlook
The statements contained in this Outlook are based on current
expectations. These statements are forward looking and actual results may
differ materially.
Management believes that, as deregulation of natural gas and other
utilities continues, multiple utility suppliers will be serving a given city
or neighborhood. Consequently, it will become more difficult and time
consuming for utility companies to read meters as they will generally not be
the provider to every user in the city or neighborhood which will increase the
cost effectiveness of reading utility meters remotely. Management believes
that the Williams Telemetry Network, described elsewhere in this Prospectus,
is a viable alternative to the current practice of manually reading meters.
Additionally, management believes that William's position as an affiliate of a
major transporter of natural gas in the United States positions it to
successfully market its telemetry network, which currently is designed to use
collector and repeater radios supplied by the Company to gather and transmit
data.
Management believes that the Company's relationship with Williams will
result in significant increases in sales of its radio products for use in the
Williams Telemetry Network. Significant increases in sales, however,
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would lead to working capital requirements which would not be provided for
from funds generated by the initial sales of the products. The Company is
currently investigating the prospects of a private placement and ultimately a
secondary public offering to meet its working capital and operating needs.
However, there is no assurance that sufficient capital or any capital will be
raised from such endeavors.
Additionally, management estimates the Company's current manufacturing
facilities would not be adequate to handle substantial increases in demand for
its products. Management is currently looking into two solutions: (1)
out-sourcing a portion of the manufacturing overload or, (2) expanding its
in-house manufacturing capacity through leasing or purchasing additional
building space and equipment. If a portion of manufacturing is out-sourced the
Company may lose some control over the following areas; cost, timeliness of
deliveries and quality. However, by out-sourcing a portion of its
manufacturing, the Company could avoid delays and expense associated with the
expansion of its own facilities. The magnitude of any expansion of the
Company's manufacturing capabilities that is required would be a direct
function of the sales increase and manufacturing overload, both of which are
unknown at this time. However, management estimates that between $2 million
and $5 million may be required for this purpose. At the present time, the
Company does not have any commitment for or source of these funds.
The Company anticipates an increase in revenues from additional contracts
for design and development services, although no new contracts have been
signed. It is management's intent to model such contracts after the KME
contract, discussed elsewhere in this Prospectus, whereby the Company receives
fees during the early stages of the agreement and is entitled to royalties or
gross profit splits based upon its customer's sales of products into which the
technology has been incorporated. It is management's intent that the fees
received will cover the Company's costs. However, these fixed fee arrangements
may not cover all of the Company's costs incurred in fulfilling any such
contract. Royalties or gross profit splits resulting from sales of products
using the technology developed under the contract would enhance the Company's
profitability if and when received.
In anticipation of obtaining additional design and development contracts,
management must continually recruit and hire additional RF (radio frequency),
software, firmware and digital engineers. It is extremely difficult,
time-consuming and expensive to find engineers qualified in those fields.
There is no assurance the Company will be able to locate and hire such
qualified engineers. Associated with the hiring of each engineer is the need
for test and development equipment, software and work stations, which
increases the Company's cash requirements.
In summary, while management is cautiously optimistic about the Company's
future, it is fully aware that anticipated revenue increases from product
sales, design and development contracts and royalty income are by no means
assured, and that if such increases do materialize, the requirements for
capital are substantial, for which there is no present commitment.
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<PAGE>
BUSINESS
Background
The Company and its subsidiaries are principally engaged in the design,
development and manufacture of wireless communications technology, systems and
products. The Company also provides contract manufacturing services to the
electronics and wireless communications industry.
Prior to its acquisition of DRCC in February 1997, a substantial majority
of the Company's revenues were derived from sales of SecuriKey(R), a small
hardware device that prevents the unauthorized use of software protected by a
SecuriKey system, and related software products. At the time of its
acquisition by the Company, DRCC was in the process of developing a number of
proprietary wireless communications products, and provided wireless design,
development and manufacturing services on a contract basis. With the
acquisition of DRCC, the Company's business focus shifted to the design,
development and manufacture of wireless communication technology, systems and
products, although the Company continues to provide contract manufacturing
services. Sales of SecuriKey products did not contribute materially to
revenues in 1997 (approximately 5%), and that product line was sold by the
Company in January 1998.
Wireless Communications Products
Electronic communications devices take many forms, including mobile
telephone, broadcast television and radio products. The central problem in
modern communications is developing the means to transmit large volumes of
data over long distances without losing or distorting the information in the
most cost effective manner. Wireless communications, using radio transmission
rather than transmission over a wire or cable, is an increasingly important
segment of the communications industry.
As illustrated below, wireless communication devices fall under various
names (television, radio, cellular, microwave, among others), but all utilize
the electromagnetic spectrum. This spectrum is the range of all
electromagnetic waves differentiated according to the frequency of the
particular wave. An electronic communication device is usually named according
to the wave frequency at which the device operates. Frequency is the number of
cycles per second in a wave and is measured in hertz (Hz). One hertz is one
cycle per second. The radiowave spectrum ranges from a few kilohertz (Khz) to
40 gigahertz (Ghz), or 40,000 megahertz (Mhz). Portions of the radiowave
spectrum are dedicated to specific uses, as follows:
Wireless Device Frequency
- ---------------- ---------
AM radio 535 - 1635 Khz
Analog cordless phones 44 - 49 MHz
TV channels (VHF) 54 - 88 MHz
FM radio 88 - 108 MHz
TV channels (VHF) 174 - 216 MHz
TV channels (UHF) 470 - 806 MHz
RF wireless modems 800 MHz
Cellular phones 806 - 890 MHz
Digital cordless phones 900 MHz
Personal communication services 900 - 929 MHz
Nationwide pagers 929 - 932 MHz
Two-way pagers 932 - 940 MHz
Satellite phones uplink 1610 - 1626.5 MHz
Satellite phones downlink 2483.5 - 2500 MHz
Satellite TV, large dish 4 - 6 GHz
Satellite TV, small dish 11.7 - 12.7 GHz
Wireless "cable" TV 28 - 29 GHz
Existing Products
The Company's wireless communications products are designed to transmit
and receive voice, video and data in applications where a hard-wired system is
cost prohibitive or simply more expensive. The Company's
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<PAGE>
principal line of existing products is a series of low speed digital radios
(LSDRs) and related devices. These products are suitable for use in a
telemetry network which has been developed by Williams Wireless, Inc., doing
business as "Williams Telemetry Services" (hereinafter "Williams"), a
subsidiary of The Williams Companies, Inc. The initial sales of products in
this line were made to Williams in September 1997.
The Williams Telemetry Network is a fixed wireless network intended by
Williams principally for use by utility companies to collect gas, water and
electric usage data, and to closely monitor usage on a "real time" basis when
required. A wireless monitoring unit mounted on a meter or other device to be
monitored gathers data and transmits it to a local WinGate(TM) collection
point, which then relays the data to a centralized operating center. While
automated meter reading is the most immediate potential application for the
Williams Telemetry Network, its possible uses also include alarm monitoring, a
reliable back up to telephone reporting and other, similar applications.
As described elsewhere in this Prospectus, the Company's initial sales of
wireless communications products occurred in September 1997, and sales to date
have been extremely limited. A number of the Company's wireless communications
products were introduced as part of the Williams Telemetry Network for the
first time in mid-September 1997 at the Automated Meter Reading Association
Trade Show in Chicago. At the present time, Williams has installed its
telemetry system with a number of national companies for testing under normal
commercial conditions, and the Company has been advised that Williams intends
to launch commercial operations of the service in the third quarter of 1998.
In December 1997, the Company received its initial orders for equipment under
a Technical Development and Marketing Alliance Agreement with Williams. See
"Contract Design and Development" below. The orders cover products, described
below, designed and manufactured by the Company and used in the Williams
Telemetry Network. The delivery schedule established by the orders calls for
shipments of approximately $2.25 million in the first quarter of 1998,
increasing to approximately $3.1 million per quarter in each of the last three
quarters of 1998, and with significant increases in shipments scheduled during
calendar 1999. Total sales under these orders, if completed in full by the end
of 1999, would be approximately $70 million. Order quantities and shipping
dates in any calendar quarter, however, are subject to adjustment by Williams
upon notice 90-days prior to the first scheduled delivery in the quarter if
customer demand or other factors beyond Williams' control make such adjustment
necessary. At the present time, therefore, the orders can be considered "firm"
as to quantities and delivery dates only with respect to units scheduled for
shipment in the first half of 1998. The Company believes that shipments in the
first three quarters of 1998 will be used primarily in Williams' test
installations, and that shipments, if any, in the fourth quarter of 1998 and
thereafter will be primarily for commercial installations.
Products which the Company has developed for use in and have been
purchased for use and testing by Williams include devices called Telemetry
Interface Modules, or TIM(TM)s, which operate at the point of data
origination. For example, in the Williams Telemetry Network the TIM(TM)s units
are designed to be mounted on meters and other devices to be monitored. The
function of these TIM(TM)s is to gather and transmit data to a data collection
and forwarding point called a WinGate(TM) unit, which includes a wireless
receiver/transmitter. The WinGate(TM) unit forwards the data to an operating
center via a wide area network. Once the data arrives at the operating center,
it is recorded and stored in a computer system.
The TIM(TM)s are short range (up to 800 feet) transmitters which transfer
data at rates up to 9600 bits per second, and function over the entire
industrial temperature range (-40oF to 185oF). The Company has two TIM(TM)s
models available, which differ primarily in frequency coverage, modulation
type and power.
The WinGate(TM) units utilize Low Speed Digital Radio ("LSDRs") which are
matched to the TIM(TM)s units from which they receive data. In this context,
"low speed" refers to speed of transmission which, for the Company's LSDRs,
ranges from 1200 to 9600 bits per second ("bps"). By contrast, the Company's
High Speed Digital Radio (HSDR) now under development, which is discussed
below under "Proposed Products", transmits at speeds between 2 million and 4
million bps (2Mbps to 4Mbps). The Company presently has a number of LSDR
models available, two of which (the LSDR 100 and the LSDR 300) have been sold
to Williams for use and/or testing in the Williams Telemetry Network. Like the
TIM(TM)s units, the various LSDR models differ primarily in frequency
coverage, modulation type, range and power.
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<PAGE>
The Company's LSDRs are designed to provide a wireless communication link
for multiple locations, with a range of up to 35 miles under "unobstructed"
line of sight conditions. The products are intended for use primarily in
remote monitoring systems in which data must be transmitted from multiple
locations and collected at one central location, e.g., to monitor data such as
capacity, temperatures and flow rates from underground or above ground fuel
tanks and oil and gas pipeline meters. Radios can be spread out over numerous
locations to transmit data large distances within a line of sight and the data
will be collected and processed in one central location for processing. Data
and power requirements for the radios are low, allowing the radios to run on
battery or solar energy. LSDR communications do not require a license from the
FCC and there is no FCC restriction on the type of data being transmitted.
An important feature of certain of the Company's LSDR products involves
the use of spread spectrum (meaning a wide frequency bandwidth) solutions to
facilitate the wireless transmission of data. Spread spectrum wireless devices
are required to modulate and demodulate a signal that is "spread" across a
wide bandwidth to reduce interference and provide enhanced security. "High
power" systems (from 0.10 to 1.0 watts) which operate in the ISM (Industrial,
Scientific and Medical) bands (902 - 928 MHz, 2400 - 2483.5 MHz, and 5725 -
5850 MHz) can only use spread spectrum techniques. Under Part 15 of the FCC
Telecommunications Code, these ISM bands do not require the customer to pursue
costly and time consuming FCC licensing approval and eliminate usage charges
involved with transmitting data via cellular networks. Thus, they are
desirable for many wireless applications, including telemetry systems for use
in data collection, high-speed wireless communication links between buildings
on corporate and other campuses, wireless speaker connections and other
peripheral applications.
Antenna Products: In November 1997, the Company acquired certain business
asset of Austin Antenna, Ltd., including the name "Austin Antenna", and the
outstanding stock of a corporation related to Austin Antenna which the Company
now operates as a wholly owned subsidiary under the name Austin Antenna, Ltd.
The acquired entities and assets were primarily employed or engaged in the
design and engineering of antenna products for various industries and
customers, including the Company. The Company intends to continue the antenna
engineering and design activities previously conducted by the acquired
entities. The Company does not expect antenna products to contribute
materially to is consolidated net sales or income in the foreseeable future.
Proposed Products
The Company currently has a number of products in various stages of
development, the two most significant of which are a High Speed Digital Radio
and a Low Cost Spread Spectrum Radio.
High Speed Digital Radio (HSDR): The Company has developed a
pre-production working prototype High Speed Digital Radio. HSDR can be used as
a wireless link to transmit digitized information (data, voice or video) to
and from locations within a "line of sight" at high speeds (i.e., up to
2.048Mbps). This transmission rate is faster than "T1" wired lines at the
present time. T1 is a data transmission standard at which 1.544 megabits are
transmitted per second. Furthermore, HSDR is a private network so users avoid
the access delays caused by excessive traffic and high costs of using T1
lines.
HSDR technology can be adapted to a variety of applications, depending
upon the user's communication requirements. One HSDR application for data
sensitive companies is to set up data links to off-site data storage and
back-up facilities which are capable of handling large volumes of information.
This application provides a user with an inexpensive real time back-up system
in the event of a disaster or other malfunction to the main or primary line of
transmission.
HSDR also can be used as a "short hop" teleconferencing and/or
video-conferencing system. The private network can connect two or more line of
sight locations with telephone service and/or video service allowing unlimited
access and usage with the cost of local and long distance telephone charges.
The installation of a private communication link is very cost effective
because of the low installation cost and lack of additional usage charges.
Moreover, HSDR can be used to establish a wireless Local Access Network (LAN)
to interconnect multiple computers that need to share information.
HSDR operates at frequencies classified under Part 15 of the Federal
Communications Commission ("FCC") Telecommunication Code, and, as a result of
this classification, no license is required nor is there any restriction on
the type of data being transmitted.
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<PAGE>
Low Cost Spread Spectrum Radio (LCSSR): The Company has developed
proprietary technology for a low cost, spread spectrum radio which the Company
believes can be sold in quantity for less than $20 per radio. As a result, the
LCSSR has the potential of substantially reducing the cost of such consumer
products as cordless telephones, wireless speakers, wireless telephone jack
extensions, wireless keyboards, wireless printer connections, security devices
and wireless toys. An LCSSR device was the principal product involved in the
Company's design and development contract with Kyushu Matsushita Electric Co.,
discussed below under the caption "Contract Design and Development".
Contract Design and Development
The Company's business has included providing engineering, design and
development services to client specifications on a fee for services basis. At
the present time, the Company is not seeking design and development service
contracts except in "partnering" situations in which the Company would have an
ownership interest in the products and/or technology which are the subject of
the contract. The two most significant such contracts, entered into in 1997
with Kyushu Matsushita Electric Co. and Williams Wireless, Inc., are described
below.
Kyushu Matsushita Electric Co. Contract: In April 1997, DRCC entered into
a contract with Kyushu Matsushita Electric Co., Ltd. ("KME") to develop low
cost spread spectrum radio technology for use in certain KME products. Under
the terms of the contract, KME agreed to pay the Company $1,296,000 for its
services in three installments of $432,000, subject to the Company's
satisfaction of certain performance goals. The Company received the initial
installment in May 1997, and the second installment and one-half of the third
installment in September 1997, following KME's evaluation of certain
prototypes furnished by the Company. The Company expects to receive the second
half of the third installment in the first quarter of 1998, following KME's
evaluation of final working samples.
As part of its development contract with KME, the Company granted KME a
world-wide, non-exclusive license to use or authorize the use of any patents,
copyrights, technical know-how and other intellectual property rights embodied
in the Company's LCSSR technology in the manufacture of KME products, and
agreed not to license others to use technology which is developed under its
contract with KME in connection with any telephone-related products for a
period of two years from the first shipment of KME products using the
technology. In consideration for these rights and the Company's services, KME
agreed to pay royalties to the Company on sales of KME products using the
technology above a prescribed minimum amount of sales for a period of two
years from the initial shipments of any such products. No royalty is paid on
sales of the first 600,000 units of product using the technology. A royalty of
$1.00 per unit of product sold is payable on sales of units 600,001 through
1,000,000. Thereafter, the royalty is $.50 per unit on all units sold until
the second anniversary of the date of the first sale of products using the
technology. The Company is unable to predict the amount of any royalties which
it may receive under this license, or whether it will receive any royalties.
Williams Wireless, Inc. Contract: In September 1997, the Company entered
into a Technical Development and Marketing Alliance Agreement (the "TDMA
Agreement") with Williams Wireless, Inc., pursuant to which the Company has
agreed to assist and cooperate with Williams in developing and manufacturing
"Telemetry Radio Products", which are generally defined in the agreement as
wireless radios for transmitting and/or receiving data as part of the Williams
Telemetry Network. The TDMA Agreement, which followed a letter of
understanding entered into by the parties in June 1997 and a relationship
between the companies which pre-dated the letter of understanding in the
course of which the Company developed a "proof of concept" radio for use in
Williams' information gathering network, was amended and restated in December
1997 in connection with Williams issuance of its initial orders for equipment
under the Agreement, as described under the caption "Existing Products" above.
Under the TDMA Agreement, as amended and restated in December 1997,
Williams may, but is not required to, contract with the Company for specific
system engineering and design services to create Telemetry Radio Products. The
Company would have the exclusive right to manufacture any Telemetry Radio
Products which were designed exclusively for use in Williams' network, so long
as the Company met prescribed quality and other performance criteria. Williams
would "own" such products, but the technology used in creating the
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products (including components that the Company has patented or for which it
holds a copyright, and all drawings, specifications, prototypes and circuit
boards relating thereto) would remain the property of the Company, provided
that Williams would have a royalty-free license to use the technology in its
telemetry network. The Company also has a non-exclusive right to market
Williams' information gathering service on terms mutually agreeable to the
parties, based upon a "standard" Williams marketing agreement which is in the
process of development.
As indicated above under the caption "Existing Products", the Company has
designed and developed a number of LSDR products and related devices that have
been sold to Williams for use in the Williams Telemetry Network. While these
products meet the definitions of "Telemetry Radio Products" used in the TDMA
Agreement, since they were developed outside the Agreement, the Company
retains all property rights to such products, subject to Williams' right to
use the technology associated with the products in its telemetry network.
Sales prices to Williams for existing products were negotiated between the
Company and Williams. Such terms relating to further products which Williams
may call upon the Company to develop under the TDMA Agreement would be
negotiated at that time.
Contract Manufacture and Assembly
The Company performs assembly and manufacturing services for other
manufacturers and vendors of medical, communications, computer graphics and
consumer electronic products at its Salt Lake City manufacturing facility. In
the current fiscal year, the Company has provided manufacturing and assembly
services for such customers as Alton Dean, Infinity Group, Evans & Sutherland,
Wavephore and TSI. In the first nine months of 1997, revenues from contract
manufacturing and assembly services represented approximately 33% of the
Company's total revenues.
Markets and Distribution
The principal markets for the Company's wireless communications products
are original equipment manufacturers ("OEM's") which utilize the Company's
products and technology in their own equipment and products, and value added
resellers and systems integrators ("VAR/Integrators") which use the Company's
products, along with hardware and software from other vendors, in systems
which they design and sell to meet their customers' data processing,
transmission, collection, storage, security and other related needs.
Marketing to OEM's and VAR/Integrators involves establishing and
increasing prospective customers' awareness of the Company's products and
technology. This is accomplished through direct mail and print advertising,
and through promotional activities which include direct contacts with trade
journal editors, industry analysts and other opinion makers. More direct sales
activity includes research to identify specific OEM's and VAR/Integrators
whose products and services make them potential buyers of the Company's
products and technology, and direct sales efforts to introduce the Company to
the potential customers. Early contacts, if successful, are likely to involve
very detailed technical discussions between the Company's and the prospective
customer's engineers and researchers. The Company's objective at this stage is
to demonstrate how its existing products and technology and/or its capacity to
custom design and develop products can benefit the customer. The prospective
customer's objective, of course, is to find sources of such products and
technology.
The Company also markets its wireless products through a manufacturer's
representative. This is a relatively new phenomenon for the Company since it
only recently reached the point at which it has had fully developed products
commercially available. Although it has only one representative at the present
time, the Company expects to add additional representatives as its product
line expands.
The Company's contract design and development capabilities are an
integral part of its overall product and technology marketing effort. All of
the Company's design and development contract revenues in 1997 have resulted
from contracts in which technology was customized and/or further developed to
meet its client's specific product needs, with the Company generally retaining
ownership or partial ownership of technology developed under the Contract and
the right to manufacture and sell to others products which employ that
technology but which are outside the client's applications. As indicated
above, the Company is not seeking design and development contracts on a purely
"fee for services" basis at the present time.
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The Company's marketing activities as relate to its contract
manufacturing and assembly capabilities have been limited, and consist
primarily of direct selling efforts directed to past and existing customers,
and to prospective customers who contact the Company or are located in the
Company's immediate geographic area. In the foreseeable future, the Company
expects to concentrate its available marketing resources in the marketing of
proprietary products and technology, rather than its contract manufacturing
and assembly service capabilities.
Competition
The Company has a number of current competitors in all aspects of its
business, many of which competitors have substantially greater financial,
marketing and technological resources than the Company, and which include such
industrial giants as Panasonic, Motorola, Sony and AT&T. The Company intends
to compete with these companies by concentrating on certain product or service
niches within the overall market. However, most of the Company's competitors
offer products which have one or more features or functions similar to those
offered by the Company, and many have the resources available to develop
products with features and functions, competitive with or superior to those
offered by the Company. There can be no assurance that such competitors will
not develop superior features or functions in their products or that the
Company will be able to maintain a lower cost advantage for its products.
A key element of the Company's competitive strategy is to align itself
with major manufacturers by developing proprietary products or technology that
can be incorporated into its "partner manufacturers'" products. In addition to
being compensated for its services relative to the development of the
partners' products, the Company would share in the success of products which
used the Company's component or technology through a royalty or similar
arrangement. The Company believes that its agreements with KME and Williams,
described above under the caption "-- Contract Design and Development",
illustrate the manner in which the Company can "partner" with much larger,
established companies to access mass markets for its proprietary wireless
communications products and technology.
Facilities
The Company's executive offices and principal administrative offices and
manufacturing facilities are located in approximately 20,079 square feet of
space at 150 Wright Brothers Drive in Salt Lake City, Utah, which is leased at
a monthly cost of $11,266 for base rental and allocable common area
maintenance charges. The Company also pays for certain utility expenses. The
lease for these premises expires May 31, 1998.
The Company's principal engineering facility is located in the Utah
Valley Business Park, American Fork City, Utah. This facility is leased at a
monthly cost of $9,849 for base rental and allocable common area maintenance
charges. The Company also pays for certain utility expenses. The Company's
lease for the facility expires June 30, 1998. This facility, which occupies
approximately 9,685 square feet, was leased by DRCC prior to the Company's
acquisition of DRCC, and housed DRCC's manufacturing facilities. After the
acquisition, the Company consolidated DRCC's manufacturing operations with
those of the Company at the Company's Salt Lake City facility.
The Company also maintains small offices in Overland Park, Kansas and in
Goric, New Hampshire.
The Company believes that its facilities are satisfactory for its present
scale of operations. The Company presently is considering a number of options
to increase its manufacturing capacity, including, at a minimum, consolidating
its existing manufacturing and engineering facilities into a single larger
facility during 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Outlook".
The Company owns most of its manufacturing equipment, and obligations
under existing equipment leases are not material. In connection with any
expansion of its manufacturing facilities, however, the Company is likely to
lease, as well as to purchase, additional equipment and, in December 1997,
ordered approximately $650,000 of test equipment and development simulation
software which is expected to be delivered in the first half of 1998.
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Employees
As of December 31, 1997, the Company had 82 employees, of whom one was
part-time. Of these employees, 14 were classified as executive or
administrative personnel; 23 engineering; 33 production and manufacturing,
including contract manufacturing; and 12 sales and marketing. The Company's
employees do not belong to a collective bargaining unit, and the Company is
not aware of any labor union organizing activity. The Company considers its
employee relations to be satisfactory.
Patents and Intellectual Property
The Company believes that reliance upon trade secrets, copyrights and
unpatented proprietary know-how in conjunction with the development of new
products is at least as important as patent protection in its business since
most patents provide fairly narrow protection, and are of limited value in
areas of rapid technological change. Further, patents require public
disclosure of information which may otherwise be subject to trade secret
protection. The Company presently owns two United States patents covering
antenna technology, which were acquired in the Austin Antenna acquisition, and
has a United States patent application pending which covers "spread spectrum"
demodulation technology. "Spread spectrum" communication is a method for
transmitting and receiving coded information which is resistant to
interference due to the fact that the transmission is spread over a large
bandwidth. This method requires, however, that both the transmitter and the
receiver have the same spreading code (i.e., a pre-determined, fixed pattern)
used to spread the information over the larger bandwidth. The purpose of the
technology covered by the Company's patent application is to recover and
remove the spreading code from a transmission signal, and thus obtain the
original information, in a simpler, less expensive manner.
Under the terms of a litigation settlement entered into with a former
co-venturer, the Company has agreed that its former co-venturer is entitled to
full and equal ownership with the Company, of the spread spectrum demodulation
technology covered by the patent application, including the right to
incorporate, develop, utilize and exploit the technology. Any uses or products
developed or derived from such technology, however, shall be the sole property
of the party which develops or derives such uses or products. In addition, if
one of the parties elects to prosecute the patent application prior to final
acceptance or rejection by the U.S. Patent Office, failure by the other party
to contribute equally to the costs of prosecuting the application result in
the loss of its rights to the technology. At this time, the Company does not
have any plans to prosecute this patent application, and is unaware of any
plans by its former co-venturer to prosecute the application.
Generally, the Company enters into confidentiality and invention
assignment agreements with its employees, and includes provisions in contracts
with its development contract customers intended to protect its proprietary
technology, "know how" and other trade secrets. The Company also claims
copyright protection for its circuit boards and software. However, there can
be no assurance that the Company's proprietary technology will be protected or
remain a trade secret, or that others will not develop or propose similar
technology. See "Risk Factors -- Intellectual Property Rights".
The Company does not presently own any trademarks. It intends to pursue
registration on trademarks associated with key products in the future. See
"Risk Factors -- Intellectual Property Rights".
Legal Proceedings
Although action has not been initiated, the Company's former Chief
Financial Officer has threatened litigation against the Company following his
resignation from that office and as a director of the Company in October 1997.
The resignation was the result of a dispute over compensation involving, among
other things, a claim by the former officer and director that the Company had
agreed to grant him options to purchase 275,000 shares of the Company's Common
Stock at a price of $2.00 per share in connection with his employment, and had
later disaffirmed such obligation. Because of the number of shares involved in
this unasserted claim, and the difference between the current market price for
the Company's Common Stock and the exercise price of the options claimed, the
expense to the Company for financial reporting purposes would be material if
the former officer should initiate and prevail in litigation over these
claims. The Company intends to vigorously defend any such action.
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MANAGEMENT
Executive Officers and Directors
The current executive officers and directors of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David D. Singer .................. 48 Chairman of the Board of Directors, President, Chief
Executive Officer and a Director
William E. Chipman, Sr. .......... 52 Chief Financial Officer and Director of Mergers and
Acquisitions
Philip A. Bunker ................. 45 President of DRCC and a Director
Donald I. Wallace ................ 53 Vice President -- Telemetry and SCADA Division
Stuart Biddulph .................. 59 Vice President -- Engineering
Eric Lee Williams ................ 33 Vice President -- Manufacturing
Brian W. Pettersen ............... 40 Director
Thomas E. Sawyer, Ph.D ........... 65 Director
George Denney .................... 60 Director
</TABLE>
David D. Singer - Mr. Singer was appointed President of the Company in
November 1996, and became a Director in February 1997. From 1977 to 1983, Mr.
Singer was President of CSL Energy Controls, Inc., a company specializing in
third party energy conservation. From 1983 to 1985, Mr. Singer was a special
consultant to the General President of the Sheetmetal Workers Association.
From 1985 to 1988, Mr. Singer was Vice President First Municipal Division,
Bank One Leasing Corporation. From 1989 to 1994, Mr. Singer was President of
Highland Energy Group. From 1991 to 1996, Mr. Singer was employed by Navtech
Industries, Inc., an electronic assembly company, as Vice President Sales and
Marketing from February 1994 to July 1995, and as President and Chief
Operating Officer from July 1995 to July 1996.
William E. Chipman, Sr. - Mr. Chipman has served as Director of Mergers
and Acquisitions for the Company, with the primary responsibility for seeking
acquisition opportunities, and negotiating and implementing acquisitions by
the Company, since the DRCC acquisition, and has served as acting Chief
Financial Officer of the Company since October 22, 1997. Mr. Chipman was the
Chief Financial Officer and a director of DRCC from August 1994 to February
1997 when the Company acquired DRCC. From 1992 to 1994, Mr. Chipman served as
CFO of MHB Technology, Inc., a technology holding company specializing in
contract manufacturing, security access products and high speed modems.
Philip A. Bunker - Mr. Bunker was a co-founder, and is President and
Chief Executive Officer, of DRCC, and has served as a Director of the Company
since its acquisition of DRCC. From 1982 to 1986, Mr. Bunker was Vice
President of CAECO, Inc. ("CAECO"), a semiconductor circuit design software
company. While at CAECO, Mr. Bunker and his engineering team developed a
computer-aided program used in advanced integrated circuit design programs
such as Motorola's 68020 and 68030 and National's 32000 microprocessors. CAECO
was subsequently sold to Mentor Graphics. From 1986 to 1991, Mr. Bunker was
the President of Desert Digital, a company that was acquired by DRCC in 1992.
Stuart Biddulph - Mr. Biddulph is the Company's Vice President of
Engineering. He was Vice President of Engineering of DRCC prior to its
acquisition by the Company. Prior to joining DRCC in June 1996, Mr. Biddulph
was Director of Engineering at Comsat RSI Plexus Corporation, a position held
since 1995. From 1989 to 1995, Mr. Biddulph was a Project Manager for Sattel
Technologies, Inc.
25
<PAGE>
Donald I. Wallace - Mr. Wallace was appointed Vice President -- Telemetry
and SCADA (i.e., Systems Control and Data Access) Division of the Company in
January 1998. Prior to his employment by the Company, Mr. Wallace was
employed, from December 1995, as President of PrimeLink, Inc., a Lenexa,
Kansas company which Mr. Wallace founded to engage in the development and
marketing of wireless telemetry products for remote meter reading. Between
September 1991 and November 1995, Mr. Wallace was employed as the President of
Arcom Control Services, Inc., which developed and marketed computer-based
monitoring and control products for the oil and gas industry.
Eric Lee Williams - Mr. Williams was appointed Vice President --
Manufacturing of the Company in January 1998. Prior to joining the Company,
Mr. Williams was employed from June 1995 to January 1998 as a Manager of
Manufacturing by 3Com Corp., a broad based supplier of networking systems and
related products, including routers, switches, modems and remote access and
telephony products. Prior to his employment by 3Com, Mr. Williams was employed
as General Manager of Navtech Industries, Inc. from December 1992 to June
1995.
Brian W. Pettersen - Mr. Pettersen has served as a Director of the
Company since February 1996, and was elected a member of the Audit Committee
of the Board in February 1998. Mr. Pettersen served as Executive Vice
President of the Company from February 1996 to December 1997. From 1980 to
1992, Mr. Petersen served as Trading Manager for Covey & Co., a retail full
service securities brokerage firm. From 1992 to 1995, Mr. Pettersen served as
a Wholesale Trader for the Paulson Investment Company. From 1995 to the
present, Mr. Pettersen has served as President of Utah Internet Services, a
full service Internet provider.
Thomas E. Sawyer - Dr. Sawyer was elected a director and member of the
Audit Committee of the Board of Directors of the Company in February 1998.
Since November 1996, Dr. Sawyer has served as Chairman of the Board Emeritus,
and is a member of the Audit and Finance Committees, of NACT
Telecommunications, Inc., a publicly-held company (Nasdaq: NACT) based in
Orrem, Utah, which designs, develops and manufactures hardware and software
elements for advanced telecommunications switching platforms with integrated
applications software and network telemanagement capabilities. Dr. Sawyer was
a founder of NACT and served as its Chairman and Chief Executive Officer from
October 1988 to March 1996. Dr. Sawyer also the Chief Technology Officer,
director and member of the Executive Committee of GST Telecommunications,
Inc., a publicly owned (AMEX: GST) provider of a broad range of integrated
telecommunications products and services and the parent corporation of NACT,
which is based in Vancouver, Washington.
George Denny - Mr. Denney was elected a director of the Company in
February 1998. Mr. Denny founded Cole-Haan in 1975, and has served as Chairman
of Cole-Haan since its inception. Cole-Haan was acquired by NIKE, Inc. in 1988.
Headquartered in Yarmouth, Maine, Cole-Haan designs and sells fine dress and
casual footwear and accessories.
Other Significant Employees
In addition to its Executive Officers and Employees, the Company believes
that the following employees will make significant contributions to the
Company:
David Andrus .............. 44 Director of RF Engineering
Jeffrey G. Ballif ......... 31 Manager of Digital and Software Services
Lance King ................ 36 Director of Marketing
David Andrus - Mr. Andrus joined the Company has Director of RF
Engineering in April 1997. Prior to joining the Company, Mr. Andrus owned and
operated Innovatronics Engineering, a Radio Frequency and Data Communications
Consulting Firm which he formed in 1987.
Jeffrey G. Ballif - Mr. Ballif was a co-founder of DRCC and, since 1992,
has been one of its principal project leaders. He has directed and/or
participated in a variety of embedded system hardware and software design
projects for the DRCC and, since the Company's acquisition of DRCC in February
1997, for the Company. Projects and responsibilities have included: modem
firmware modifications, fax modem debugging, telephone line switching product
design, digital modem design and firmware data modems to meet European
requirements. Prior to 1992, Mr. Ballif was an engineer at Desert Digital.
26
<PAGE>
Lance King - Mr. King is the Company's Director of Marketing, and was the
Director of Marketing of DRCC prior to its acquisition by the Company. Mr. King
served as Director of Marketing of MHB Technology, Inc. from 1992 to 1994,
prior to which he was Vice President of Sales and Marketing for Intelligent
Modem Corp.
Corporate Governance Standards
The Company intends to apply to have its Common Stock approved for
quotation on The Nasdaq Stock Market, Inc. SmallCap Market following the date
of this Prospectus. Issuers whose securities are quoted on the SmallCap Market
are required to comply with certain corporate governance standards, including
a requirement that at least two directors of the issuer be "independent"
directors, and that the issuer have an audit committee, a majority of the
members of which are "independent" directors. The Company believes it is in
compliance with these requirements.
Compensation of Executive Officers
David D. Singer, the Company's Chairman, President and Chief Executive
Officer, has been functionally employed in those positions since October 1996,
although he was not formally appointed to those positions by the Board of
Directors until February 1997. Mr. Singer's current annual salary is $120,000.
He does not have a fixed term employment contract with the Company.
The table below sets forth information concerning compensation paid in
1997 to Mr. Singer. Except as indicated in the table below, no executive
officer of the Company received compensation of $100,000 or more in 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------
Other Annual
Compensation
Name and Principal Position Year Salary ($) Bonus ($) ($)
- -------------------------------- ------ ------------ ----------- --------------
<S> <C> <C> <C> <C>
David D. Singer, ............... 1997 $120,000 -0- (2)
President(1)
<CAPTION>
Long Term Compensation
-----------------------------------------
Awards Payouts
--------------------------- ------------
Securities All
Restricted Underlying Other
Stock Options/ LTIP Compen-
Name and Principal Position Award(s)($) SARS(#) Payouts($) sation($)
- -------------------------------- ------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
David D. Singer, ............... -0- 300,000 -0- 225,000(3)
President(1)
</TABLE>
- ------------
(1) Mr. Singer was acting President and Chief Executive Officer of the Company
from October 1996 to February 3, 1997, when he was formally appointed
President, Chief Executive Officer and Chairman of the Board of Directors.
(2) Mr. Singer did not receive compensation reportable as "Other Annual
Compensation" which exceeded 10% of his salary.
(3) Represents compensation expense accrued by the Company in the fourth
quarter of 1997 in respect to options granted to Mr. Singer to purchase
300,000 shares of Common Stock at an exercise price of $6.50 per share,
which was $2.25 below the fair value of such shares based on the closing
bid price of the Company's Common Stock on the OTC Electronic Bulletin
Board on the date of grant.
<PAGE>
The following tables set forth certain information regarding options
granted to Mr. Singer in 1997, and options owned by Mr. Singer at December 31,
1997:
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARs Exercise
Underlying Granted to or Base Grant
Options/SARs Employees in Price Expiration Date Fair
Name Granted (#) Fiscal Year ($/Sh) Date Value ($)
- ------------------------- ---------------- ----------------- --------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
David D. Singer ......... 300,000(1) 27.6% $ 6.50 11/10/02 1,170,000(2)
</TABLE>
- ------------
(1) The stock options are exercisable as follows: 50,000 upon grant and 62,500
each on May 10, 1998, November 10, 1998, May 10, 1999 and November 10,
1999.
(2) The Grant Date Fair Value was computed using the Black-Scholes
option-pricing model with the following assumptions: 0.0% dividend yield;
54.3% expected volatility; 5.2% risk-free interest rate; and 2.0 years
expected life of the options; with the fair value of the underlying Common
Stock deemed equal to the OTC Electronic Bulletin Board closing bid price
of $8.75 on the date of grant.
27
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and
Option/SAR Values at 12/31/97
<TABLE>
<CAPTION>
Number of Securities Underlying
Unexercised
Options/SARs at Fiscal Value of Unexercised
Shares Year-End In-The-Money Options/SARs at
Acquired (#) December 31, 1997 ($)
on ------------------------------ -----------------------------
Exercise Value
Name (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ---------- ------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
David Singer ......... -0- -0- 50,000 250,000 312,500 1,562,500
</TABLE>
For the purpose of computing the value of "in-the-money" options at
December 31, 1997, in the above table, the fair market value of the Common
Stock at December 31, 1997, is deemed to be $12.75 per share, which was the
average of the last reported trade of such shares on the OTC Electronic
Bulletin Board on such date.
Directors' Compensation
Two directors of the Company, Jonathan Rahn (who resigned as a director
in December 1997) and Brian W. Pettersen, received options in November 1997 to
purchase shares of Common Stock (25,000 shares each) at a price of $6.50 per
share in compensation for their services as directors. The Company has no
formal plan to compensate directors for their services.
28
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The Company had 10,378,974 shares of Common Stock outstanding at February
13, 1998. The following table sets forth certain information regarding the
ownership of the Company's Common Stock as of February 13, 1998, and adjusted,
assuming the sale of all Shares, to reflect such ownership by (i) each of the
Company's executive officers and directors, (ii) all executive officers and
directors as a group; and (iii) each other person known to the Company to be
the beneficial owner of more than 5% of the outstanding shares of Common
Stock.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership Adjustments for Offering
-------------------------------- -------------------------------------
Ownership
Shares Assuming the Sale
Name and Address of As of Percent Registered of All Shares
Beneficial Owner 1997(1) of Class(2) for Sale No. of Shares(1) Percentage
- --------------------------------------- ---------------- ------------- ------------ --------------- ----------
<S> <C> <C> <C> <C> <C>
(i) Directors and Executive
Officers
David D. Singer, President, Chief ..... 525,000(3) 5.0% -0- 525,000 5.0%
Executive Officer and Director
2873 South Ursula Court
Aurora, CO 80014
William E. Chipman, Sr., Chief ........ 425,870(4) 4.1% 406,495 19,375 *
Financial Officer and Director
of Mergers and Acquisitions
150 Wright Brothers Drive
Suite 560
Salt Lake City, UT 84116
Philip A. Bunker, Secretary ........... 336,416(5) 3.2% 301,416 35,000 *
and Director
946 East 880 North
Orem, UT 84057
Stuart Biddulph(6) .................... 49,041 * 39,041 10,000 *
Vice President -- Engineering
1303 N. Lakeview Drive
Provo, UT 84604
Donald I. Wallace ..................... 10,000 * -0- 10,000 *
Vice President -- Telemetry and
SCADA
5912 Edgewater Drive
Overland Park, KS 66223
Eric L. Williams ...................... -0- -0- -0- -0- -0-
Vice President -- Manufacturing
1358 McCormick Way
Salt Lake City, UT 84121
Brian W. Pettersen, Director .......... 339,000(7) 3.2% -0- 339,000 3.1%
2025 East Lincoln Circle
Holladay, UT 84124
Thomas E. Sawyer, Director ............ 10,000 * -0- 10,000 *
548 West 630 South
Orem, UT 84058
George Denney, Director ............... 40,000 * -0- 40,000 *
28 Woodside Lane
Freeport, ME 04032
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership Adjustments for Offering
------------------------------------ -------------------------------------
Ownership
Shares Assuming the Sale
Name and Address of As of Percent Registered of All Shares
Beneficial Owner 1997(1) of Class(2) for Sale No. of Shares(1) Percentage
- -------------------------------------- -------------------- ------------- ------------ --------------- ----------
<S> <C> <C> <C> <C> <C>
(ii) All Directors and Executive ..... 1,735,327(8) 16.1% 746,952 988,375 9.1%
Officers as a Group
(9 Persons)
(iii) Other 5% Beneficial Owners
Michael Lauer ........................ 2,538,000(9) 24.5% 1,967,500 570,500 5.4%
200 Park Avenue
Suite 3900
New York, NY 10166
Lancer Offshore LP ................... 1,123,750(10) 10.8% 1,023,750 100,000 *
200 Park Avenue
Suite 3900
New York, NY 10166
Lancer Partners, LP .................. 845,650(10) 8.2% 793,750 51,900 *
200 Park Avenue
Suite 3900
New York, NY 10166
Abraham J. Salaman ................... 638,250(11) 6.2% -0- 638,250 6.1%
c/o Trinity American Corp.
800 Kings Highway North
Suite 500
Cherry Hill, NJ 08034
</TABLE>
- ------------
* Less than one percent.
(1) Unless otherwise indicated, this column reflects shares owned beneficially
and of record and as to which the named party has sole voting power and
sole investment power. This column also includes shares issuable upon the
exercise of options or similar rights which are exercisable within 60 days
from the date of this Prospectus.
(2) In computing the percentage of shares beneficially owned by any person,
shares which the person has the right to acquire upon the exercise of
options or other rights held by such person within 60 days from the date
of this Prospectus are deemed outstanding. Such shares are not deemed to
be outstanding in computing the percentage ownership of any other person.
(3) Includes 50,000 shares issuable upon a presently-exercisable option
granted under the Company's 1997 Stock Option Plan (the "1997 Plan "), but
does not include options to purchase an additional 250,000 shares granted
under the 1997 Plan but which is not presently exercisable and will not
become exercisable as to any such shares within sixty days.
(4) Includes 17,316 shares issuable upon the exercise of DRCC Conversion
Options and 10,000 shares issuable upon a presently exercisable 1997 Plan
Option, but does not include options to purchase an additional 70,000
shares granted under the 1997 Plan which are not presently exercisable and
will not become exercisable within sixty days.
(5) Includes 267,369 shares owned jointly with his wife, a total of 16,731
shares owned as custodian for his minor children under the Utah Uniform
Gift to Minors Act, 17,316 shares issuable upon the exercise of DRCC
Conversion Options and 35,000 shares issuable upon a presently exercisable
1997 Plan Option, but does not include 1997 Plan Options to purchase an
additional 140,000 shares which are not presently exercisable and will not
become exercisable within sixty days.
30
<PAGE>
(6) Represents 39,041 shares issuable upon the exercise of DRCC Conversion
Options, and 10,000 shares issuable upon exercise of a presently
exercisable 1997 Plan Option. Does not include a 1997 Plan Option to
purchase an additional 20,000 shares which is not presently exercisable
and will not become exercisable within sixty days.
(7) Includes 95,000 shares owned jointly with his wife, 204,000 shares
issuable upon the exercise of options granted in December 1996 and January
1997 in recognition of past services, and an option to purchase 25,000
shares granted under the 1997 Plan.
(8) Includes 73,673 shares issuable upon the exercise of DRCC Conversion
Options, 130,000 shares issuable upon presently exercisable 1997 Plan
options, and 204,000 shares issuable upon other presently-exercisable
options granted by the Company, but does not include options to purchase
480,000 shares granted under the 1997 Plan which are not presently
exercisable and will not become exercisable within sixty days.
(9) Of these shares, 400,000 are owned by Mr. Lauer in street name; 1,123,750
are held directly and of record by Lancer Offshore, Inc.; 845,650 are held
directly and of record by Lancer Partners, LP; and 168,600 are held
directly and of record by Lancer Voyager. Mr. Lauer is believed to control
the voting and disposition of these shares by virtue of being the
investment manager for these entities. He is also the general partner of
Lancer Partners LP. None of the shares owned by Mr. Lauer and held in
street name are included in the Shares registered for sale.
(10) Michael Lauer is deemed to be an indirect beneficial owner of these
shares.
(11) Includes 363,250 shares owned directly and of record by Trinity American
Corp. (113,250 shares) and Cherry Hill, Inc. (250,000 shares). Also
includes 275,000 shares owned of record by Robsal, Inc. which Mr. Salaman
has the right to vote, but as to which he disclaims any other beneficial
interest.
(12) Includes 370,000 shares owned directly and of record by Roslyn Maxwell,
Daniel Maxwell's wife, and 150,000 shares issuable upon the exercise of
options granted to Mr. Maxwell in December 1996 in recognition of past
services.
Selling Shareholders not named above, and the number of Outstanding
Shares owned by each such Selling Shareholder prior to the offering, is set
forth in the table below. Unless otherwise indicated, all shares owned by the
Selling Shareholders listed are being registered for sale and, if sold, would
reduce the Selling shareholder's ownership interest in the Company to zero.
<TABLE>
<CAPTION>
NO. OF
NAME OUTSTANDING SHARES
- ---- -------------------
<S> <C>
Jeffrey G. Ballif ........................................... 216,255(1)
Robert Kresge ............................................... 5,460
Robert Short ................................................ 36,982
Penny Warr & Dorothy Warr ................................... 1,394
Albert Walla ................................................ 2,231
Smith Barney, Inc. custodian FBO Robert K. Beardall ......... 5,460
Russell J. Verducci ......................................... 2,231
Dennis A. Joaquin & Jeff M. Joaquin ......................... 1,673
Vito Catalano ............................................... 1,115
Ronald Z. Plotkin and Kenneth Mendelson ..................... 1,115
Hans Rech & Rose Marie Rech ................................. 3,346
Salvatore J. Galletto ....................................... 4,462
Patricia A. McDonald ........................................ 1,115
Michael McGlone ............................................. 1,115
Xiaoming Xiong .............................................. 558
Yixing Qi ................................................... 558
William Hungerville ......................................... 10,039
Timothy Alsdorf ............................................. 1,115
Frank Michel ................................................ 4,462
Michael Plaza & Carol Plaza ................................. 2,231
Barbara A. Schwartz & John H. Rech JTWROS ................... 1,115
Thomas D. Rech & Valerie Rech ............................... 1,115
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NO. OF
NAME OUTSTANDING SHARES
- ----- -------------------
<S> <C>
Jerald W. Davidson & Marian Davidson .................... 2,231
Louis H. Merzario ....................................... 1,115
Jose D. Clemente, Jr. ................................... 1,115
Andreas F. Pozzi ........................................ 1,004
Maurice Shmueli ......................................... 112
Ronald L. Piasecki ...................................... 40,000
Jeff Walker ............................................. 558
Richard T. Mallen ....................................... 11,154
Tony Mei ................................................ 558
Nelson Wai .............................................. 558
Winn B. Pierce & Janet Pierce ........................... 167
Lon R. Hunsaker Trust ................................... 167
Mike Woodard & Debbie Woodard ........................... 558
Russell Woodard & Jana Lee Woodard ...................... 335
Halina Mjerezjewska ..................................... 2,231
Howard A. Berger & Dorothy G. Berger, JTWROS ............ 6,115
XLCR, Inc. .............................................. 2,625
Gail Isaksen ............................................ 1,115
Vito Catalano, C/F Matthew Healy ........................ 557
Vito Catalano, C/F Joseph Healy ......................... 558
Ronald T. Steinberg, Robert Steinberg, Arthur Steinberg
& Mitchell Steinberg, JTWROS ........................... 1,115
Bill B. Cowser .......................................... 1,701
Craig Wise C/F Kyle Chipman ............................. 1,115
Craig A. Wise ........................................... 5,577
Loomis J. Grossman, Jr. ................................. 6,065
Joyce A. Demorest ....................................... 2,231
Henry P. Juco ........................................... 1,115
Bruce Ender ............................................. 558
Rodney M. Juco .......................................... 1,115
Pensco Pension Service for Aileen Belarmino ............. 558
Vincent P. Sharrock ..................................... 558
John F. Folan ........................................... 2,231
Paul J. Fiorello ........................................ 1,115
Pensco Pension Service for Johannes C. Kaashoek ......... 1,115
Richard A. Grossman ..................................... 6,065
Harald Justnes, Jr. ..................................... 2,231
Russel J. Redgate ....................................... 2,500
Robert L. Weeks ......................................... 211,516
Charter Small Business Network .......................... 26,771
Stephen R. Field ........................................ 1,115
William G. Schwartz ..................................... 6,065
Robert Beyersdorier, Jean Beyersdorier .................. 223
Daniel B. French ........................................ 18,195
Stephen C. Sadtler ...................................... 35,695
John C. Decas ........................................... 4,462
Decas Companies Pension Plan ............................ 3,346
Martin H. Garvey ........................................ 30,000
Craig Wise C/F Ryan Chipman ............................. 1,115
Kent Huff ............................................... 5,577
Dianne Gill ............................................. 1,115
Gibbs V. Bray ........................................... 4,183
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
NO. OF
NAME OUTSTANDING SHARES
- ---- -------------------
<S> <C>
Paine Webber CF Domina H. Suprenant ................................. 1,115
Vera Rose Burd ...................................................... 2,231
Robert Abreu ........................................................ 1,115
James Hurley ........................................................ 1,115
Dennis Saluti ....................................................... 2,231
Thomas R. Reilly .................................................... 2,231
Herbert T. Etzold ................................................... 1,115
Edward Turi & Lisa Turi ............................................. 6,693
J. P. Ranch ......................................................... 71,526
Capital Holdings Partnership ........................................ 121,815
Prudential Securities Agreement CF SRF .............................. 120
Robert L. Field & Stephen R. Field, Ttees ........................... 22,586
SRF TTEE of the Profit Sharing Plan of the Law Office of SRF ........ 1,360
Michael S. Davis .................................................... 5,577
W. H. Highleyman TTEE Sombers Assoc., Inc. Profit Sharing Plan ...... 1,115
Alix Michel ......................................................... 2,231
Jay Rosenberg ....................................................... 5,577
James A. Burke ...................................................... 1,115
Nava Sarver ......................................................... 4,462
Donald Lyman & Gloria Lyman ......................................... 3,718
Robert J. Witt ...................................................... 2,231
Chris Watkins ....................................................... 3,000
Kim D. Isaacson ..................................................... 3,135
David Politis ....................................................... 10,513
Stephen Cowser ...................................................... 139
Jack Berg ........................................................... 279
George Denny ........................................................ 40,000
Horse Trader Investments ............................................ 6,163
Kevin & Tracey Tolbert .............................................. 3,083
Stan & Beth Tolbert ................................................. 3,083
Steve Bench ......................................................... 5,000
Carmello Catalano ................................................... 2,857
Chris & Pat Chipman ................................................. 8,500
David Michael Chipman ............................................... 5,600
Sean Edward Chipman ................................................. 5,600
Virginia Chipman .................................................... 1,150
Ray Doucet .......................................................... 10,311
Karen Eamons ........................................................ 112
Jeff Fishman ........................................................ 10,000
Jeff Joaquin ........................................................ 3,000
Lyle O. & Melissa W. Keys ........................................... 2,857
Lance King .......................................................... 10,000
Art Larsen .......................................................... 167
Michael Lukes ....................................................... 1,000
Nate Morgan ......................................................... 1,000
Jeff Shields ........................................................ 1,000
Earl Stevens ........................................................ 6,164
Stephen Tarbet ...................................................... 2,000
Curtis Ward ......................................................... 2,000
Gerald Wilson ....................................................... 6,000
3172040 Canada Inc. ................................................. 606
3172066 Canada Inc. ................................................. 606
</TABLE>
33
<PAGE>
NO. OF
NAME OUTSTANDING SHARES
- ---- -------------------
3172074 Canada Inc. ............................ 606
Digital Scientific, Inc. ....................... 40,000
Seven Syndicate, A General Partnership ......... 5,000
---------
TOTAL ..................................... 1,226,133
---------
- ------------
(1) Does not include Option shares, as set forth in the table below.
Holders of DRCC Conversion Options (other than directors and executive
officers of the Company, whose ownership is disclosed in the table on pages 29
and 30), and the number of Option Shares which each has the right to purchase
upon the exercise of such Options, are as follows:
NO. OF
NAME OPTION SHARES
----- --------------
Jeffrey G. Ballif ......... 13,943
Lance King ................ 20,212
David Politis ............. 8,366
Arthur Larsen ............. 167
Bob Kresge ................ 1,116
Charlotte Hankins ......... 781
Floyd Bailey .............. 112
Glade Johnson ............. 10,597
Judy Harris ............... 558
Judy Sperry ............... 10,039
Lesie Carter .............. 112
Nancy Croft ............... 224
Rich Sawyer ............... 3,012
Rob Carrier ............... 223
Shayne Miller ............. 893
Solomone Liukaina ......... 502
Stephen Cowser ............ 27,887
Tondra Duran .............. 335
------
TOTAL ..................... 99,079
------
34
<PAGE>
PLAN OF DISTRIBUTION
Outstanding Shares will be sold for the account of Selling Shareholders,
and none of the proceeds from the sale of Outstanding Shares will be received
by the Company. Option Shares will be sold by the Company upon the exercise of
DRCC Conversion Options. If all DRCC Conversion Options were exercised, the
Company would receive $345,098 in payment for Option Shares.
Outstanding Shares may be offered and sold, and Option Shares acquired by
holders of DRCC Conversion Options may be resold, from time to time as market
conditions permit in transactions that may take place in the over-the-counter
market, including block trades, ordinary brokers' transactions, privately
negotiated transactions or through sales to one or more broker/dealers for
resale of such securities as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage
fees or commissions may be paid by these holders in connection with such
sales. The Company will bear all expenses (other than underwriting discounts
and selling commissions, state and local transfer taxes, and fees and expenses
of counsel or other advisors to the Selling Stockholders) in connection with
the registration of the Shares.
With limited exceptions in the case of resales of Option Shares, the
registration statement of which this Prospectus forms a part must be current
at any time during which a Selling Stockholder sells any Shares. Any material
changes which the Company, in its sole discretion, determines should be
disclosed prior to the sale of Shares will be set forth in an accompanying
supplement to this Prospectus (the "Prospectus Supplement"). The names of any
participating brokers or dealers, any applicable commissions or discounts and
the net proceeds to the Selling Stockholders from such sale will be set forth
in the applicable Prospectus Supplement as required.
In connection with sales of Shares pursuant to the Registration Statement
of which this Prospectus is a part, a Selling Shareholder offering such Shares
and brokers and dealers who participate in the offer and sale of the Shares
may be deemed "underwriters" as such term is defined in the Securities Act. In
addition, persons using this Prospectus in the offer and sale of the Shares
will be deemed to be engaged in a "distribution" of the Shares as such term is
defined in Regulation M under the Exchange Act, and will be required to comply
with Regulation M with respect to contemporaneous market activity and other
provisions of such Regulation.
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<PAGE>
MARKET INFORMATION
"Bid" and "asked" prices for the Company's Common Stock have been quoted
on the Nasdaq OTC Electronic Bulletin Board since October 4, 1996, prior to
which there was no public market for the Common Stock. Since October 4, 1996,
actual trading of the Common Stock has been limited and, based upon sales
figures furnished to the NASD by broker dealers who have quoted prices for the
Company's Common Stock, the total trading volume between October 4, 1996, and
December 31, 1997, was 1,137,700 shares. The table below sets forth for the
periods indicated the high and low bid quotations as furnished by the NASD.
These quotations reflect inter-dealer prices, without retail mark-up,
markdown, or commission and may not necessarily represent transactions. The
bid and asked prices for the Common Stock on February 13, 1998, were $9.06 and
$9.75, respectively.
High Low
----------- -----------
1996
----
Fourth quarter ............ $ 2.00 $ 2.00
(beginning 10/4/96)
1997
----
First quarter ............. $ 11.00 $ 2.00
Second quarter ............ $ 11.00 $ 9.00
Third quarter ............. $ 12.25 $ 8.125
Fourth quarter ............ $ 12.75 $ 8.75
1998
----
First quarter ............. $ 12.125 $ 9.06
(through February 13, 1998)
At December 31, 1997, the Company had approximately 350 beneficial owners
of its Common Stock.
Outstanding Options
At February 13, 1998, there were outstanding options to purchase a total
of 1,367,796 shares of the Company's Common Stock at prices ranging from $0.18
to $6.50 per share, and expiring between June 30, 1998, and December 17, 2002.
See "Description of Securities -- 1997 Stock Option Plan" and "-- Other
Outstanding Options".
Shares Saleable Under Rule 144
At February 13, 1998, the Company had outstanding 7,818,214 shares that
were "restricted securities" as defined in Rule 144, promulgated by the
Securities and Exchange Commission. Of these shares, 3,679,894 shares
currently are saleable under Rule 144 upon the seller's compliance with the
manner of sale and other conditions and limitations of that Rule. Rule 144
also requires that specified information concerning the Company must be
available at the time any such sale is made. Following this offering, the
Company will be subject to reporting requirements of the Securities Exchange
Act of 1934, compliance with which also will satisfy Rule 144 "public
information" requirements. Shares registered for sale by Selling Shareholders
are restricted securities which are not currently saleable under Rule 144, but
which would become saleable under that Rule by the holders of such securities
at various times in 1998.
ORGANIZATIONAL AND OTHER TRANSACTIONS
Organization, Initial Capitalization and Purchase of Assets of Micro Security,
Inc.
The Company was formed in November 1995 to acquire certain assets that had
been used in the business of Micro Security, Inc. ("Micro"). Contemporaneously
with its organization, the Company entered into an agreement to acquire the
Micro assets from Chocolate Leasing LLC ("Chocolate"), a limited liability
company that
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<PAGE>
had previously acquired those assets. The individuals principally responsible
for organizing the Company were Abraham Salaman and Lynn Dixon, and the
organizers of Chocolate were Gary Christensen, Gary Peterson, Dan Maxwell and
Brian Pettersen. Messrs. Christensen, Peterson, Maxwell, Pettersen, Salaman and
Dixon all may be considered "founders" or "promoters" of the Company. Messrs.
Salaman and Dixon had no relationship with Chocolate prior to the Company's
organization and, with the exception of Mr. Maxwell, none of the organizers of
Chocolate had a relationship with Micro prior to the time that Chocolate
acquired Micro's Assets. Mr. Maxwell had been an employee of Micro, which was a
publicly-owned corporation.
In connection with the purchase and sale of Micro assets, Mr. Christensen
received $269,000 in redemption of his interest, which exceeded the amount he
had invested by $69,000. Messrs. Maxwell, Peterson and Pettersen received
shares of the Company's Common Stock (450,000, 105,000 and 105,000 shares,
respectively) in consideration for their interests, through Chocolate, in the
Micro assets, which assets had been acquired by them during 1995 at a cash
cost of $150,000, $20,500 and $20,500, respectively, and, in the case of
Messrs. Peterson, and Pettersen, for services valued by the Company for
accounting purposes at $16,980 and $16,980, respectively. These shares were
not physically issued by the Company until April 22, 1996. For accounting
purposes, they are deemed to have been issued at various dates from April 1995
through November 1995 depending on when the recipients of such shares acquired
their respective interests in Chocolate which were transferred to the Company
in exchange for the shares.
Also in connection with the Company's organization and initial
capitalization, and the purchase of Micro assets, the Company issued 132,140
shares of Common Stock to Robsal, Inc. and Elvena, Inc., corporations
controlled by or otherwise associated with Messrs. Salaman and Dixon, for cash
($5,000) and for services valued by the Company at $38,606. The Company also
issued 320,000 shares of Common Stock to Jonathan D. Rahn, who also may be
considered a founder or promoter of the Company, for services valued by the
Company for accounting purposes at approximately $105,000, and borrowed
$275,000 from Robsal, Inc., Elvena, Inc., three other corporations controlled
by Messrs. Salaman and Dixon and/or their adult children (Cherry Hill, Inc.,
BRRD, Inc. and Stamatt, Inc.), Mr. Salaman's nephew and three other investors.
These short term borrowings and accrued interest thereon at the rate of 6%
were converted into 1,892,860 shares of Common Stock, an effective cash price
of approximately $.15 per share, which was approximately $.08 per share, less
than the value placed on the shares by the Company for accounting purposes.
With the exception of 107,140 shares issued upon the organization of the
Company, all of the aforementioned shares were issued in April 1996, following
the consummation of the Company's acquisition of assets from Chocolate. For
accounting purposes, the shares issued for services and finance fees (a total
of 542,746 shares) are deemed to have been issued in November 1995, and the
shares issued upon conversion of notes are deemed to have been issued in March
1996.
Mr. Dixon served as the initial President and sole director of the Company
until Mr. Peterson became a director, President and Chief Executive Officer,
and Mr. Rahn became Secretary/Treasurer and a director, of the Company on
November 16, 1995. Mr. Peterson remained President and a director of the
Company until October 28, 1996. Mr. Maxwell was employed by the Company in a
supervisory engineering and manufacturing position until December 31, 1997. Mr.
Pettersen served as Executive Vice President of the Company through December
31, 1997, and is a Director. Mr. Rahn served as Secretary and a Director of the
Company through December 12, 1997. None of the Company's other founders/
promoters is or has been employed by the Company.
Employment of David Singer
In October 1996, the Company entered into an agreement with David Singer
in connection with which Mr. Singer assumed the duties of Chief Executive
Officer of the Company, and the Company agreed to acquire ECA Contract
Assembly, Inc., which had been organized by Mr. Singer and a business
associate of his to engage in contract manufacturing and assembly, in exchange
for 500,000 shares of Common Stock. Since ECA did not have assets or
operations at the time of the agreement, the shares acquired by Mr. Singer in
this transaction (475,000 shares) were treated, for accounting purposes, as
being issued for services, and have been valued by the Company at
approximately $1.51 per share for accounting purposes. See Note 2 of Notes to
Consolidated Financial Statements. As indicated in the Prospectus Summary, ECA
was dissolved at the end of 1997, and the contract assembly operations
previously conducted by ECA are now conducted directly by the Company.
Principal Capital Transactions
In October 1996 through January 1997, the Company issued 2,357,857 shares
of Common Stock to a total of 33 investors for cash (1,800,000 shares at $.33
per share, and 557,857 shares at $.35 per share), 11,000 shares
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<PAGE>
in payment of accrued interest on a note at a price of $.45, and 5,629 shares
in conversion of a note at $.35 per share. Purchasers included Lynn Dixon and
Elvena, Inc. (245,629 shares); Trinity American Corp., a corporation owned and
controlled by Mr. Salaman (113,250 shares), J.R. Consultants, Inc., a
corporation owned and controlled by Mr. Rahn (75,500 shares), a number of
other entities and individuals related to Messrs. Salaman and Dixon and other
investors.
During 1997, the Company issued a total of 2,000,000 shares of Common
Stock raising a total of $4,000,000 (average cost of $2.00 per share) in
direct private placements of Common Stock or units of securities consisting of
Common Stock and Warrants, all of which were subsequently exercised. Michael
Lauer, certain of his associates, and a number of institutional investors for
which Mr. Lauer is the investment manager and/or general partner, were the
purchasers of these securities. Mr. Lauer also purchased 400,000 shares of
Common Stock in the financing transactions described in the preceding
paragraph. In connection with these purchases, the investors were granted the
right to require the Company to register the shares purchased, at the
Company's expense, at any time within two years following their purchase, and
to use its best efforts to keep the Registration Statement effective for a
period of six months. The investors also were granted the right to include
their shares in any other registration of shares by the Company. All of these
shares are included in the Shares, i.e., have been registered in the
Registration Statement of which this Prospectus is a part.
Acquisition of DRCC
In February 1997, a majority of the shareholders of DRCC accepted an
offer to merge DRCC into a subsidiary of the Company to be formed for that
purpose, with the result that DRCC would become a wholly-owned subsidiary of
the Company. Upon consummation of that merger, DRCC shareholders received
0.5577349 shares of the Company's Common Stock in exchange for each share of
DRCC common stock outstanding prior to the merger, which resulted in the
issuance of 1,798,100 shares of Common Stock by the Company. Outstanding
options to purchase shares of DRCC common stock were converted on the same
basis into options to purchase an aggregate of 201,900 shares of the Company's
common stock at a weighted average price of $1.90. For accounting purposes,
the shares issued to acquire DRCC were assigned a value of $4.44 per share,
and the options were assigned a value of $3.42 per option.
In connection with the merger, certain of DRCC's principal shareholders
(Philip Bunker, Jeffrey G. Ballif and William E. Chipman, Sr.) and the Company
entered into a Shareholders Agreement pursuant to which the Company agreed to
include the shares of Common Stock which it issued or which were issuable upon
the exercise of options issued in connection with the DRCC merger in any
Registration Statement subsequently filed by the Company. As a result all such
shares are being registered and are included in the Shares. Former DRCC
shareholders also were granted the right to demand registration of their
shares, subject to certain restrictions. The Shareholders Agreement also
provided for the election of David Singer and Messrs. Bunker and Chipman (or,
alternatively, of designees selected by Messrs. Bunker and Chipman) as
directors of DRCC, to constitute a majority of its Board of Directors, so long
as the Company owns any capital stock of DRCC. As a result of this
Shareholders Agreement, control of the composition of the Board of Directors
of DRCC, for all practical purposes, was permanently subject to the control of
Messrs. Bunker and Chipman. As a result of DRCC's transfer of assets and
liabilities to the Company in January 1998, these provisions of the
Shareholders Agreement are no longer meaningful.
Short Term Loans From Officer
In December 1997, the Company borrowed $125,000 from William Chipman, the
Company's Chief Financial Officer, at an interest rate of 12%. The loan was
due December 31, 1997, but is still outstanding. In addition to interest at
the stated rate, the Company issued 9,375 shares of common stock to Mr.
Chipman, valued by the Company for accounting purposes at $98,938, in
consideration of his making this loan. The terms of the Company's borrowing
from Mr. Chipman are substantially the same as terms negotiated at arms length
with an unaffiliated party for a $200,000 short term loan concurrently with
the loan by Mr. Chipman.
Sale of SecuriKey(R) Assets
In January 1998, the Company sold its SecuriKey(R) assets to a
corporation organized and controlled by Dan Maxwell. The sale price for these
assets was approximately $373,000, all of which has been received by the
Company. The "book value" of the assets sold was approximately $73,000.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.001 par value, of which 10,378,974 shares were outstanding as
of February 13, 1998, and 1,000,000 shares of Preferred Stock, $.001 par
value, of which no shares are outstanding.
Common Stock
Holders of Common Stock are entitled to one vote for each share of Common
Stock owned of record on all matters to be voted on by stockholders, including
the election of directors. Holders of Common Stock do not have cumulative
voting rights and, accordingly, the holders of more than 50% of the
outstanding shares can elect the entire Board of Directors. The holders of
outstanding shares of Common Stock are entitled to receive such dividends, if
any, as may be declared from time to time by the Board of Directors out of
assets legally available therefor, subject to any preferential dividend rights
of outstanding preferred stock. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in the assets remaining after payment of all liabilities of the
Company, subject to any liquidation preferences of outstanding preferred
stock. The Common Stock has no preemptive or other subscription rights, and
there are no conversion rights or redemption provisions. All outstanding
shares of Common Stock are validly issued, fully paid, and nonassessable.
Preferred Stock
The Company's Board of Directors has the authority by resolution to issue
up to 1,000,000 shares of preferred stock in one or more series and fix the
number of shares constituting any such series, the voting powers,
designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions thereof,
including the dividend rights, dividend rate, terms of redemption (including
sinking fund provisions), redemption price or prices, conversion rights and
liquidation preferences of the shares constituting any series, without any
further vote or action by the stockholders. For example, the Board of
Directors is authorized to issue a series of preferred stock that would have
the right to vote, separately or with any other series of preferred stock, on
any proposed amendment to the Company's Articles of Incorporation or on any
other proposed corporate action, including business combinations and other
transactions.
1997 Stock Option Plan
On October 1, 1997, the Company's Board of Directors approved the 1997
Stock Option Plan (the "Plan"), subject to shareholder approval of the Plan,
and reserved 1,500,000 shares of Common Stock for issuance upon options
granted under the Plan.
The Board has granted options to purchase a total of 937,044 of Common
Stock at a price of $6.50 per share to persons then serving as executive
officers, directors, key employees and other employees of the Company (a total
of 31 individuals). The persons receiving options, and their capacities in
which the options were granted, are as follows:
<TABLE>
<CAPTION>
Total Shares
Name of Optionee Shares Vested(1)
---------------- --------- ----------
<S> <C> <C>
David D. Singer, President and a Director ........................... 300,000 50,000
Philip A. Bunker, President of DRCC and a Director .................. 175,000 35,000
Lance King, Director of Marketing ................................... 85,000 5,000
William E. Chipman, Sr., CFO ........................................ 80,000 10,000
David Andrus, Director of Development Engineering ................... 30,000 10,000
Stuart Biddulph, Director of Engineering ............................ 30,000 10,000
Brian W. Pettersen, Director ........................................ 25,000 25,000
Jonathan D. Rahn, Director .......................................... 25,000 25,000
Jeffrey G. Ballif, Manager of Digital and Software Services ......... 30,000 10,000
Other employees (22 individuals) .................................... 157,044 27,808
------- ------
Total ........................................................... 937,044 207,808
</TABLE>
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<PAGE>
- ------------
Options which are not vested vest over 24 months from the date of grant,
as follows: on May 10, 1998 - 164,809 shares; on November 10, 1998 - 179,809;
on May 10, 1999 - 184,309 shares; and on November 10, 1999 - 200,309 shares.
The options expire between November 10, 2002, and December 18, 2002, unless
exercised prior to that date.
The Plan and the grant of options under the Plan as described above were
approved by shareholders of the Company on December 18, 1997.
The purposes of the Plan are to provide incentives and rewards to those
employees who are in a position to contribute to the long-term growth and
profitability of the Company; to assist the Company to attract, retain and
motivate personnel with experience and ability; and to make the Company's
compensation program more competitive with those of other employers. The
Company anticipates it will benefit from the added interest which such
personnel will have in the success of the Company as a result of their
proprietary interest.
The Plan presently is administered by the Board of Directors, but the
Board may establish a Stock Option Committee (the "Committee"), which consists
of at least three directors, to administer the Plan. References to the
"Committee" herein include the Board of Directors so long as it continues to
administer the Plan directly.
The Committee is authorized to select from among eligible employees,
directors, advisors and consultants those individuals to whom options are to
be granted and to determine the number of shares to be subject to, and the
terms and conditions of, the options. The Committee also is authorized to
prescribe, amend and rescind terms relating to options granted under the Plan
and the interpretation of options. Generally, the interpretation and
construction of any provision of the Plan or any options granted thereunder is
within the discretion of the Committee.
The Plan provides that options may or may not be Incentive Stock Options
within the meaning of Section 422 of the Internal Revenue Code ("ISOs"). Only
employees of the Company are eligible to receive ISOs, while employees and
non-employee directors, advisors and consultants are eligible to receive
options which are not ISOs, i.e. "Non-Qualified Options."
The acquisition of shares upon exercise of an ISO will not result in
recognition of income at the time. However, the excess of the fair market
value of the shares acquired over the exercise price will constitute an item
of tax preference, to be included in the optionee's computation of his
"alternative minimum tax" for federal income tax purposes. If the optionee
does not dispose of the shares issued to him upon the exercise of an ISO
within one years of such issuance or within two years from the date of the
grant of the ISO, whichever is later, any gain or loss realized by the
optionee on a later sale or exchange of such shares generally will be a
long-term capital gain or long-term capital loss. If the optionee sells the
shares during such period, the optionee will recognize ordinary income for the
year in which disposition occurs equal to the amount, if any, by which the
lesser of the fair market value of such shares on the date of exercise of such
ISO or the amount realized from such sale exceeded the amount paid for such
shares.
In the case of Non-Qualified Options, the optionee generally will
recognize ordinary income upon exercise of the Non-Qualified Option in an
amount equal to the difference between the option price, assuming that the
option price equaled the fair market value of the Company's Common Stock at
the time of grant, and the fair market value of the shares on the date of
exercise. When the shares are sold, the grantee will generally recognize
capital gain or loss equal to the difference between (i) the selling price of
the shares, and (ii) the sum of the option price and the amount included in
his income when the option is exercised.
The terms of options granted under the Plan are determined by the
Committee at the time the option is granted. Each option is evidenced by a
written option document, which, together with the provisions of the Plan
itself determines such terms as: when options under the Plan become
exercisable; the exercise price of options granted under the Plan, which may
not be less than 100% of the fair market value of the Common Stock on the date
of the grant in the case of ISOs (110% in the case of optionees who own 10% or
more of the Company's Common Stock on the date of grant); the term of the
option; vesting provisions; and special termination provisions.
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An option is not transferrable by the optionee, other than by will or the
laws of descent and distribution, and is exercisable only by the optionee
during his lifetime or, in the event of his death, by a person who acquires
the right to exercise the option by bequest or inheritance or by reason of the
optionee's death.
Other Options
The Company has outstanding options to purchase 172,752 shares of Common
Stock at prices ranging from $0.18 per share to $2.00 per share (average
exercise price of $2.00 per share) issued in connection with the DRCC
acquisition in order to convert DRCC options granted prior to the Company's
acquisition of DRCC. The DRCC "conversion options" are subject to the terms
and conditions of DRCC's Omnibus Stock Option Plan (the "DRCC Plan") pursuant
to which the options originally were granted. The terms of the DRCC Plan are
substantially the same as the Company's 1997 Stock Option Plan.
The Company also has outstanding options to purchase 258,000 shares at a
price of $.33 per share, which were granted to Gary Peterson, a former
President and CEO of the Company, and to Brian Pettersen, a director of the
Company who, at the time of grant, also was serving as the Company's Executive
Vice President, in late 1996 and early 1997 in recognition of their prior
service.
The options described above are fully vested and expire between February
1, 1999 and December 20, 2001 in the case of the DRCC conversion options, and
on June 30, 1998, in the case of the 258,000 options granted in December 1996
and January 1997.
Registration Rights of Certain Shareholders
In connection with the Company's acquisition of DRCC, holders of DRCC
common stock and options were granted the right to include shares issued or
issuable upon the subsequent exercise of options issued in connection with
that acquisition in any registration statement subsequently filed by the
Company, and to require that their shares be registered in certain cases. See
"Organizational and Other Transactions -- Acquisition of DRCC."
In connection with certain financings, investors who purchased Common
Stock of the Company at a price of $2.00 per share were granted the right to
demand registration of their shares. See "Organizational and Other Transactions
- -- Principal Capital Transactions."
"Anti-Takeover" Provisions
Although the Board of Directors is not presently aware of any takeover
attempt or interest involving the Company, the Articles of Incorporation and
Bylaws of the Company and the Nevada General Corporation Law (the "NGCL")
contain certain provisions which may be deemed to be "anti-takeover" in nature
in that such provisions may deter, discourage or make more difficult the
assumption of control of the Company by another corporation or person through
a tender offer, merger, proxy contest or similar transaction or series of
transactions.
Authorized but Unissued Shares: The authorized capital stock of the
Company is 50,000,000 shares of Common Stock and 1,000,000 shares of Preferred
Stock. These shares of capital stock were authorized for the purpose of
providing the Board of Directors of the Company with as much flexibility as
possible to issue additional shares for proper corporate purposes, including
equity financing, acquisitions, stock dividends, stock splits, employee stock
option plans, and other similar purposes which could include public offerings
or private placements. Other than with respect to shares of Common Stock
reserved for issuance upon the exercise of options, as described above, the
Company has no agreements, commitments or immediate plans for the sale or
issuance of the additional shares of Common Stock or Preferred Stock at this
time. However, shares of Preferred Stock could be issued quickly with terms
calculated to delay or prevent a change in control of the Company without any
further action by the stockholders. Stockholders of the Company do not have
preemptive rights with respect to the purchase of these shares. Therefore,
such issuance could result in a dilution of voting rights and book value per
share of the Common Stock of the Company. No shares of Preferred Stock have
been issued, and the Company has no present plan to issue any such shares.
No Cumulative Voting: Neither the Company's Articles of Incorporation nor
its Bylaws contain provisions for cumulative voting. Cumulative voting entitles
each stockholder to as many votes as equal the number of
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<PAGE>
shares owned by him multiplied by the number of directors to be elected. A
stockholder may cast all these votes for one candidate or distribute them
among any two or more candidates. Thus, cumulative voting for the election of
directors allows a stockholder or group of stockholders who hold less than 50%
of the outstanding shares voting to elect one or more members of a board of
directors. Without cumulative voting for the election of directors, the vote
of holders of a plurality of the shares voting is required to elect any member
of a board of directors and present stockholders would be able to elect all of
the members of the board of directors. The Company's founders did not provide
for cumulative voting in the Articles of Incorporation of the Company because
of a belief that each director should represent and act in the interest of all
stockholders and not any special group of stockholders.
Control Share Acquisitions: Sections 78.378 et seq. of the NGCL provide
for notice to shareholders of a "control share acquisition", which is defined
as the acquisition of 20% of the voting power of a Nevada corporation, or of
voting power exceeding one-third of such total voting power by a person who
owns 20% or more of such voting power prior to the acquisition, or a majority
or more of such voting power by a person who already owns one-third or more of
the voting power. Shareholders have the right to demand "fair value" for their
shares if a control share acquisition occurs. The "control share" provisions
limit the voting power of the acquiror in a control share acquisition, and
permit a corporation to recover profits resulting from the sale of control
shares in certain situations. The control share acquisition provisions of the
NGCL apply only to Nevada corporations with a minimum of 100 shareholders of
record who reside in Nevada and, for that reason, do not now apply to the
Company.
General Effect of Anti-Takeover Provisions: The overall effect of these
provisions may be to deter a future tender offer or other takeover attempt
that some stockholders might view to be in their best interests at that time.
In addition, these provisions may have the effect of assisting the Company's
current management in retaining its position and place it in a better position
to resist changes which some stockholders may want to make if dissatisfied
with the conduct of the Company's business.
Provisions Relating to Officers and Directors
The Company's Articles of Incorporation contain a provision permitted by
Nevada law which eliminates the personal liability of the Company's directors
for monetary damages for breach or alleged breach of their fiduciary duty of
care which arises under state law. Although this does not change the
directors' duty of care, it limits legal remedies which are available for
breach of that duty to equitable remedies, such as an injunction or
rescission. This provision of the Company's Articles of Incorporation has no
effect on directors' liability for: (1) breach of the directors' duty of
loyalty; (2) acts or omissions not in good faith or involving intentional
misconduct or known violations of law; and (3) approval of any transactions
from which the directors derive an improper personal benefit.
The Company's Articles of Incorporation also contain a provision
providing for the indemnification of directors and officers to the fullest
extent permitted under the NGCL.
Dividend Policy
The Company has never paid and does not presently anticipate paying
dividends on its Common Stock.
Transfer Agent
Interwest Transfer Co., Inc., Suite 100, 1901 E. 4000 South, Salt Lake
City, UT 84117, is the transfer agent and registrar for the Company's Common
Stock.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Section 78.751 of the NGCL, as amended, authorizes the Company to
indemnify any director or officer under certain prescribed circumstances and
subject to certain limitations against certain costs and expenses, including
attorneys' fees actually and reasonably incurred in connection with any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, to which such person is a party by reason of being a
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<PAGE>
director of officer of the Company if it is determined that such person acted
in accordance with the applicable standard of conduct set forth in such
statutory provisions. The Company may also purchase and maintain insurance for
the benefit of any director or officer which may cover claims for which the
Company could not indemnify such person. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore unenforceable.
LEGAL MATTERS
The firm of Connolly Epstein Chicco Foxman Oxholm & Ewing, Philadelphia
PA, has rendered an opinion that the Shares are (or, in the case of the Option
Shares, when issued in accordance with the terms of the DRCC Conversion
Options, will be) fully paid and non-assessable.
EXPERTS
The consolidated financial statements of World Wireless Communications,
Inc. and subsidiaries as of September 30, 1997, and December 31, 1996 and
1995, for the nine months ended September 30, 1997, for the year ended
December 31, 1996, and for the period April 10, 1995 (date or inception)
through December 31, 1995, included in this Prospectus have been so included
in reliance on the report of Hansen, Barnett & Maxwell, independent
accountants, given on the authority of said firm as experts in auditing and
accounting. The consolidated financial statements of Digital Radio
Communications Corporation and subsidiaries as of December 31, 1996 and 1995,
and for the years ended December 31, 1996 and 1995, included in this
Prospectus have been so included in reliance upon the report of Hansen,
Barnett & Maxwell, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-1 (including all
amendments and supplements thereto, the "Registration Statement") with the
Commission under the Securities Act with respect to the Shares offered hereby.
This Prospectus, which forms a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
Exhibits filed therewith, certain parts of which have been omitted in
accordance with the rules and regulations of the Commission. Statements
contained herein concerning the provisions of such documents are not
necessarily complete and, in each instance, reference is made to the
Registration Statement or to the copy of such document filed as an Exhibit to
the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference. Copies of the
Registration Statement and Exhibits thereto can be obtained upon payment of a
fee prescribed by the Commission or may be inspected free of charge at the
public reference facilities and regional offices referred to below. Additional
information with respect to this offering may be provided in the future by
means of supplements or "stickers" to the Prospectus.
Prior to the date of this Prospectus, the Company has not been subject to
the informational and reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Following the date of this Prospectus,
the Company will be subject to Exchange Act reporting requirements and, in
accordance therewith, will file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed with the Commission
by the Company may be inspected and copied at the public reference facilities
maintained by the Commission at its principal offices at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and 7 World Trade Center, Suite 1300, New York,
New York 10048. Such reports, proxy statements and other information may also
be obtained from the web site that the Commission maintains at
http://www.sec.gov. Copies of these materials can also be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal offices in Washington, D.C., set forth above.
43
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF WORLD WIRELESS
COMMUNICATIONS, INC. AND DIGITAL RADIO COMMUNICATIONS CORPORATION
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Nine Months
Ended
September 30, 1997 .................................................................... F-2
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Year Ended
December 31, 1996 ..................................................................... F-2
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants ...................................... F-4
Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996
and 1995 ... F-5 Consolidated Statements of Operations for the Nine Months
Ended September 30, 1997 and
1996
(Unaudited), for the Year Ended December 31, 1996, and for the Period from April 10,
1995
(Date of Inception) through December 31, 1995 ........................................ F-6
Consolidated Statements of Stockholders' Equity for the Period from April 10, 1995
(Date of
Inception) through December 31, 1995, for the Year Ended December 31, 1996, and for
the Nine
Months Ended September 30, 1997 ...................................................... F-7
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and
1996
(Unaudited), for the Year Ended December 31, 1996, and for the Period from April 10,
1995
(Date of Inception) through December 31, 1995 ........................................ F-9
Notes to Consolidated Financial Statements .............................................. F-10
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Report of Independent Certified Public Accountants ...................................... F-22
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995 .......................... F-23
Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1995 .. F-24
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December
31, 1995
and 1996 ............................................................................. F-25
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 .. F-26
Notes to Consolidated Financial Statements ............................................ F-27
</TABLE>
F-1
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed consolidated statements of
operations are to present the losses from operations for the nine months ended
September 30, 1997 and for the year ended December 31, 1996 assuming the
acquisition of DRCC was consummated as of January 1, 1996. The acquisition of
DRCC was accounted for by the purchase method of accounting. The excess
acquisition costs over the identifiable net assets acquired was allocated to
purchased research and development and expensed at the acquisition date. This
nonrecurring charge to operations has been eliminated from the pro forma
results of operations.
The following financial information was derived from, and should be read
in conjunction with the separate historical consolidated financial statements
of the Company and DRCC and the related notes to those financial statements,
which are included elsewhere herein. These unaudited pro forma condensed
consolidated statements of operations have been included herein for
comparative purposes only and do not purport to be indicative of the results
of operations which actually would have been obtained had the acquisition
occurred January 1, 1996, or the results of operations which may be obtained
in the future. In addition, future results may vary significantly from the
results reflected in these pro forma statements of operations.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
World Digital Pro Forma Pro Forma
Wireless Radio Adjustments Results
---------------- --------------- -------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Sales ......................................... $ 2,371,619 $ 134,585 $ -- $ 2,506,204
Cost of sales ................................. 1,858,169 77,344 -- 1,935,513
------------- ------------ ------------ ------------
Gross profit .................................. 513,450 57,241 -- 570,691
------------- ------------ ------------ ------------
Research and development expense .............. 2,239,143 323,456 (A) (1,258,000) 1,304,599
General and administrative expense ............ 2,210,395 201,896 -- 2,412,291
Amortization of goodwill ...................... 985,634 -- (B) 197,127 1,182,761
Interest expense .............................. 34,426 -- -- 34,426
------------- ------------ ------------ ------------
Total Operating Expenses ...................... 5,469,598 525,352 (1,060,873) 4,934,077
------------- ------------ ------------ ------------
Loss from operations .......................... (4,956,148) (468,111) 1,060,873 (4,363,386)
Benefit from income taxes ..................... -- 4,653 (C) (4,653) --
------------- ------------ ------------ ------------
Net loss ...................................... $ (4,956,148) $ (463,458) $ 1,056,220 $ (4,363,386)
============= ============ ============ ============
Net loss per common share ..................... $ (0.52) $ (0.45)
============= ============
Weighted average number of common
shares used in per share calculation ......... 9,513,177 (D) 235,616 9,748,793
============= ============ ============
FOR THE YEAR ENDED DECEMBER 31, 1996
Sales ......................................... $ 618,505 $ 1,386,478 $ -- $ 2,004,983
Cost of sales ................................. 662,184 1,006,366 -- 1,668,550
------------- ------------ ------------ ------------
Gross profit .................................. (43,679) 380,112 -- 336,433
------------- ------------ ------------ ------------
Research and development expense .............. 92,932 440,125 -- 533,057
General and administrative expense ............ 1,789,904 1,089,821 -- 2,879,725
Amortization of goodwill ...................... -- -- (B) 1,577,015 1,577,015
Interest expense .............................. 1,310,142 36,397 -- 1,346,539
------------- ------------ ------------ ------------
Total expenses ................................ 3,192,978 1,566,343 1,577,015 6,336,336
------------- ------------ ------------ ------------
Loss from operations .......................... (3,236,657) (1,186,231) (1,577,015) (5,999,903)
Benefit from income taxes ..................... -- 13,718 (C) (13,718) --
------------- ------------ ------------ ------------
Net loss ...................................... $ (3,236,657) $ (1,172,513) $ (1,590,733) $ (5,999,903)
============= ============ ============ ============
Net loss per common share ..................... $ (0.85) $ (1.03)
============= ============
Weighted average number of common
shares used in per share calculation ......... 3,806,077 (D) 2,000,000 5,806,077
============= ============ ============
</TABLE>
F-2
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(A) Purchased research and development in the amount of $1,258,000 was
expensed at the date of the merger. This expense is a nonrecurring charge
directly attributable to the acquisition and has been eliminated from the
pro forma condensed statement of operation for the nine months ended
September 30, 1997.
(B) Goodwill in the amount of $7,885,075 was recognized in connection with the
acquisition, and is being amortized over a five-year period.
(C) The Company has had significant losses from operations and any tax benefit
previously recognized by DRCC would not have been realized had the
acquisition occurred at January 1, 1996; accordingly, the benefit from
income taxes has been eliminated.
(D) The historical weighted average number of common shares used in the per
share calculation was increased in 1996 by 1,798,100 common shares issued
and by 201,900 common equivalent shares from stock options granted in
connection with the acquisition of DRCC. The related increase in 1997
relates only to the period prior to the date of issuance of these common
shares and stock options.
F-3
<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801)
532-7944
Member of SECPS 345 East Broadway,
Suite 200
Member of Summit International Associates Salt Lake City,
Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
World Wireless Communications, Inc.
We have audited the accompanying consolidated balance sheets of World Wireless
Communications, Inc. and subsidiaries as of September 30, 1997 and December
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the nine months ended September 30,
1997, for the year ended December 31, 1996, and for the period from April 10,
1995 (date of inception) through December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of World
Wireless Communications, Inc. and subsidiaries as of September 30, 1997 and
December 31, 1996 and 1995, and the results of their operations and their cash
flows for the nine months ended September 30, 1997, for the year ended
December 31, 1996, and for the period from April 10, 1995 (date of inception)
through December 31, 1995, in conformity with generally accepted accounting
principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
November 21, 1997
F-4
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------------
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents ............................. $ 723,463 $ 37,278 $ 29,682
Trade accounts receivables (net of allowance) ......... 201,297 131,392 30,621
Inventory ............................................. 433,060 159,881 60,656
------------ ------------ ----------
Total Current Assets. .............................. 1,357,820 328,551 120,959
------------ ------------ ----------
Equipment ................................................ 1,362,855 448,237 339,693
Less accumulated depreciation ........................... (320,476) (121,215) (38,853)
------------ ------------ ----------
Net Equipment ...................................... 1,042,379 327,022 300,840
------------ ------------ ----------
Investments .............................................. 222,500 -- --
------------ ------------ ----------
Goodwill, net of accumulated amortization ................ 6,899,442 -- --
------------ ------------ ----------
Other Assets ............................................. 99,265 7,469 4,141
------------ ------------ ----------
Total Assets ............................................. $ 9,621,406 $ 663,042 $ 425,940
============ ============ ==========
LIABILITIES ANDSTOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable ................................ $ 261,894 $ 61,997 $ 31,256
Accrued liabilities ................................... 150,909 55,788 827
Checks written in excess of cash in bank .............. 103,678 -- --
Notes payable -- current portion ...................... 54,788 85,566 244,013
Non-compete obligation ................................ 81,148 -- --
Accrued settlement obligation ......................... 323,456 -- --
------------ ------------ ----------
Total Current Liabilities .......................... 975,873 203,351 276,096
------------ ------------ ----------
Long-Term Liabilities
Notes payable ......................................... 49,048 44,808 44,500
------------ ------------ ----------
Stockholders' Equity
Preferred stock -- $0.001 par value; 1,000,000 shares
authorized; no shares issued ......................... -- -- --
Common stock -- $0.001 par value; 50,000,000
shares authorized; 10,035,239 shares, 5,663,000
shares and 1,132,140 shares issued and outstanding,
respectively ......................................... 10,035 5,663 1,132
Additional paid-in capital ............................ 17,049,991 3,916,613 374,948
Accumulated deficit ................................... (8,463,541) (3,507,393) (270,736)
------------ ------------ ----------
Total Stockholders' Equity ......................... 8,596,485 414,883 105,344
------------ ------------ ----------
Total Liabilities and Stockholders' Equity ............... $ 9,621,406 $ 663,042 $ 425,940
============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
For the Nine Months For the From April 10,
Ended September 30, Year Ended 1995 (Date of
--------------------------------- December 31, Inception) through
1997 1996 1996 December 31, 1995
---------------- -------------- ---------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C>
Sales ......................................... $ 2,371,619 $ 452,640 $ 618,505 $ 426,825
Cost of Sales ................................. 1,858,169 477,748 662,184 237,356
------------ ---------- ------------ ----------
Gross Profit (Loss) ........................... 513,450 (25,108) (43,679) 189,469
------------ ---------- ------------ ----------
Operating Expenses
Research and development ..................... 2,239,143 -- 92,932 --
General and administrative ................... 2,210,395 452,286 1,789,904 386,612
Amortization of goodwill ..................... 985,634 -- -- --
Interest ..................................... 34,426 407,672 1,310,142 73,593
------------ ---------- ------------ ----------
Total Operating Expenses ................... 5,469,598 859,958 3,192,978 460,205
------------ ---------- ------------ ----------
Net Loss ...................................... $ (4,956,148) $ (885,066) $ (3,236,657) $ (270,736)
============ ========== ============ ==========
Net Loss Per Common Share ..................... $ (0.52) $ (0.26) $ (0.85) $ (0.26)
============ ========== ============ ==========
Weighted Average Number of Common
Shares Used in Per Share Calculation ......... 9,513,177 3,352,063 3,806,077 1,049,679
============ ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the Total
------------------------- Paid-in Development Stockholders'
Shares Amount Capital Stage Equity
------------ ---------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance -- April 10, 1995 (Date of Incep-
tion) ......................................... -- $ -- $ -- $ -- $ --
Shares issued for cash, April through June
1995, $0.33 per share.......................... 1,050,000 1,050 348,950 -- 350,000
Shares issued for cash payments in behalf of
the Company, September through
November 1995, $0.33 per share................. 139,394 139 45,861 -- 46,000
Shares issued for services, September
through December 1995, $0.33 per share. 425,758 426 140,074 -- 140,500
Shares issued for financing fees, November
1995, $0.33 per share.......................... 116,988 117 38,489 -- 38,606
Redemption of shares, May through
November 1995, $0.45 per share................. (600,000) (600) (268,400) -- (269,000)
Beneficial conversion feature of convertible
debt issued November and December
1995 -- -- 69,974 -- 69,974
Net Loss ....................................... -- -- -- (270,736) (270,736)
--------- ------ ---------- ---------- ----------
Balance -- December 31, 1995 ................... 1,132,140 1,132 374,948 (270,736) 105,344
Beneficial conversion feature of convertible
debt issued January and February 1996 ......... -- -- 90,384 -- 90,384
Shares issued upon conversion of notes pay-
able, March 1996, $0.15 per share.............. 1,892,860 1,893 273,107 -- 275,000
Shares issued for cash, less $12,000 in offer-
ing costs, April through May 1996, $0.70
per share ..................................... 300,000 300 197,700 -- 198,000
Shares issued for services, March 1996,
$0.70 per share................................ 7,000 7 4,893 -- 4,900
Shares issued for cash less $5,000 in offer-
ing costs, June through December 1996,
$0.97 per share................................ 600,000 600 579,097 -- 579,697
Beneficial conversion feature of convertible
debt issued June through December 1996. -- -- 629,397 -- 629,397
Shares issued upon conversion of notes pay-
able, October through December 1996,
$0.45 per share ............................... 1,200,000 $1,200 $ 538,800 $ -- $ 540,000
</TABLE>
(Continued)
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the Total
------------------------- Paid-in Development Stockholders'
Shares Amount Capital Stage Equity
------------ ----------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Shares issued for services, October 1996,
$1.51 per share................................. 500,000 $ 500 $ 752,025 $ -- $ 752,565
Shares issued for services, November 1996,
$1.51 per share................................. 20,000 20 30,143 -- 30,123
Shares issued for interest due on convertible
notes, December 1996, $0.45 per share........... 11,000 11 4,939 -- 4,950
Compensation related to grant of stock
options, December 18, 1996 ..................... -- -- 441,180 -- 441,180
Net loss ........................................ -- -- -- (3,236,657) (3,236,657)
------- -------- ----------- ------------ ------------
Balance -- December 31, 1996 .................... 5,663,000 5,663 3,916,613 (3,507,393) 414,883
Compensation related to grant of stock
options, January 9, 1997 ....................... -- -- 265,500 -- 265,500
Shares issued for cash, January 15, 1997,
$0.35 per share................................. 557,857 558 194,692 -- 195,250
Shares issued upon conversion of note pay-
able, January 15, 1997, $0.35 per share......... 5,630 6 1,964 -- 1,970
Shares issued and 201,900 stock options
granted in acquisition of Digital Radio
Communications Corporation, February
12, 1997, $4.44 per share and $3.42 per
option ......................................... 1,798,100 1,798 8,672,264 -- 8,674,062
Shares and 500,000 warrants (exercisable at
$2.00 per share) issued for cash, February
12, 1997, $1.69 per share and $0.31 per
warrant ........................................ 500,000 500 999,500 -- 1,000,000
Shares issued for cash and upon exercise of
warrants, March through August 1997,
$2.00 per share................................. 1,500,000 1,500 2,998,500 -- 3,000,000
Shares issued for cash upon exercise of
options, August and September 1997,
$0.09 per share................................. 10,652 10 958 -- 968
Net loss ........................................ -- -- -- (4,956,148) (4,956,148)
--------- -------- ----------- ------------ ------------
Balance -- September 30, 1997 ................... 10,035,239 $ 10,035 $17,049,991 $ (8,463,541) $ 8,596,485
========== ======== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------------------
1997 1996
---------------- ---------------
(Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net loss ............................................. $ (4,956,148) $ (885,066)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization ...................... 212,149 66,322
Amortization of goodwill ........................... 985,634 --
Financing fees and amortization of debt dis-
count ............................................. -- 253,560
Stock issued for services .......................... -- 4,900
Compensation from stock options granted ............ 265,500 --
Purchased research and development ................. 1,258,000 --
Changes in operating assets and liabilities, net of effects of businesses
acquired:
Accounts receivable ............................... 148,666 (4,165)
Other assets ...................................... 3,170 (5,060)
Inventory ......................................... (16,694) (8,740)
Accounts payable .................................. (186,415) 19,335
Accrued liabilities ............................... (402,257) 25,829
------------ -----------
Net Cash and Cash Equivalents Used By Operat-
ing Activities ....................................... (2,688,395) (533,085)
------------ -----------
Cash Flows From Investing Activities
Pre-acquisition advances to investees ................ (224,764) --
Payments for the purchase of property and equip-
ment ............................................... (566,705) (89,598)
Proceeds from sale of property and equipment ......... 10,754 --
------------ -----------
Net Cash and Cash Equivalents Used By Invest-
ing Activities ..................................... (780,715) (89,598)
------------ -----------
Cash Flows From Financing Activities
Payment to redeem common stock ....................... -- --
Proceeds from issuance of common stock ............... 4,196,218 351,828
Checks written in excess of cash in bank ............. 103,678 --
Proceeds from borrowings, net of discount ............ -- 441,900
Proceeds from issuance of beneficial debt conver-
sion feature ....................................... -- --
Principal payments of debt ........................... (111,487) (205,255)
Principal payments on capital lease obligations ...... (33,114) --
------------ -----------
Net Cash and Cash Equivalents Provided By
Financing Activities ............................... 4,155,295 588,473
------------ -----------
Net Increase In Cash and Cash Equivalents ............. 686,185 (34,210)
Cash and Cash Equivalents -- Beginning of
Period ............................................... 37,278 29,682
------------ -----------
Cash and Cash Equivalents -- End of Period ............ $ 723,463 $ (4,528)
============ ===========
<CAPTION>
For the Period
For the From April 10,
Year Ended 1995 (Date of
December 31, Inception) through
1996 December 31, 1995
----------------- -------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss ............................................. $ (3,236,657) $ (270,736)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization ...................... 83,094 38,853
Amortization of goodwill ........................... -- --
Financing fees and amortization of debt dis-
count ............................................. 1,284,415 34,987
Stock issued for services .......................... 787,588 179,106
Compensation from stock options granted ............ 441,180 --
Purchased research and development ................. -- --
Changes in operating assets and liabilities, net of
effects of businesses acquired:
Accounts receivable ............................... (100,688) (30,621)
Other assets ...................................... (4,143) --
Inventory ......................................... (99,225) (14,799)
Accounts payable .................................. 30,741 31,256
Accrued liabilities ............................... 54,965 827
------------- -----------
Net Cash and Cash Equivalents Used By Operat-
ing Activities ....................................... (758,730) (31,127)
------------- -----------
Cash Flows From Investing Activities
Pre-acquisition advances to investees ................ -- (340,000)
Payments for the purchase of property and equip-
ment ............................................... (90,544) (49,691)
Proceeds from sale of property and equipment ......... -- --
------------- -----------
Net Cash and Cash Equivalents Used By Invest-
ing Activities ..................................... (90,544) (389,691)
------------- -----------
Cash Flows From Financing Activities
Payment to redeem common stock ....................... -- (19,000)
Proceeds from issuance of common stock ............... 777,697 350,000
Checks written in excess of cash in bank ............. -- --
Proceeds from borrowings, net of discount ............ (417,008) 77,847
Proceeds from issuance of beneficial debt conver-
sion feature ....................................... 719,781 41,653
Principal payments of debt ........................... (223,600) --
Principal payments on capital lease obligations ...... -- --
------------- -----------
Net Cash and Cash Equivalents Provided By
Financing Activities ............................... 856,870 450,500
------------- -----------
Net Increase In Cash and Cash Equivalents ............. 7,596 29,682
Cash and Cash Equivalents -- Beginning of
Period ............................................... 29,682 --
------------- -----------
Cash and Cash Equivalents -- End of Period ............ $ 37,278 $ 29,682
============= ===========
</TABLE>
Supplemental cash flow information and noncash investing and financing
activities -- Note 9
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization -- On April 10, 1995 a group of investors contributed
$340,000 in cash to form a joint venture (the Joint Venture). On the same day,
the Joint Venture acquired substantially all of the assets and operations of
Micro Security Systems, Inc. (Micro), a bankrupt company, at a sheriff's
auction for $340,000 cash. The acquisition was accounted for by the purchase
method of accounting. The purchase price was allocated to the assets acquired
based upon their fair value: $45,857 to current assets and $294,143 to
equipment and other long-term assets. The operations of the acquired business
are included in the accompanying financial statements from the date of
acquisition. Due to circumstances beyond the control of the Joint Venture,
Micro continued to operate under the direction of the court-appointed trustee,
using the Joint Venture's assets, until approximately November 1995. These
operations, as far as they could be identified, have been included in the
accompanying financial statements.
Data Security Corporation (Data Security) was formed on November 15, 1995
under the laws of the State of Nevada. The Joint Venture was reorganized into
Data Security in November 1995 by Data Security issuing 787,140 shares of
common stock and agreeing to pay $269,000 to one of the owners of the Joint
Venture. The transfer of the net assets and operations to Data Security was a
transfer between enterprises under common control and has been accounted for
at historical cost in a manner similar to that in pooling-of-interests
accounting. The accompanying financial statements have been restated to
reflect the common stock equivalents which would have been issued and redeemed
from the dates of the original transactions with the owners of the Joint
Venture based upon the shares exchanged in the transfer.
By shareholder action on January 15, 1997, the Company's name was changed
from Data Security Corporation to World Wireless Communications, Inc.
Principles of Consolidation -- The consolidated financial statements
include the accounts of World Wireless Communication, Inc. and it's wholly
owned subsidiaries, ECA Electronic Contract Assembly, Inc. (ECA) and Digital
Radio Communications Corporation, which has subsidiaries, from the date of
their acquisitions. Intercompany accounts and transactions have been
eliminated in consolidation. The consolidated entities are collectively
referred to herein as "the Company."
Nature of Business -- The Company and its subsidiaries design, develop
and manufacture wired and wireless communications technology, systems and
products, and provide contract manufacturing services to the electronics and
wireless communications industry.
Prior to the acquisition of Digital Radio, the primary operations of the
Company were centered around the design and manufacture of computer security
products, which constituted most of the Company's sales for 1996 and 1995.
Sales of these products were insignificant during 1997 and are not expected to
be significant in the future.
Business Condition -- Since the acquisition of Digital Radio in February
1997, the Company no longer is considered in the development stage, having
reached planned operations. However, it has not had sales sufficient to meet
its operating expenses and to generate income. It has sustained operating
losses in the nine months ended September 30, 1997, and for the years ended
December 31, 1996 and 1995, and may require additional capital to continue
operations. Management intends to obtain additional capital through issuance
of common stock. Management expects the acquisition of Digital Radio will
enhance the Company's profitability from operations. However, there is no
assurance that profitable operations can be obtained or sustained.
Long-Lived Assets -- Impairment losses are recorded when indicators of
impairment are present and undiscounted cash flows estimated to be generated
by those assets are less than the carrying amount. No impairment losses were
required to be recognized in the accompanying financial statements.
F-10
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Segment Information and Concentration of Risk -- Prior to 1997, the
Company operated solely in the electronics industry and primarily in the
Western United States. Accordingly, segment information relating to operations
in different industries or geographic areas is not presented in these
financial statements. Beginning in 1997 the Company expanded its operations to
include significant sales nationally and internationally. Export sales during
the nine months ended September 30, 1997 were $1,432,055. The concentration of
business in one industry and one geographic area subjects the Company to a
concentration of credit risk relating to trade accounts receivable. The
Company generally does not require collateral from its customers with respect
to the Company's trade receivables.
Financial Instruments -- The Company considers all highly-liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. The amounts reported as cash and cash equivalents, accounts
receivable, other receivables, investments, accounts payable and notes payable
are considered to be reasonable approximations of their fair values. The fair
value estimates presented herein were based on market information available to
management at the time of the preparation of the financial statements.
Cash in excess of insured limits was approximately $118,000 at September
30, 1997.
Trade Accounts Receivable and Major Customers -- Seventeen percent of
sales in 1996, or $102,578, were to one customer. For the nine months ended
September 30, 1997, 72% of sales, or $1,709,956, were to two customers under
contracts which subject the Company to the risk that the Company may not be
able to continue the current level of revenue due to loss of contracts. Due to
the actual write-off of accounts that were uncollectible at December 31, 1996
and 1995, an allowance for doubtful accounts was not required. At September
30, 1997, an allowance for doubtful accounts of $35,000 was provided.
Inventory -- Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Research and Development Expense -- Current operations are charged with
all research, engineering and product development expenses.
Goodwill -- Goodwill arose from the acquisition of Digital Radio and is
being amortized over a five-year period by the straight-line method.
Equipment -- Equipment is stated at cost. Depreciation, including
amortization of leased assets, is computed using the straight-line method over
the estimated useful lives of the equipment, which are five to seven years.
Depreciation expense was $82,362 and $38,853 for the year ended December 31,
1996 and for the period from April 10, 1995 through December 31, 1995,
respectively. Depreciation expense for the nine months ended September 30,
1997 was $202,535. Maintenance and repairs of equipment are charged to
operations, and major improvements are capitalized. Upon retirement, sale, or
other disposition of equipment, the cost and accumulated depreciation are
eliminated from the accounts, and gain or loss is included in operations.
Investments -- At September 30, 1997, investments include common stocks
of customers which are restricted from sale, and are stated at historical cost
of $116,500. Investments also include a down payment of $106,000 made towards
the acquisition of a subsidiary as further described in Note 12.
Sales Recognition -- Sales are recognized upon delivery of products or
services and acceptance by the customer. Sales revenue from technology
development contracts is recognized as pre-defined bench marks are reached and
accepted by the customer. For the nine months ended September 30, 1997, the
Company recorded $1,080,000 in revenue from the fulfillment of benchmarks in a
$1,296,000 contract. As a result of design and technology contracts, the
Company has a right to receive royalties which will be recognized upon the
related sales by customers.
F-11
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Net Loss Per Common Share -- Net loss per share has been computed using
the weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of shares issuable upon
conversion of notes payable and shares issuable upon the exercise of stock
options. Common stock equivalents are included from the dates the convertible
notes were issued and the stock options were granted.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in these financial
statements and accompanying notes. Actual results could differ from those
estimates.
Stock-Based Compensation -- Stock-based compensation to employees is
measured by the intrinsic value method. This method recognizes compensation
expensed based on the difference between the fair value of the underlying
common stock and the exercise price on the date granted.
Interim Financial Statements -- The accompanying consolidated financial
statements for the nine months ended September 30, 1996 are unaudited. In the
opinion of management, all necessary adjustments (which include only normal
recurring adjustments) have been made to present fairly the results of
operations and cash flows for that period. In addition, the results of
operations for the nine-month period ended September 30, 1997 are not
necessarily indicative of the operating results to be expected for the full
year.
New Accounting Pronouncement -- In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share". Statement No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share and is
effective for financial statements issued for both interim and annual periods
ending after December 15, 1997. The Company will adopt Statement No. 128 for
the year ended December 31, 1997. Earlier application is not permitted. Loss
per share as currently reported is the same as basic loss per share required by
the new standard. Accordingly, adoption of the new standard is not anticipated
to result in a change to the accompanying financial statements.
NOTE 2--BUSINESS COMBINATION AND ACQUISITION
ECA was incorporated on October 24, 1996 under the laws of the State of
Nevada. ECA had no operations or assets and had made efforts toward the
development of business relating to the assembly of printed circuit boards and
wire/cable harnesses. Effective October 28, 1996, the Company acquired all of
ECA's outstanding common stock and employed two ECA officers, by issuing
500,000 shares of common stock. The business combination was accounted for
using the purchase method of accounting. The purchase price, based upon the
fair value of the common shares issued, was $752,565, or $1.51 per share. The
excess of the purchase price over the fair value of the assets acquired was
$752,565, which was allocated to compensation expense. Its operations have
been included in the accompanying financial statements from the date of
acquisition.
On February 12, 1997, a majority of the shareholders of Digital Radio
Communications Corporation (Digital Radio), a Utah Corporation, accepted an
offer from the Company to merge Digital Radio into a newly-formed subsidiary
of the Company. The Digital Radio shareholders agreed to exchange each of
their common shares for 0.5577349 common shares of World Wireless, which
resulted in the Company issuing 1,798,100 shares of common stock. In addition,
holders of Digital Radio stock options exchanged each of their options for
0.5577349 stock options, which resulted in the Company issuing options to
purchase 201,900 shares of common stock exercisable at a weighted-average
price of $1.90 per share.
The merger has been accounted for using the purchase method of
accounting. The purchase price, based upon the fair value of the common shares
and stock options issued, was $8,674,062. The fair value of the common shares
and stock options issued was based upon the average market price of the
Company's common stock
F-12
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 2--BUSINESS COMBINATION AND ACQUISITION -- (Continued)
at the time of the acquisition, discounted for restrictions on resale and for
trading volume. The excess of the purchase price over the estimated fair value
of the identifiable acquired assets less liabilities assumed was $7,885,075,
which was recognized as goodwill. The fair value of purchased research and
development amounted to $1,258,000 and was recognized as an expense at the
date of the merger. The accompanying consolidated financial statements include
the accounts and operations of Digital Radio from February 12, 1997. The
following pro forma information presents the results of operations as if the
Digital Radio acquisition had occurred at the beginning of 1996. The write-off
of purchased research and development was a nonrecurring charge which resulted
directly from the transaction and therefore has been excluded from the
following pro forma information. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would
have occurred had the acquisition been made at the beginning of 1996 as
described above or of the results which may occur in the future.
<TABLE>
<CAPTION>
For the Nine For the
Months Ended Year Ended
September 30, December 31,
1997 1996
--------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales ............................. $ 2,506,204 $ 2,004,983
Net Loss .......................... (4,363,386) (5,999,903)
Net Loss per Common Share ......... $ (0.45) $ (1.03)
</TABLE>
NOTE 3--INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------
1997 1996 1995
--------------- ----------- -----------
<S> <C> <C> <C>
Materials ............... $ 305,757 $ 20,935 $ --
Work in process ......... 67,475 138,946 60,656
Finished goods .......... 59,828 -- --
--------- --------- --------
Total ................... $ 433,060 $ 159,881 $ 60,656
========= ========= ========
</TABLE>
<PAGE>
NOTE 4--EQUIPMENT
Equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------
1997 1996 1995
--------------- ----------- -----------
<S> <C> <C> <C>
Computer equipment .............. $ 211,704 $ 68,440 $ 55,216
Telephone equipment ............. 98,535 31,273 22,873
Office equipment ................ 46,202 29,995 26,042
Manufacturing equipment ......... 870,321 308,458 225,491
Furniture and fixtures .......... 24,875 10,071 10,071
Software ........................ 111,218 -- --
----------- --------- ---------
Total ........................... $ 1,362,855 $ 448,237 $ 339,693
=========== ========= =========
</TABLE>
NOTE 5--OBLIGATION UNDER NON-COMPETE AGREEMENT
In connection with Digital Radio's acquisition of a subsidiary,
Dem-Tronics, in 1995, Digital Radio entered into a non-compete agreement with
the seller. The agreement originally called for a series of yearly minimum
F-13
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 5--OBLIGATION UNDER NON-COMPETE AGREEMENT -- (Continued)
payments to be increased by a contingent amount based on Dem-Tronics' sales
volume. The payment plan was accelerated through a renegotiated agreement in
September 1997 whereby the contingent payments were eliminated and the minimum
payments increased in both amount and frequency of payment. The new agreement
is for a total of $110,000 to be paid over four equal monthly payments of
$27,500 which began September 15, 1997. Interest on the minimum obligation has
been imputed at 10 percent, resulting in a total present value at September
30, 1997 of $81,148.
NOTE 6--ACCRUED SETTLEMENT OBLIGATION
In October 1997, the Company reached a settlement with an otherwise
unrelated joint venture partner over a suit filed by the partner against
Digital Radio and certain of its major customers. The suit asserted claims
that the joint venture had an interest in the technology which Digital Radio
used in products sold to those customers. Digital Radio strongly disputed the
partner's interest in the technology at issue. The settlement was made in an
effort to minimize the time and expense of protracted litigation, as well as
to maintain its good customer relations. Prior to its merger with the Company,
Digital Radio recorded a liability of $323,456 for the estimated cost of the
settlement. The settlement releases all claims against the Company and allows
the Company unlimited use of the technology. The obligation was settled by the
Company issuing 40,000 shares of restricted common stock valued at $8.09 per
share based upon fair value of the common stock on the date issued. Under the
settlement agreement, the Shareholder has an option to require the Company to
redeem the stock at $4.00 per share through March 1998.
NOTE 7--NOTES PAYABLE
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------------
1997 1996 1995
--------------- ------------ -------------
<S> <C> <C> <C>
Convertible notes payable; due upon demand; net of
$34,987 unamortized discount; converted to
common stock in 1996 ............................ $ -- $ -- $ 85,013
10% Promissory note incurred in connection with
stock redemption; paid in 1996 .................. -- -- 159,000
10% Notes payable; collateralized by equipment;
paid in 1997 .................................... -- 3,404 --
Payable due to shareholder; converted to common
stock in January 1997 ........................... -- 1,970 --
Capital lease obligations for equipment .......... 37,846 -- --
15% Note payable to a shareholder; payable $7,798
monthly through September 1998; secured by
equipment and personally guaranteed by two
stockholders .................................... 65,990 125,000 44,500
--------- --------- ----------
Total Notes Payable .............................. 103,836 130,374 288,513
Less: Current Portion ............................ (54,788) (85,566) (244,013)
--------- --------- ----------
Long-Term Notes Payable .......................... $ 49,048 $ 44,808 $ 44,500
========= ========= ==========
</TABLE>
From November 1995 through February 1996, the Company issued convertible
notes payable totaling $275,000. The notes bore interest at 6% in addition to
the amortization of the discount (see Note 10) resulting in an effective
interest rate of 463%. The notes were converted into 1,892,860 shares of
common stock in March 1996.
From June through December 1996, the Company issued convertible notes
payable totaling $540,000 in connection with a unit offering of common stock.
The notes bore interest at 6% in addition to the amortization
F-14
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 7--NOTES PAYABLE -- (Continued)
of the discount which amounted to $1,154,094 (see Note 10). The discount was
fully amortized during the period from the dates the notes were issued through
December 31, 1996.
The annual maturities of notes payable as of September 30, 1997 were as
follows:
Periods Ending December 31:
1997 ................................ $ 24,213
1998 ................................ 58,344
1999 ................................ 12,461
2000 ................................ 8,132
2001 686
---------
Total ............................... $ 103,836
=========
NOTE 8--INCOME TAXES
The net loss for all periods presented resulted entirely from operations
within the United States. There was no provision for or benefit from income
tax for any period. The components of the net deferred tax asset are shown
below:
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------------
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
Operating Loss Carryforwards .......... $ 2,250,381 $ 864,937 $ 95,813
Accrued liabilities and other ......... 416,027 168,979 5,169
------------ ------------ ----------
Total Deferred Tax Assets ............. 2,666,408 1,033,916 100,982
Valuation Allowance ................... (2,666,408) (1,033,916) (100,982)
------------ ------------ ----------
Net Deferred Tax Asset ................ $ -- $ -- $ --
============ ============ ==========
</TABLE>
For tax reporting purposes, the Company has net operating loss
carryforwards in the amount of $6,045,565 that will expire beginning in the
year 2011. Of this amount, $1,246,871 was from Digital Radio prior to its
acquisition, and the availability of this amount to offset future taxable
income is limited.
The following is a reconciliation of the amount of tax (benefit) that
would result from applying the federal statutory rate to pretax loss with the
provision for income taxes for the periods ended:
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------------------
1997 1996 1995
----------------- ----------------- --------------
<S> <C> <C> <C>
Tax at statutory rate (34%) ................. $ (1,685,090) $ (1,100,463) $ (92,050)
Non-deductible expenses ..................... 836,898 283,633 --
Change in valuation allowance ............... 1,011,845 932,934 100,982
State tax benefit, net of federal tax effect. (163,653) (106,811) (8,932)
Research and development credit ............. -- (9,293) --
------------- ------------- ----------
Net Income Tax Expense ...................... $ -- $ -- $ --
============= ============= ==========
</TABLE>
In connection with the Digital Radio acquisition, $1,258,000 of research
and development was written-off before tax. This amount comprises most of the
non-deductible expenses in 1997. The results of the acquisition were an
increase to total deferred tax assets of $620,647 and a corresponding increase
in the valuation allowance.
F-15
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 9--SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH INVESTING AND FINANCING
ACTIVITIES
Supplemental Cash Flow Information --
For the Nine
Months Ended For the Year Ended
September 30, December 31,
--------------- ----------------------
1997 1996 1995
--------------- ----------- --------
Taxes Paid ............ $ -- $ -- $ --
Interest Paid ......... $ 35,007 $ 30,677 $ --
Noncash Investing and Financing Activities -- During the period from
April 10, 1995 through December 31, 1995 the Company redeemed 600,000 shares
of common stock as follows:
<TABLE>
<S> <C>
Common stock redeemed .................................... $ 269,000
---------
Payments made by others in exchange for the following:
139,394 shares of common stock ........................ 46,000
Notes payable, net of discount ........................ 16,679
Beneficial debt conversion feature .................... 28,321
Issuance of note payable to former shareholder ........... 159,000
---------
250,000
---------
Cash Paid to Redeem Common Stock ......................... $ 19,000
=========
</TABLE>
During the period ended December 31, 1995, the Company issued 542,746
shares of common stock valued at $179,106 for services and financing fees.
During the year ended December 31, 1996, $138,000 of debt was issued to
acquire equipment, of which $120,000 was to a stockholder. Notes payable in
the amount of $815,000 were converted to common stock. Common stock valued at
$787,588 was issued for services.
During the nine months ended September 30, 1997, $1,970 in long-term debt
was converted into 5,630 shares of common stock at $0.35 per share. Equipment
was sold at no gain or loss in exchange for assumption by the purchaser of a
$54,320 note payable. The Company issued 1,798,100 shares of common stock and
201,900 stock options in exchange for all of the issued and outstanding common
stock of Digital Radio. In January and February 1997, which was prior to the
effective date of the merger, the Company advanced $118,764 to Digital Radio.
In conjunction with the merger, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired ......................... $ 1,112,399
Purchased research and development .................... 1,258,000
Goodwill .............................................. 7,885,075
Common stock issued and stock options granted ......... (8,674,062)
------------
Liabilities Assumed ................................... $ 1,581,412
============
</TABLE>
NOTE 10--STOCKHOLDERS' EQUITY
The Company began business on April 10, 1995 as a joint venture. The
accompanying financial statements have been restated to present the capital
transactions of the Joint Venture at their common stock equivalents, based on
787,140 common shares issued upon the reorganization of the Joint Venture into
Data Security Corporation in November 1995. Capital transactions of the Joint
Venture were as follows: Owners of the Joint Venture invested cash in the
amount of $340,000 and $10,000 in April and June 1995, respectively, and paid
another $46,000 on behalf of the Company during this time. In addition, owners
contributed management services valued at $34,900 and were paid financing fees
of $30,356. These capital transactions, totaling $461,256, have been
F-16
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 10--STOCKHOLDERS' EQUITY -- (Continued)
presented as being equivalent to the issuance of 1,387,140 shares of common
stock which were valued at $0.33 per share, based upon the price shares were
issued to owners in exchange for cash, as stated above. As described more
fully in Note 9, the Company redeemed one of the owner's interest in the Joint
Venture for $269,000 by paying the owner $19,000, by other owners of the Joint
Venture paying the owner $46,000 (as described above), by a third-party lender
paying the owner $45,000 and by the Company entering into an agreement to pay
the owner $159,000 plus interest thereon at 10% by March 1996. The redemption
of the ownership interest has been presented in the accompanying financial
statements as being equivalent to the redemption of 600,000 shares of common
stock at $0.45 per share. The payments to the owner were not in exchange for
any additional stated or unstated rights or privileges.
On November 15, 1995, the Company issued 25,000 shares of common stock as
fees for raising financing for the Company. The shares issued were valued at
$8,250 or $0.33 per share, based upon the price common stock had been issued
for cash. In December 1995, an additional 320,000 shares of common stock were
issued to a director of the Company in payment for management services. The
services and the shares issued were also valued at $0.33 per share and totaled
$105,600.
In November 1995 through February 1996, the Company issued convertible
notes payable in the amount of $275,000, of which notes for $120,000 were
issued in 1995. The debt was converted into 1,892,860 shares of common stock
in March 1996 at $0.15 per share. The market value of the restricted common
shares at the dates the debt was issued exceeded the rate the debt was
converted by an average of $0.23 per share. This difference was a beneficial
conversion feature of the convertible debt and has been accounted for as a
discount on the debt in the amount of $69,974 in 1995 and $90,384 in 1996. The
beneficial conversion feature was credited to additional paid-in capital on
the dates the convertible notes payable were issued.
The Company issued 300,000 shares of common stock at $0.70 per share
during April and May 1996 for $210,000 in cash and incurred costs in
connection with the offering of $12,000. The Company issued 7,000 shares of
common stock in March 1996 in connection with the termination of the
employment of an employee. The shares issued were valued based upon the $0.70
cash price for common stock.
Common stock and convertible debt were issued as a unit in an offering
from June through December 1996. The offering resulted in the issuance of
600,000 shares of common stock and $540,000 of notes payable which were
convertible into common stock at $0.45 per share. The gross proceeds from the
offering before $5,000 offering costs were $600,000 and were allocated on the
dates received to (a) the common stock based upon its fair value, (b) to the
beneficial conversion feature of the notes payable based upon the excess of
the fair value of the common stock over the conversion price, and (c) the
remaining amount was allocated to the notes payable, net of a $1,154,094
discount. The excess of the market value of the common stock over the
conversion price at the dates the notes payable were issued ranged from $0.25
to $0.73 per share and was a beneficial conversion feature of the convertible
debt. The portion of the proceeds from the unit offering allocated to the
beneficial conversion feature was $629,397, which amount was accounted for as
additional paid-in capital on the dates the convertible notes payable were
issued. The notes payable were converted into 1,200,000 shares of common stock
from October through December 1996.
The Company issued 20,000 shares of common stock in November 1996 in
settlement of an employment agreement. The services were valued at $30,123, or
$1.51 per share.
On February 12, 1997, the Company issued 500,000 units at $2.00 per unit
in a private placement offering, with each unit consisting of one share of
common stock and one warrant. Each warrant entitled the holder to purchase one
share of common stock at $2.00 per share. The 500,000 warrants were exercised
on March 6, 1997 and resulted in proceeds of $1,000,000.
F-17
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 10--STOCKHOLDERS' EQUITY -- (Continued)
On April 23, 1997 the Company issued 250,000 units at $2.00 per unit in a
private placement offering, with each unit consisting of one share of common
stock and one warrant. Each warrant entitled the holder to purchase one share
of common stock at $2.00 per share. The warrants were immediately exercised
for cash resulting in proceeds of $1,000,000 for the stock and warrants. On
August 8, 1997 the Company issued 500,000 shares of common stock at $2.00 per
share in a private placement offering for cash.
NOTE 11--STOCK OPTIONS
In December 1996, the Company granted options to an employee, a former
member of the Board of Directors, and a consultant to purchase a total of
258,000 shares of restricted common stock at $0.33 per share. In January 1997,
the consultant was granted an additional option to purchase 150,000 shares at
$0.35 per share. The options may be exercised from the date granted through
June 30, 1998. The Company recorded compensation expense of $441,180 ($1.71
per share) during 1996 and $265,500 ($1.77 per share) during 1997 for the
difference between the exercise price and the fair value of the common stock
on the dates granted.
In connection with the acquisition of Digital Radio, the Company assumed
Digital Radio's stock option plans and granted options to the former
shareholders and employees of Digital Radio to purchase 201,900 shares of
common stock at a weighted average price of $1.90 per share through December
20, 2001.
A summary of the status of the Company's stock options as of September
30, 1997 and December 31, 1996, and changes during the periods then ended is
presented below:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
-------------------------------- -------------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------------ ------------------ ------------ -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period ............... 258,000 $ 0.33 -- $ --
Granted .......................................... 351,900 1.21 258,000 0.33
Exercised ........................................ (10,652) 0.09 -- --
------- -------
Outstanding at end of period ..................... 599,248 $ 0.85 258,000 $ 0.33
======= =======
Options exercisable at period-end ................ 539,998 $ 0.57 258,000 $ 0.33
======= =======
Weighted-average fair value of options granted
during the period ............................... $ 2.16 $ 1.76
========= =========
</TABLE>
The Board of Directors approved a stock option plan in September 1997.
Options to purchase 1,500,000 shares of common stock are authorized under the
plan. Options to purchase 937,044 common shares were granted on December 18,
1997,with a weighted-average exercise price of $6.50 per share. The plan was
approved and the options were granted subject to shareholders' approval, which
was obtained on December 18, 1997. The options become exercisable from the
date granted through November 10, 1999. The unexercised options expire in
December 17, 2002. Compensation relating to the options of $2,108,349, $2.25
per share, will be recognized over the period the options vest, of which
$697,840 will be recognized during the fourth quarter of 1997.
F-18
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 11--STOCK OPTIONS -- (Continued)
The Company measures compensation under stock-based options and plans
using the intrinsic value method prescribed in Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees, and related
Interpretations. Stock-based compensation charged to operations was $265,500
during the nine months ended September 30,1997 and $441,180 during the year
ended December 31, 1996. Had compensation cost for the Company's options been
determined based on the fair value at the grant dates consistent with the
alternative method set forth under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, net loss and loss per share
would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended
Nine Months December 31,
Ended September -----------------------------------
30, 1997 1996 1995
----------------- ----------------- ---------------
<S> <C> <C> <C>
Net loss:
As reported ......... $ (4,956,148) $ (3,236,657) $ (270,736)
Pro forma ........... (4,974,148) (3,249,557) (270,736)
Loss per share:
As reported ......... $ (0.52) $ (0.85) $ (0.26)
Pro forma ........... (0.52) ( 0.85) ( 0.26)
</TABLE>
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996, respectively:
dividend yield of 0.0% for both periods; expected volatility of 145.5% and
99.6%; risk-free interest rate of 5.6% and 5.0% and expected life of the
options of 2.0 years and 1.5 years. Pro forma net loss for the nine months
ended September 30, 1997 would have been $5,486,425, or $0.57 per share had
the options to purchase 937,044 shares of common stock, as explained above,
been granted on September 30, 1997. The related fair value of pro forma
options granted was based upon the following pro forma weighted-average
assumptions: dividend yield of 0.0%; expected volatility of 79.1%; risk-free
interest rate of 5.3%; and expected life of options of 2.0 years.
NOTE 12--SUBSEQUENT EVENTS
Subsequent to September 30, 1997, option holders exercised options to
purchase 168,160 shares of common stock at exercise prices from $0.33 to $2.00
per share. As described in Note 11, the Company granted options to purchase
937,044 common shares at $6.50 per share on December 18, 1997.
On October 31, 1997, the Company acquired all of the outstanding common
stock of TWC, Ltd, (TWC), a Delaware corporation engaged in the design and
manufacture of antennas for sale to radio and electronics manufacturers, and
the assets of Austin Antenna, Ltd. (Austin Antenna), a New Hampshire
corporation. The Company paid approximately $146,000 in cash by advancing
$106,000 before September 30, 1997 and by paying approximately $40,000 in
acquisition costs, and issued 100,000 shares of restricted common stock valued
at $1,036,000 or $10.36 per share. The acquisition was accounted for using the
purchase method of accounting. The net assets acquired were recorded at their
fair value, with $400,000 allocated to patents, and $200,000 allocated to
research and development. The patents, which expire in July 2004, will be
amortized over their remaining useful life. The excess of the purchase price
over the estimated fair value of the net assets acquired was $453,938 which
was allocated to goodwill. Goodwill will be amortized over a period of five
years. The results of operations of TWC will be included in the consolidated
financial statements from the date of acquisition. The net assets and
operations of TWC are not significant to the net assets and operations of the
Company; therefore, pro forma financial statements are not presented.
On November 11, 1997 the Company acquired all of the issued and
outstanding stock of XARC Corporation, a Kansas corporation primarily engaged
in sales, by issuing 10,000 shares of restricted common stock valued at
$103,000. XARC was a shell corporation having no assets or liabilities. Since
the owner of XARC did
F-19
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 12--SUBSEQUENT EVENTS -- (Continued)
not receive a controlling interest in the Company, the acquisition is
accounted for under the purchase method of accounting with the purchase price
allocated to purchased research and development and charged against operations
at the acquisition date. Results of operations for XARC will be included in
the consolidated financial statements from the date of acquisition.
On November 13, 1997 the Company borrowed $200,000 from an otherwise
unrelated stockholder for a term of 60 days at 12% interest. The loan is
personally guaranteed by and secured by common stock held by an officer and
director. In connection with the loan the Company issued 15,000 shares of
restricted common stock valued at $154,200 as a financing fee. The Company
borrowed $125,000 on December 4, 1997 from an officer. The related promissory
note is due December 31, 1997 and bears interest at 12%. In addition, 9,375
shares of common stock were issued as a financing fee to the officer and were
valued at $98,938. From December 24, 1997 through January 8, 1998, the Company
borrowed $800,000 from an unrelated party under the terms of the promissory
notes. The notes are due September 30, 1998, bear interest at 10%, and are
unsecured (unaudited).
On December 19, 1997 the Company entered into agreements to fulfill
initial orders for various wireless products to be delivered through March
1998 totaling $177,000. While the agreements anticipate substantial increases
in additional orders, these increases are not assured. Should the orders
materialize, the Company anticipates it will be able to meet production
requirements with its present capacities during 1998. In addition to the
orders for products, the Company entered into a contract to provide for
project management, engineering design, and support services (unaudited).
In January 1998, the Company sold its SecuriKey business and related
products to a shareholder/employee for $372,499 which was collected in
February 1998. The sale resulted in a gain of approximately $300,000. The
results from operations of the SecuriKey business were not significant during
the nine months ended September 30, 1997 (unaudited).
NOTE 13--COMMITMENTS AND CONTINGENCIES
Lease Commitments -- The Company leases office and production facilities
in Salt Lake City and American Fork, Utah. The leases are accounted for as
operating leases. Lease expense under these agreements for the nine months
ended September 30, 1997, and for the periods ended December 31, 1996 and 1995
was $123,779 and $59,096, respectively. The facilities lease terms end in May
and June 1998. The Company also assumed lease commitments in the merger with
Digital Radio for three vehicles under operating lease agreements. Future
minimum rental payment commitments as of September 30, 1997 under facility and
vehicle leases by years are as follows:
<TABLE>
<CAPTION>
Facilities Vehicles
------------ -----------
<S> <C> <C>
Year Ending December 31:
1997 ......................................... $ 47,972 $ 3,005
1998 ......................................... 100,593 18,267
1999 -- 4,981
-------- --------
Total Minimum Payments Required ......... $148,565 $ 26,253
======== ========
</TABLE>
Unasserted Claim -- Although action has not been initiated, a former
officer of the Company has threatened litigation against the Company following
his resignation as an officer and as a director in October 1997. The
resignation was the result of a dispute over compensation involving, among
other things, a claim by the former officer and director that the Company had
agreed to grant him options to purchase 275,000 shares of the Company's common
stock at a price of $2.00 per share in connection with his employment, and had
later disaffirmed such obligation. Because of the number of shares involved in
this unasserted claim, and the difference
F-20
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 13--COMMITMENTS AND CONTINGENCIES -- (Continued)
between the current market price for the Company's common stock and the
exercise price of the options claimed, the expense to the Company for
financial reporting purposes would be material if the former officer should
initiate and prevail in litigation over these claims. The Company intends to
vigorously defend any such action.
401K Profit Sharing Plan -- With the acquisition of Digital Radio, the
Company assumed the Digital Radio commitments under a 401K profit sharing
plan. The Company has no commitment to match the employee's contributions to
the plan, nor has the Company made any contributions to the plan.
Equipment and software purchase -- The Company has ordered $650,000 of
test equipment and design and development simulation software to be delivered
during the first half of 1998 (unaudited).
F-21
<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East Broadway, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Digital Radio Communications Corporation
We have audited the accompanying consolidated balance sheets of Digital Radio
Communications Corporation and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Digital
Radio Communications Corporation and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has a working capital deficiency and a net
capital deficiency at December 31, 1996, and has incurred a loss from
operations and negative cash flows from operating activities during the year
ended December 31, 1996. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans and
subsequent events regarding those matters are described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 4, 1997, except for the second paragraph of Note 2, as to which the date
is September 15, 1997, and the sixth paragraph of Note 14 as to which the date
is November 21, 1997.
F-22
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
Current assets
Cash ........................................................................ $ 1,854 $ 4,981
Trade accounts receivables .................................................. 258,016 290,460
Other accounts receivable ................................................... 82,340 160,000
Inventory ................................................................... 308,496 175,043
Prepaid expenses ............................................................ 15,328 11,748
Deferred income taxes ....................................................... 69,738 41,316
------------ ----------
Total current assets ..................................................... 735,772 683,548
------------ ----------
Property and equipment ....................................................... 611,422 485,642
Less accumulated depreciation ............................................... (192,964) (76,297)
------------ ----------
Net property and equipment ............................................... 418,458 409,345
------------ ----------
Other assets
Capitalized financing costs ................................................. 18,000 --
Purchased technology, net of accumulated amortization ....................... -- 9,230
Investment in joint venture, which principally owns a patent, net of
amortization .............................................................. 13,520 16,900
Investment in securities .................................................... 36,500 30,000
Goodwill, net of amortization ............................................... 72,112 33,985
------------ ----------
Total other assets ....................................................... 140,132 90,115
------------ ----------
Total Assets ................................................................. $ 1,294,362 $1,183,008
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Checks written in excess of cash in bank .................................... $ 2,921 $ 12,992
Trade accounts payable ...................................................... 447,612 207,195
Accrued liabilities ......................................................... 430,824 229,921
Accrued income taxes ........................................................ 722 16,967
Notes payable ............................................................... 3,405 66,624
Notes payable to related parties ............................................ 162,540 119,503
Obligation under capital leases -- current portion .......................... 73,902 72,753
Obligation under non-compete agreement ...................................... 101,475 71,571
------------ ----------
Total current liabilities ................................................ 1,223,401 797,526
------------ ----------
Long-term liabilities
Obligation under capital leases ............................................. 73,562 75,306
Deferred income taxes ....................................................... 43,801 39,731
Convertible debentures ...................................................... 100,000 --
------------ ----------
Total long-term liabilities .............................................. 217,363 115,037
------------ ----------
Stockholders' equity (deficit)
Preferred stock -- $0.01 par value; 2,000,000 shares authorized; no shares
issued .................................................................... -- --
Common stock -- $0.01 par value; 10,000,000 shares authorized;
3,049,814 shares and 2,550,000 shares issued and outstanding .............. 30,498 25,500
Additional paid-in capital .................................................. 1,028,500 505,672
Receivable from shareholders ................................................ -- (151,000)
Deferred offering costs ..................................................... -- (76,840)
Accumulated deficit ......................................................... (1,205,400) (32,887)
------------ ----------
Total stockholders' equity (deficit) ..................................... (146,402) 270,445
------------ ----------
Total Liabilities and Stockholders' Equity (Deficit) ......................... $ 1,294,362 $1,183,008
============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
Sales .................................................... $ 1,386,478 $ 1,638,559
Cost of sales ............................................ 1,006,366 1,120,293
------------ ------------
Gross profit ............................................. 380,112 518,266
------------ ------------
Expenses
Research and development expense ........................ 440,125 117,081
General and administrative expenses ..................... 1,089,821 341,427
Interest expense ........................................ 36,397 20,301
------------ ------------
Total expenses ....................................... 1,566,343 478,809
------------ ------------
Income (loss) before income taxes ........................ (1,186,231) 39,457
Provision for (benefit from) income taxes ................ (13,718) 8,669
------------ ------------
Net Income (Loss) ........................................ $ (1,172,513) $ 30,788
============ ============
Net Income (Loss) Per Common Share ....................... $ (0.42) $ 0.01
============ ============
Weighted average number of common shares used in per share
calculation ............................................. 2,818,250 2,212,884
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-In
Shares Amount Capital
----------- ----------- --------------
<S> <C> <C> <C>
Balance -- December 31, 1994 ........... 2,200,000 $ 22,000 $ (19,010)
Issuance to acquire EMA Inc.,
$3.12 per share, April 1, 1995 ........ 11,000 110 17,072
Issuance of shares, at $4.00 per
share, December 29, 1995 .............. 5,000 50 9,950
Issuance of shares, at $3.00 per
share, December 30, 1995 and
subscription receivable ............... 334,000 3,340 497,660
Deferred offering costs incurred ....... -- -- --
Net income for year ending
December 31, 1995 ..................... -- -- --
--------- -------- -----------
Balance -- December 31, 1995 ........... 2,550,000 25,500 505,672
Issuance for cash, $1.53 per share,
January through April 1996 ............ 71,666 717 109,283
Collection of subscription
receivable ............................ -- -- --
Issuance upon exercise of options . 191,000 1,910 7,335
Issuance for services .................. 20,000 200 27,400
Issuance of shares upon conversion
of debentures ......................... 21,748 217 49,783
Issuance of shares for cash in
private placement offering, net
of $147,519 offering costs ............ 195,400 1,954 329,027
Net loss for the year ended
December 31, 1996 ..................... -- -- --
--------- -------- -----------
Balance -- December 31, 1996 ........... 3,049,814 $ 30,498 $ 1,028,500
========= ======== ===========
<CAPTION>
Total
Stockholders'
Accumulated Equity
Deficit Other (Deficit)
--------------- ------------- --------------
<S> <C> <C> <C>
Balance -- December 31, 1994 ........... $ (63,675) $ -- $ (60,685)
Issuance to acquire EMA Inc.,
$3.12 per share, April 1, 1995 ........ -- -- 17,182
Issuance of shares, at $4.00 per
share, December 29, 1995 .............. -- -- 10,000
Issuance of shares, at $3.00 per
share, December 30, 1995 and
subscription receivable ............... -- (151,000) 350,000
Deferred offering costs incurred ....... -- (76,840) (76,840)
Net income for year ending
December 31, 1995 ..................... 30,788 -- 30,788
------------ ----------- ------------
Balance -- December 31, 1995 ........... (32,887) (227,840) 270,445
Issuance for cash, $1.53 per share,
January through April 1996 ............ -- -- 110,000
Collection of subscription
receivable ............................ -- 151,000 151,000
Issuance upon exercise of options . -- -- 9,245
Issuance for services .................. -- -- 27,600
Issuance of shares upon conversion
of debentures ......................... -- -- 50,000
Issuance of shares for cash in
private placement offering, net
of $147,519 offering costs ............ -- 76,840 407,821
Net loss for the year ended
December 31, 1996 ..................... (1,172,513) -- (1,172,513)
------------ ----------- ------------
Balance -- December 31, 1996 ........... $ (1,205,400) $ -- $ (146,402)
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 1996 1995
<TABLE>
<CAPTION>
1996 1995
---------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) .................................................... $ (1,172,513) $ 30,788
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization ...................................... 144,697 67,135
Compensation paid with common shares ............................... 27,600 --
Compensation paid with notes payable ............................... 43,037 --
Trade receivable collected with investment securities .............. (6,500) (30,000)
Changes in operating assets and liabilities, net of effects of
businesses acquired:
Accounts receivable ............................................. 32,444 (211,568)
Other accounts receivable........................................ (82,340) --
Inventory ....................................................... (133,453) (110,501)
Accounts payable ................................................ 240,417 98,186
Accrued liabilities ............................................. 174,966 129,789
Accrued income taxes ............................................ (16,245) 10,100
Other ........................................................... 1,385 2,096
------------ ----------
Net cash used by operating activities ................................ (746,505) (13,975)
------------ ----------
Cash flows from investing activities
Payments for the purchase of property and equipment .................. (62,980) (53,846)
Increase in deposits ................................................. -- (4,090)
Investment in patent ................................................. -- (16,900)
Cash received in acquisitions ........................................ -- 60,417
------------ ----------
Net cash used by investing activities ................................ (62,980) (14,419)
------------ ----------
Cash flows from financing activities
Proceeds from issuance of common stock ............................... 527,066 200,000
Collection of receivables from shareholders for common stock ......... 311,000 --
Proceeds from issuance of convertible debentures, net of $18,000 in
financing costs paid ............................................... 132,000 --
Net payment on short-term obligations ................................ (10,071) (26,787)
Principal payments on notes payable .................................. (71,160) (33,150)
Principal payments on obligation under capital lease ................. (55,454) (40,615)
Payments on non-compete obligation ................................... (27,023) (28,800)
Payment of deferred offering costs ................................... -- (76,840)
------------ ----------
Net cash provided by (used in) financing activities .................. 806,358 (6,192)
------------ ----------
Net decrease in cash .................................................. (3,127) (34,586)
Cash -- beginning of year ............................................. 4,981 39,567
------------ ----------
Cash -- end of year ................................................... $ 1,854 $ 4,981
============ ==========
</TABLE>
Supplemental cash flow information and noncash investing and financing
activities -- Note 11
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Digital Radio Communications Corporation and subsidiaries (the Company),
began business in 1992. On March 15, 1996, its name was changed from
Electronic Technology Corp. It designs and manufactures electronic products,
including radio frequency and infrared systems, embedded control, low power FM
transceivers and antenna technologies. It provides research and design
services on a contract basis for others and it is also engaged in contract
manufacture of electronic components.
Principles of Consolidation
The consolidated financial statements include the accounts of Digital
Radio Communications Corporation and its wholly owned subsidiaries, EMA Inc.
and Dem-Tronics, Inc., since the date of their respective acquisitions, after
elimination of intercompany accounts and transactions. Investments in
unconsolidated joint ventures, which relate primarily to research and
development ventures, are accounted for using the equity method. The Company's
share of losses from its equity investments are included in "Research and
development expense" in the consolidated statements of operations.
Business Condition
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates continuation
of the Company as a going concern. However, the Company sustained a
substantial operating loss during the year ended December 31, 1996. Further,
at December 31, 1996 current liabilities exceeded current assets by $494,037
and total liabilities exceeded total assets by $152,810. These matters raise
substantial doubt about the Company's ability to continue as a going concern;
however the financial statements do not include any adjustments that might
result from the outcome of this uncertainty. To mitigate these factors, in
1997, the Company obtained $1,380,000 of short-term debt financing under a
bridge loan from World Wireless Communications, Inc. and obtained additional
capital financing by merging with World Wireless Communications, Inc. Also in
the first four months of 1997, approximately $2,000,000 of revenue was earned
or was committed under short-term contracts with customers. However, there is
no assurance that this additional capital and future revenues can meet the
Company's obligations and its production and operating expenses as they become
due.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates.
Segment Information and Concentration of Risk
Through 1996, the Company operated solely in the electronics industry
primarily in the Western United States. Accordingly, segment information
relating to operations in different industries or geographic areas is not
presented in these financial statements. The concentration of business in one
industry and one geographic area subjects the Company to a concentration of
credit risk relating to trade accounts receivable. The Company generally does
not require collateral from its customers with respect to the Company's trade
receivables. Beginning in 1997, the Company has expanded its operations to
include significant sales nationally and internationally.
F-27
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Major Customers
Sales to two customers were each in excess of 10% of total sales during
1996 and 1995. Sales to the first customer were $249,123 and $121,635 in 1996
and 1995, respectively, and were $591,000 and $324,000, respectively, to the
second customer. In 1997, contracts with several additional significant
customers have been signed.
Accounts Receivable
Due to the actual write off of accounts that were uncollectible at
December 31, 1996 and 1995, an allowance for doubtful accounts was not
required. Management believes that the remaining accounts receivable are fully
collectible. Trade accounts receivable included $95,000 at December 31, 1996,
which was subsequently collected by receiving shares of customers' common
stock, as prescribed in the related performance contracts.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Long-Lived Assets
Beginning in 1996, the Company adopted Statement of Financial Accounting
Standard 121 (SFAS 121) which requires Management to review long-lived assets
and the related intangible assets for impairment whenever events or changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. Recoverability is determined by an analysis of undiscounted
future cash flows from operations related to those assets. If the related
operations are determined to be unable to recover the carrying amount of its
assets, then the assets are written down to fair value. Fair value is
determined based on discounted cash flows or appraised values, depending upon
the nature of the assets. The adoption of SFAS 121 did not result in an
adjustment to the carrying amount of assets during 1996.
Equipment
Property and equipment are stated at cost. Depreciation, including
amortization of leased assets, is computed using the straight-line method over
the estimated useful lives of the equipment, which is five years. Maintenance
and repairs of equipment are charged to operations, and major improvements are
capitalized. Upon retirement, sale, or other disposition of equipment, the
cost and accumulated depreciation are eliminated from the accounts, and gain
or loss is included in operations.
Investments
Investments in equity securities for which the Company cannot sell those
securities for a period in excess of one year, due to restrictions from
securities regulation, are carried at historical cost and are classified as
non-current assets.
Sales Recognition
Sales are recognized upon delivery of products or services and acceptance
by the customer.
Research and Development Expense
Current operations are charged with all research, engineering and product
development expenses.
F-28
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Net Income (Loss) Per Common Share
Net income (loss) per share is computed using the weighted average number
of common shares outstanding during each period.
NOTE 2 -- ACQUISITIONS
On April 1, 1995, the outstanding common stock of EMA Inc. (EMA), an
electronic component assembler, was purchased for $30,430. The Company paid
$13,258 in cash (including acquisition costs) and issued 5,500 shares of
common stock valued at $17,172. The owner of EMA did not own a controlling
interest in the Company; accordingly, the acquisition has been accounted for
using the purchase method of accounting. Assets were recorded at fair value.
The results of operations of EMA are included in the consolidated financial
statements from the date of acquisition.
On August 1, 1995 the Company acquired the net assets of Dem-Tronics,
Inc., an electronic component assembler, for $175,328. The Company executed a
non-interest bearing promissory note to the seller for $62,724 payable in
January 1996. Additionally, the Company executed a non-compete agreement which
initially required a series of yearly minimum payments, to be increased by a
contingent amount based on Dem-Tronics sales volume. The payment plan was
accelerated through a subsequently re-negotiated agreement whereby the
contingent payments were replaced with higher minimum payments due in entirety
by December 15, 1997. The new payments total $137,023. With imputed interest
at 10%, the resulting present value of the obligation was $128,498 at the date
of acquisition. Since the owners of Dem-Tronics did not receive a controlling
interest in the Company, the acquisition was accounted for using the purchase
method of accounting. The results of operations of Dem-Tronics are included in
the consolidated financial statements from the date of acquisition.
The fair value of the net assets acquired was $72,724 which is net of
liabilities incurred and assumed of $101,743. The excess of the purchase price
over the fair value of the identifiable assets was $94,001 and was allocated
to goodwill. Goodwill is being amortized over five years on a straight-line
basis. Goodwill amortization expense was $18,800 and $3,089 for the years
ended December 31, 1996 and 1995, respectively.
Pro forma results of operations for the year ended December 31, 1995, as
if the acquisitions were effective January 1, 1995, are as follows
(unaudited):
Revenue ......................... $ 1,998,021
Net Income ...................... 39,888
Income Per Common Share ......... 0.02
NOTE 3 -- OTHER RECEIVABLES AND RECEIVABLE FROM SHAREHOLDER
In 1996, other receivables included loans to employees of $7,768 for
payroll advances and a receivable from a partner in a joint venture for
engineering services under the joint venture agreement.
These amounts were received subsequent to year end. Other receivables
also included a receivable from a customer which retained $35,000 for a
project that is pending completion, once a third party provides necessary
software.
Other receivables at December 31, 1995 consist of subscriptions for the
Company's common shares subscribed for during 1995. Total subscriptions at
December 31, 1995 were $311,000, of which $160,000 was received by April 8,
1996, and was recorded as a current asset. The balance of $151,000 was
recorded as an offset against additional paid-in capital on the balance sheet
and was collected in 1996.
F-29
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 4 -- INVENTORY
Inventory consists of the following at December 31:
1996 1995
------------ -----------
Materials ................ $ 131,983 $ 84,403
Work in process .......... 176,513 90,640
--------- --------
Total .................... $ 308,496 $175,043
========= ========
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1996 1995
----------- -----------
Computer equipment ............... $ 32,102 $ 26,526
Electronic equipment ............. 131,977 125,117
Office equipment ................. 7,955 6,313
Manufacturing equipment .......... 373,832 295,447
Furniture and fixtures ........... 13,738 13,738
Software ......................... 51,818 18,501
--------- --------
Total ............................ $ 611,422 $485,642
========= ========
Depreciation expense, which includes amortization of assets under capital
lease, was $116,667 and $42,900 for the years ended December 31, 1996 and
1995, respectively.
NOTE 6 -- RELATED PARTIES TRANSACTIONS
Notes payable to related parties consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Payable to officers for deferred compensation, no terms for
repayment, unsecured ................................................. $ 124,962 $ 61,370
Notes payable to shareholders, no terms for repayment, no stated
interest rate at December 31, 1996 ................................... 8,828 10,863
Loan payable to an officer, no terms for repayment, unsecured ......... 28,750 27,000
Loans payable to employees, unsecured, paid during 1996 ............... -- 20,270
--------- ---------
Total ................................................................. $ 162,540 $ 119,503
========= =========
</TABLE>
The Company has entered into a line of credit agreement with AAH
Development Company, Inc. The maximum amount available under the line of
credit was $200,000 with $5,000 borrowed at December 31, 1995, and included
above in notes payable to shareholders. The note had a 10% annual interest
rate. The note was repaid January 1996.
F-30
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 7 -- NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Note payable to an individual, secured by Dem-Tronics common
stock, paid in 1996 ......................................... $ -- $ 62,724
Other notes payable, various terms ........................... 3,405 3,900
Convertible debentures payable, interest at 12%, due September
1998, unsecured ............................................. 100,000 --
--------- --------
Total notes payable .......................................... 103,405 66,624
Less current portion ......................................... 3,405 66,624
--------- --------
Convertible Debentures - Long-Term ........................... $ 100,000 $ --
========= ========
</TABLE>
During 1996, the Company issued notes payable in the amount of $150,000;
these notes were convertible into common stock at a ratio of 289.96 shares per
$1,000 principal amount of notes. On December 6, 1996, $50,000 of these notes
were converted to common stock for 14,498 shares, leaving a remaining balance
of $100,000 of notes payable. Interest is due at 12%, and the notes are due
September 1998. Subsequent to year end, the Company issued additional
convertible notes payable for $75,000. All of the outstanding debentures were
converted to common stock, although the Company amended the terms of its notes
to increase the conversion ratio to 434.94 shares per $1,000 of principal
amount. In 1997, the Company converted $175,000 of debt into 83,369 shares of
common stock (including 7,249 shares for notes converted prior to the 1997
amendment).
NOTE 8 -- OBLIGATION UNDER NON-COMPETE AGREEMENT
In connection with the acquisition of Dem-Tronics (see Note 2) the
Company entered into a non-compete agreement with the seller. The remaining
liability on the agreement is $110,000, imputed interest at 10 percent is
$7,936 for a carrying amount of $102,604, payable in four monthly payments
beginning September 15, 1997 of $27,500 each.
NOTE 9 -- LEASE COMMITMENTS
Capital Leases -- The Company has leased equipment under capital lease
agreements, and has capitalized lease equipment of $268,847 and $214,151 as of
December 31, 1996 and 1995, respectively. During 1996, the Company leased
additional equipment with a capitalized value of $54,696. During 1995, the
Company received capital lease equipment capitalized in the amount of $55,562
in connection with the acquisitions described in Note 2, and leased additional
equipment with a capitalized value of $126,669. Accumulated amortization on
all leased equipment was $55,935 and $18,400 at December 31, 1996 and 1995,
respectively. Amortization of leased equipment is included with depreciation
expense.
F-31
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 9 -- LEASE COMMITMENTS -- (Continued)
The following is a schedule by years of the future minimum lease payments
required under capital leases together with the present value of the net
minimum lease payments as of December 31, 1996:
Years Ending December 31:
- ------------------------------------------------------------
1997 ............................................. $ 102,038
1998 49,870
1999 41,985
2000 9,021
2001 695
---------
Total Minimum Lease Payments ........................ 203,609
Less amount representing interest ................... (56,145)
---------
Present Value of Net Minimum Lease Payments ......... 147,464
Less Current Portion ................................ (73,902)
---------
Capital lease - Long-Term ........................... $ 73,562
=========
Operating Leases -- The Company leases office space under operating lease
agreements. Lease expense for the year ended December 31, 1996 was $117,518.
The future obligations under these operating leases are $95,456 and $53,109
for the years ending December 31, 1997 and 1998, respectively.
During 1996, the Company began leasing three automobiles under operating
lease agreements. Lease expense was $14,258 for the year ended December 31,
1996 for these auto leases. The future obligations for the leases are $19,238
and $9,096 for the years ending December 31, 1997 and 1998, respectively.
<PAGE>
NOTE 10 -- INCOME TAXES
Digital Radio Communications Corporation files a consolidated tax return
with it's two wholly-owned subsidiaries, EMA Inc., and Dem-Tronics, Inc. The
components of the provision for income taxes were as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- -----------
<S> <C> <C>
Current: Federal ................................... $ (10,550) $ 13,147
State ........................................ (4,753) 3,820
Deferred: Federal .................................. 1,309 (6,855)
State ........................................ 276 (1,443)
---------- --------
Provision for (benefit from) income taxes .......... $ (13,718) $ 8,669
========== ========
</TABLE>
The net deferred tax assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Deferred Tax Assets:
Compensated absences ..................... $ 32,316 $ 10,895
Deferred compensation and other .......... 36,974 30,421
Net Operating Loss ....................... 416,278 --
Research and development credit .......... 23,809 --
---------- ---------
Total Deferred Tax Assets .............. 509,377 41,316
---------- ---------
Valuation Allowance ......................... (439,639) --
---------- ---------
Deferred Tax Liabilities:
Depreciation ............................. (59,846) (29,494)
Amortization of Goodwill ................. (9,892) (10,237)
---------- ---------
Total Deferred Tax Liabilities ......... (69,738) (39,731)
---------- ---------
Net deferred tax asset ...................... $ -- $ 1,585
========== =========
</TABLE>
F-32
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 10 -- INCOME TAXES -- (Continued)
The following is a reconciliation of the amount of tax (benefit) that
would result from applying the federal statutory rate to pretax income (loss)
with the provision for income taxes at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- -----------
<S> <C> <C>
Tax at statutory rate (34%) ........................... $ (403,319) $ 13,415
Non-deductible expenses ............................... 8,778 3,017
Change in valuation allowance ......................... 439,639 --
State tax benefit, net of Federal tax effect .......... (39,146) 1,302
Research and development credit ....................... (19,996) --
Effect of lower tax rates ............................. 326 (9,065)
---------- --------
Provision for (benefit from) income taxes ............. $ (13,718) $ 8,669
========== ========
</TABLE>
For tax reporting purposes, the Company has a net operating loss carry
forward in the amount of $1,064,799 that will expire in the year 2011.
NOTE 11 -- SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH INVESTING AND
FINANCING ACTIVITIES
Supplemental Cash Flow Information --
1996 1995
---------- ---------
Taxes Paid ............. $ 7,479 $ 100
Interest Paid .......... 32,634 22,154
Supplemental Information of Noncash Investing and Financing Activities --
During 1996, equipment was leased under a capital lease obligation in the
amount of $54,859. Equipment was purchased by a note payable in the amount of
$7,941. Additional goodwill was recognized in connection with the
renegotiation of, and the increase in, the non-compete obligation related to
the acquisition of Dem-Tronics in the amount of $56,927. Also, $50,000 of
convertible debentures were converted into common stock.
During 1995, equipment was leased under a capital lease obligation in the
amount of $126,669. Equipment was purchased for $31,334 for which liabilities
were assumed in the same amount. The Company contributed a patent with a cost
of $16,900 to a joint venture and recorded an investment in the joint venture
of $16,900. Common stock was issued to investors for notes receivable of
$311,000.
In 1995, the Company purchased the common stock of EMA Inc. for $30,430.
In conjunction with the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired .............................. $ 131,727
Common stock issued and acquisition costs incurred ......... (30,430)
---------
Liabilities assumed ........................................ $ 101,297
=========
</TABLE>
In 1995, the Company purchased the common stock of Dem-Tronics, Inc. by
assuming and incurring liabilities in the amount of $231,395.
NOTE 12 -- STOCKHOLDERS' EQUITY
On December 11, 1995, the shareholders of the Company agreed to a
5.5-for-1 stock split of the Company's common stock. On March 15, 1996, the
shareholders approved an increase of the authorized common stock
F-33
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 12 -- STOCKHOLDERS' EQUITY -- (Continued)
from 500,000 shares to 5,000,000 shares. On August 31,1996, the shareholders
approved a 2-for-1 stock split and also approved increasing the authorized
common stock to 10,000,000 shares. The accompanying financial statements have
been restated for the effects of the changes in capital structure and for the
stock splits for all periods presented.
On March 15, 1996, the shareholders authorized 2,000,000 shares of
nonvoting preferred stock, $0.01 par value. The preferred stock has been
designated for issuance in connection with purchases of other companies. The
Board of Directors is authorized to designate classes of preferred stock with
various rights and preferences as to dividends and liquidation. No preferred
stock has been issued.
NOTE 13 -- STOCK OPTIONS
On October 1, 1995, the Company adopted the Omnibus Stock Option Plan,
which authorized incentive and non-qualified stock options to be granted.
291,000 shares of common stock have been reserved for issuance under the Plan.
On May 17, 1996, the Company adopted the 1996 Stock Option Plan and authorized
200,000 options for granting to employees and consultants. Incentive stock
options must be granted with an exercise price at least equal to the market
value of the common stock on the date of grant, as determined by the Company's
Board of Directors. The options generally become exercisable upon being
granted and are exercisable for a period of five years. In the event of a
dissolution or liquidation of the Company, any options outstanding under the
Plan will terminate. Options were granted under the Plans with exercise prices
equal to the market value of the common stock on the dates granted.
During 1995, the company granted options to investors to purchase 94,000
shares of common stock at $0.01 to $0.02 per share. Those options were
exercised during 1996. In addition, during 1996, options for 96,000 shares of
common stock were granted to an investor. The investor paid the Company $4,800
of the exercise price during 1996 with services and exercised the options in
February 1997 with a payment of $100 in cash.
The Company has elected to continue to account for stock-based
compensation under the provisions of APB Opinion No. 25 rather than Statement
of Financial Accounting Standards (SFAS) No. 123. However, net loss and net
loss per share would not have changed had SFAS No. 123 been adopted.
The following table presents the status of stock options:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise Price
------------- ---------------
<S> <C> <C>
Outstanding, December 31, 1994 ............ -- --
Granted ................................ 209,850 $ 0.02
-------
Outstanding, December 31, 1995 ............ 209,850 0.02
Granted ................................ 241,150 1.34
Exercised .............................. (191,000) 0.02
Canceled ............................... (400) 2.50
--------
Outstanding, December 31, 1996 ............ 259,600 1.25
========
Exercisable, December 31, 1996 ......... 200,350 1.05
========
</TABLE>
Options at December 31, 1996 had exercise prices ranging from $0.02 to
$2.50.
NOTE 14 -- SUBSEQUENT EVENTS
In February 1997, the Company borrowed $97,093 under the terms of an 8%
promissory note payable to a customer to finance the purchase of certain radio
receivers from the customer. Payments are due monthly and will begin upon
signing an additional contract with the customer and are only payable out of
the revenue from the potential contract. The note is secured by the investment
in common stock of the customer held by the Company.
F-34
<PAGE>
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 14 -- SUBSEQUENT EVENTS -- (Continued)
An investor exercised options for 96,000 shares of common stock for $100
on February 22, 1997.
The Company granted options to purchase 200,000 shares of common stock on
February 12, 1997 to employees and consultants under the 1996 Stock Option
Plan. The options are exercisable at $1.84 per share.
On February 12, 1997, the Board of Directors and a majority of the
shareholders approved a merger of the Company into a wholly-owned subsidiary
of World Wireless Communications, Inc. (WWCI), subject to approval of a
definitive agreement. The terms of the agreement presently provide that each
outstanding share of common stock will be exchanged for 0.5577349 shares of
WWCI common stock. All outstanding options will be converted at the same ratio
into WWCI options exercisable at $2.00 per share.
The Board also authorized borrowing up to $1,000,000 under a promissory
note payable to WWCI for monies advanced to the Company. The note is due
February 1998, with interest payable semi-annually commencing on August 12,
1997. Through May 15, 1997, the Company has borrowed approximately $1,380,000
under this note and additional notes (unaudited).
In October 1997, the Company reached a settlement with an otherwise
unrelated joint venture partner over a suit filed during July 1997 by the
partner against the Company and certain of its major customers. The suit
asserted claims that the joint venture had an interest in the technology which
the company used in products sold to those customers. The Company strongly
disputed the partner's interest in the technology at issue. The settlement was
made in an effort to minimize the time and expense of protracted litigation,
as well as to maintain its good customer relations. During February 1997,
prior to its merger with World Wireless Communications, Inc., the Company
recorded a liability of $323,456 for the estimated cost of the settlement. The
settlement releases all claims against the Company and World Wireless and
allows them unlimited use of the technology.
F-35
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Selling Shareholders and any broker/dealers or agents that
participate with the Selling Shareholders in the distribution of the Shares
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and any commissions received by them
and any profit on the resale of the Shares purchased by them may be deemed to
be underwriting commissions or discounts under the Securities Act. Persons who
are deemed to be underwriters may be subject to statutory liabilities if the
registration statement of which this Prospectus is a part contains a material
misstatement or omits to disclose any information necessary to make statements
which are made not misleading. The Company has not agreed to indemnify any of
the Selling Stockholders regarding such potential liabilities. See "Plan of
Distribution".
No dealer, salesperson or other person has been authorized by the Company or
the selling shareholders to give any information or to make any
representations other than those contained in this prospectus in connection
with the offering made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized. The
delivery of this Prospectus shall not, under any circumstances, create any
implication that information herein is correct as of any time subsequent to
the date of the Prospectus. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy the shares to any person or by
anyone in any jurisdiction in which such offer or solicitation may not
lawfully be made.
--------------------------
TABLE OF CONTENTS
Page
-----
PROSPECTUS SUMMARY ......................... 3
RISK FACTORS ............................... 5
DILUTION ................................... 10
USE OF PROCEEDS ............................ 10
SELECTED CONSOLIDATED HISTORICAL AND PRO
FORMA FINANCIAL DATA ..................... 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ............................... 13
BUSINESS ................................... 18
MANAGEMENT ................................. 25
PRINCIPAL AND SELLING SHAREHOLDERS ......... 29
PLAN OF DISTRIBUTION ....................... 35
MARKET INFORMATION ......................... 36
ORGANIZATIONAL AND OTHER TRANSACTIONS ...... 36
DESCRIPTION OF CAPITAL STOCK ............... 39
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES .............................. 42
LEGAL MATTERS .............................. 43
EXPERTS .................................... 43
AVAILABLE INFORMATION ...................... 43
Until ________, 1998, all dealers effecting transactions in the Common
Stock, whether or not participating in this distribution, may be required to
deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WORLD WIRELESS
COMMUNICATIONS, INC.
4,039,664 Shares
Common Stock, $.001 Par Value
-------------------------
PROSPECTUS
-------------------------
----------------------------------- , 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated amount of various expenses
in connection with the sale and distribution of the securities being
registered:
SEC registration fee .................... $ 13,668
Printing and engraving expenses ......... 20,000
Legal fees and expense
(including blue sky fees and expenses) .......... 85,000
Accounting fees and expenses ............ 75,000
Miscellaneous ........................... 6,332
--------
Total .................................. $200,000
========
Item 14. Indemnification of Directors and Officer.
The Bylaws of the Registrant provide for indemnification of directors and
officers of the Registrant in accordance with the indemnification of the
Nevada General Corporation Law. The Nevada statute permits indemnification of
directors and employees of a corporation under certain conditions and subject
to certain limitations.
The Registrant's Articles of Incorporation provide that, subject to
certain limitations, no director shall be personally liable to the Registrant
or its stockholders for monetary damages for any breach of fiduciary duty by
such director as a director.
Item 15. Recent Sales of Unregistered Securities.
Since its inception, the Company has sold Common Stock and other
securities in reliance upon exemptions from the registration requirements of
the Securities Act of 1933 (the "Securities Act") in the following
transactions:
a. Upon incorporation of the Company in November 1995, the Company issued
107,140 shares of Common Stock to Elvena, Inc. (53,570 shares), a corporation
controlled by Lynn Dixon, and to Robsal, Inc. (53,570 shares). Abraham J.
Salaman holds the power to vote the shares of the Company owned by Robsal,
Inc. These shares were issued for cash ($5,000) and for services valued by the
Company for accounting purposes at $30.356 in reliance upon Section 4(2) of
the Securities Act of 1933 (the "Act") and are restricted as to resale. Also
in connection with the Company's organization, the Company issued 320,000
shares to J.R. Consultants, Inc., a corporation controlled by Jonathan D.
Rahn, and 25,000 shares to Robsal, Inc., for services valued by the Company
for accounting purposes at $113,850, in reliance on Rule 504, Regulation D.
b. In connection with the acquisition of assets with which the Company
commenced business operations, the Company issued 680,000 shares of Common
Stock to equity owners (Roslyn Maxwell, Gary B. Peterson, Betty A. Peterson,
Brian Pettersen and Ann Marie Pettersen) of Chocolate Leasing LLC, a limited
liability company which then owned the assets, and to Data Growth, Inc., an
unaffiliated corporation which then held an option to acquire the assets from
Chocolate Leasing. Based upon their net equity contributions to Chocolate
Leasing, the cash cost of these shares to the former Chocolate Leasing equity
holders was approximately $191,000. A portion of the Shares were issued for
services valued for accounting purposes at $34,900. These shares were issued
in reliance upon Section 4(2) of the Securities Act and restricted as to
resale.
c. In connection with the Company's acquisition of assets from Chocolate
Leasing and its commencement of operations, the Company raised a total of
$275,000 in short term debt financing. The debt financing was placed with nine
investors (Elvena, Inc., Cherry Hill, Inc., Robsal, Inc., Research Net
Services, Consolidated Capital, Cow Bell, Inc., BRRD, Inc., Mitchell Salaman
and Stamatt, Inc.). This indebtedness and interest accrued thereon was
converted into 1,892,860 shares of Common Stock in connection with the
Regulation D, Rule 504 offering described in the following paragraph.
II-1
<PAGE>
d. From April through May 1996, the Company issued 300,000 shares of
Common Stock at a price of $.70 per share ($210,000) to a total of 64 investors
in reliance upon Rule 504, Regulation D. The names of the purchasers of these
shares are as follows: American Merger Cons., Russell L. Brown, Jr., Carolyn
Bushong, James M. Glevenger, Dana J. Collins, Michael J. Collins, Ronald J.
Damiana, Betty R. Dorman, David I. Dougan, Alan C. Errickson, Alicia C.
Errickson, Mary L. Errickson, Bjorg R. Ferraro, David A. Ferraro, Dennis S.
Ferraro, Eric R. Ferraro, Melanie B. Ferraro, Michael A. Ferraro, Sarah A.
Ferraro, Steven R. Fitzgerald, Cynthia A. Fleet, Douglas F. Fleet, Ingrid H.
Fretheim, Mary B. Fritz, William E. Fritz, William Fritz c/f Emily Fritz UGMA
Co., William Fritz c/f Laura Fritz UGMA Co., William Fritz c/f Peter Fritz UGMA
Co., Gemini Investments, HKDP Marketing Co., John Noble Harris, Dean Haze, H.
W. Hillyard, Jr., Dawn Jacka, Roger D. Leclerc Robert Lovell, Dennis McGuire,
Glenne McGuire, Megan S. McGuire, William B. Myer, Northglenn Judo, Inc.,
Northglenn Optometry, Consolidated Capital, Shuichi Otaka, Kelly S. Pitts,
Kelly Pitts c/f Stevi Pitts UGMA CO, Traci Pitts, Edward Price, Blanche M.
Richards, Deborah L. Richards, R. Mark Richards, Robert Mark Richards and
Rochelle M. Richards, Robert Mark Richards and Danielle L. Richards, Blanche M.
Richards FBO SBR Partnership, Judy Smeester, Kerry T. Smeester, Ethan A. Smith,
Jasper T. Smith, Leslie G. Smith, Mallory Smith, Randy C. Smith, Cynthia L.
Spoerl, Charlotte M. William, Orlin W. Williams. In connection with this
offering, the Company solicited and obtained the conversion of debt referred to
in the preceding paragraph, also in reliance upon Rule 504, Regulation D.
e. In March 1996, the Company issued 7,000 shares, restricted as to
resales, to an employee, Paul K. Jensen, for services valued at $4,900 in
reliance upon Section 4(2) of the Act.
f. In the period October 1996 through January 15, 1997, the Company sold
2,357,857 shares to a total of 31 investors for cash (1,800,000 shares at a
price of $.33 per share and 557,857 shares at a price of $.35 per share),
5,629 shares in conversion of a note at $.35 per share, and 11,000 shares in
payment of accrued interest on a note at $.45 per share. The investors in such
offering, and the number of shares purchased by each, were as follows:
<TABLE>
<S> <C>
Investor No. of Shares
- ------------------------------------------------------------------ --------------
Capco Nominees Limited Partnership 654,000
Michael Lauer 400,000
Lynn Dixon/Elvena, Inc. 245,629
Melissa D. Epperson 181,200
T. Kent Rainey 180,600
Trinity American Corp. 113,250
Turan M. Itil 85,000
J.R. Consultants, Inc. 75,500
SRS Partners, Ltd. 60,400
BRRD, Inc. 60,400
Thornhill, Ltd. 60,400
Heather Hanby 50,000
Philip C. Bohm 42,858
Michael Williamson 21,750
Jeffrey G. Shields 20,200
Cartwright Holdings, Inc. 20,000
Rona Dixon 20,000
Alan Dabrow 15,000
Alan Robbins and Judie Robbins 15,000
Brenda Hubrich 10,000
Alisa Pace, individually and as Custodian under UT UGMA 8,000
Joni Dixon 5,000
Lynda Whitehead 5,000
Allen Dixon 5,000
Norene Dixon 5,000
Charlie Schwab and Dorothy Hanby 5,000
Laina Egan 5,000
Peter Gordon 3,300
Justin Moeller, custodian under UGMA 1,000
Lori Gunter, custodian under UGMA 1,000
---------
Total 2,374,487
</TABLE>
II-2
<PAGE>
These shares were issued in reliance upon Section 4(2) of the Act, and
Rule 506, Regulation D, promulgated thereunder, and restricted as to resales.
Of the 31 investors participating in this financing, based upon information
obtained by the Company in connection with financing or otherwise available to
the Company, the Company believes that 18 of such investors are accredited
investors, and that each purchaser who is not an accredited investor, alone or
with his/her purchaser representative, has such knowledge in financial and
business matters that he/she is capable of evaluating the merits and risks of
an investment in the Company.
g. In November 1996, the Company issued 520,000 shares of Common Stock to
Hyrum Taylor (25,000 shares), David D. Singer (475,000 shares) and Raymond
Scharp (20,000 shares) in connection with their employment by the Company. The
shares were valued, for tax and accounting purposes, at $1.51 per share, and
were issued in reliance upon Section 4(2) of the Act, and restricted as to
resale.
h. In the period March 1997 and through August 1997, the Company sold a
total of 2,000,000 shares of Common Stock at a price of $2.00 per share
(including the allocable cost of warrants to purchase Common Stock exercised
by these purchasers, as described below) to investment funds under the control
of Michael Lauer, and certain business associates of Mr. Lauer, in reliance
upon Section 4(2) of the Act and/or Rule 506 thereunder, and restricted as to
resale, as follows:
Investor No. of Shares
- --------------------------- --------------
Lancer Partners, LP 1,043,750
Lancer Offshore, Inc. 773,750
Lancer Voyager 150,000
Martin H. Garvey 30,000
Russel J. Redgate 2,500
---------
2,000,000
A portion of these shares were issued upon the exercise of warrants which
were issued in units with shares of Common Stock. All such warrants were
exercisable at a price of $2.00 per share, and all have now been exercised.
The Company believes that all of these investors are accredited.
i. In July 1997, the Company issued a total of 1,798,100 shares of Common
Stock, and options to purchase 201,900 shares of Common Stock, to former
shareholders and employees of Digital Radio Communications Corporation
("DRCC") in exchange for shares and options of DRCC. Of the 98 former
shareholders of DRCC receiving shares in this transaction, based upon
information obtained by the Company in connection with the transaction or
otherwise available to the Company, the Company believes that 80 shareholders
are accredited investors, and that each shareholder who is not an accredited
investor, alone or with his/her purchaser representative, has such knowledge
in financial and business matters that he/she is capable of evaluating the
merits and risks of an investment in the Company. These shares and options
were issued in reliance upon Rule 506, Regulation D, and restricted as to
resale.
j. In September and October 1997, the Company issued a total of 10,931
shares of Common Stock to former employees and directors of DRCC, David
Politis, Stephen Cowser and Jack Berg, at prices of $0.09 (10,513 shares),
$0.18 (139 shares) and $2.00 (279 shares), respectively. The shares were
issued in reliance upon Section 4(2) of the Act, and restricted as to resales.
k. In November 1997, the Company acquired all of the outstanding capital
stock of TWC Ltd., a corporation majority-owned and controlled by Richard
Austin and Barbara Austin, in exchange for 100,000 shares of the Company's
Common Stock as follows: Richard Austin -- 74,800 shares; Barbara Austin --
25,000 shares; Paul Obert -- 100 shares; Richard Andrew Austin -- 100 shares.
In connection with this acquisition, the Company issued an additional 1,200
shares to Richard Austin in compensation for services performed for the
Company by Mr. Austin prior to the acquisition. The shares were issued in
reliance upon Section 4(2) of the Securities Act [and Rule 506 of Regulation D
thereunder], and are restricted as to resale. Based upon information obtained
by the Company in connection with the acquisition, the Company believes that
two of the former shareholders of Austin (Richard and Barbara Austin) are
accredited investors, and that the two former shareholders who are not
accredited investors, alone or with a purchaser representative, have such
knowledge in financial and business matters as to be able to evaluate the
merits and risks of an investment in the Company.
II-3
<PAGE>
l. In November 1997, the Company issued 40,000 shares of Common Stock to
Digital Scientific, Inc. ("DSI") pursuant to the terms of a Settlement
Agreement dated November 11, 1997. The shares were issued in reliance upon
Section 4(2) of the Act and Rule 506 of Regulation D promulgated thereunder.
Based upon information obtained by the Company in connection with the
negotiation and execution of the Settlement Agreement and its prior business
relationship with DSI, the Company believes that DSI, through its
representatives, has such knowledge in financial and business matters as to be
able to evaluate the merits and risks of an investment in the Company.
m. In December 1997, the Company acquired all of the outstanding capital
stock of XARC Corporation ("XARC"), a Kansas corporation, in exchange for
10,000 shares of the Company's Common Stock. The sole stockholder for XARC
prior to this transaction was Donald I. Wallace, who received all shares
issued in the transaction. The shares were issued by the Company in reliance
upon Section 4(2) of the Act and Rule 506 of Regulation D promulgated
thereunder. Based upon information obtained by the Company in connection with
this transaction, the Company believes that Mr. Wallace has such knowledge in
financial and business matters as to be able to evaluate the merits and risks
of an investment in the Company.
n. In December 1997, the Company issued 14,167 shares of Common Stock
upon the exercise of DRCC Conversion Options to Lance King (14,000 shares) and
Arthur Larsen (167 shares). The shares were issued in reliance upon Section
4(2) of the Act and Rule 506 of Regulation D promulgated thereunder. Messrs.
King and Larsen are employees of the Company and the Company believes that
they have such knowledge in financial and business matters as to be able to
evaluate the merits and risks of an investment in the Company.
o. In December 1997, the Company issued 15,000 shares of Common Stock to
T. Kent Rainey, and 9,375 shares of Common Stock to William E. Chipman, Sr.,
as compensation and/or additional interest in connection with short term loans
to the Company of $200,000 by Mr. Rainey and $125,000 by Mr. Chipman. The
shares were issued in reliance upon Section 4(2) of the Act and Rule 506 of
Regulation D promulgated thereunder. The Company believes that Mr. Rainey and
Mr. Chipman are accredited investors.
p. In January 1998, the Company issued 150,000 shares to Dan Maxwell, and
3,714 shares to Lance King, upon the exercise of stock options. Mr. Maxwell's
options were exercised at $.35; Mr. King's at $2.00. The shares were issued in
reliance upon Section 4(2) of the Act and Rule 506 promulgated thereunder. The
Company believes that Messrs. King and Maxwell,both of whom were management
employees at the time of the transaction, have such knowledge in financial and
business matters as to be able to evaluate the merits and risks of an
investment in the Company.
Item 16. Exhibits
(a) Exhibits
*Indicates an Exhibit filed herewith.
All other Exhibits were previously filed.
<TABLE>
<CAPTION>
Exhibit
No.
- ----------
<S> <C>
3.1 Articles of Incorporation of the Company and all amendments thereto 3.2
Bylaws of the Company 4.1 Form of Common Stock Certificate 4.2 Form of
Subscription Agreement used in private financing providing for registration
rights
*5 Opinion of Connolly Epstein Chicco Foxman Engelmyer & Ewing regarding the legality of secur-
ities being registered*
10.1 1997 Stock Option Plan
10.2 DRCC Omnibus Stock Option Plan
10.3 Development and License Agreement dated April 4, 1997, between
DRCC and Kyushu Matsushita Electric Co., Ltd.
10.4 Amended and restated Technical Development and Marketing Alliance
Agreement dated Septem- ber 15, 1997, between the Company and
Williams Telemetry Services, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No.
- ----------
<S> <C>
10.5 Lease Agreement dated May 17, 1995, between DRCC and Pracvest
Partnership relating to the Company's American Fork City offices
and facility
10.6 Lease Agreement dated February 12, 1996, between the Company and
Green/Praver, et al., relating to the Company's Salt Lake City
offices
10.7 Shareholders Agreement dated May 21, 1997 between the Company, DRCC, Philip A. Bunker and
William E. Chipman, Sr.
10.8 Asset Purchase Agreement dated October 31, 1997, between the Company and Austin Antenna,
Ltd.
10.9 Stock Exchange Agreement dated October 31, 1997, between the
Company, TWC, Ltd. and the shareholders of TWC, Ltd.
10.10 Settlement Agreement, Mutual Waiver and Release of All Claims dated November 11, 1197
between Digital Radio Communications Corp. and Digital Scientific, Inc.
10.11 Agreement (undated) between the Company, Xarc Corporation and
Donald J. Wallace relating to the Company's acquisition of Xarc
Corporation.
10.12 Promissory Note dated December 4, 1997, by the Company, payable to William E. Chipman, Sr.
in the principal amount of $125,000
10.13 Promissory Note dated November 13, 1997, by the Company, payable to T. Kent Rainey in the
principal amount of $200,000
10.14 Investment Banking Services Agreement dated November 19, 1997,
between the Company and PaineWebber Incorporated
10.15 $400,000 Promissory Note dated December 24, 1997, payable to Electronic Assembly Corpora-
tion
10.16 $400,000 Promissory Note dated January 8, 1998, payable to Tiverton Holdings Ltd.
11 Statement of Computation of Per Share Earnings (Loss)
21 Revised Schedule of Subsidiaries of the Company
*23.1 Consent of Hansen, Barnett & Maxwell, independent certified public
accountants *23.2 Consent of Connolly Epstein Chicco Foxman Engelmyer & Ewing
(included in Exhibit 5)
*27 Revised Financial Data Schedules
</TABLE>
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to:
1. File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the Prospectus any facts or events which, individually
or in the aggregate, represent a fundamental change in the information set
forth in the Registration Statement; and
(iii) Include any additional or changed material information on the
Plan of Distribution described in the Registration Statement.
II-5
<PAGE>
2. For the purpose of determining any liability under the Securities Act,
treat each post-effective amendment as a new registration of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering thereof.
3. To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time the Commission declared it effective.
For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in this Registration
Statement, and the offering of the securities at that time, shall be deemed to
be the initial bona fide offering of those securities.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly authorized this Registration Statement, as amended by
Amendment No. 2 thereto, to be signed on its behalf by the undersigned, in
Salt Lake City, Utah, on the 16th day of February, 1998.
WORLD WIRELESS COMMUNICATIONS, INC.
/s/ DAVID D. SINGER
---------------------------------------------
David D. Singer, President and Chief Executive
Officer
/s/ WILLIAM E. CHIPMAN
---------------------------------------------
William E. Chipman, Sr., Chief Financial
Officer
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
and on the dates stated.
Signatures Title Date
- --------------------------- ---------- ------------------
/s/ BRIAN W. PETTERSEN
----------------------- Director February 16, 1998
Brian W. Pettersen
/s/ PHILIP A. BUNKER Director February 16, 1998
-----------------------
Philip A. Bunker
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Description Page
- ---------- ------------------------------------------------------------------------------ -----
<S> <C> <C>
3.1 Articles of Incorporation of the Company and all amendments thereto
3.2 Bylaws of the Company
4.1 Form of Common Stock Certificate
4.2 Form of Subscription Agreement used in private financing
providing for registration rights
*5 Opinion of Connolly Epstein Chicco Foxman Engelmyer & Ewing
regarding the legality of securities being registered*
10.1 1997 Stock Option Plan
10.2 DRCC Omnibus Stock Option Plan
10.3 Development and License Agreement dated April 4, 1997, between
DRCC and Kyushu Matsushita Electric Co., Ltd.
10.4 Amended and restated Technical Development and Marketing Alliance
Agreement dated September 15, 1997, between the Company and
Williams Telemetry Services, Inc.
10.5 Lease Agreement dated May 17, 1995, between DRCC and Pracvest
Partnership relating to the Company's American Fork City offices
and facility
10.6 Lease Agreement dated February 12, 1996, between the Company the
Green/Praver, et al., relating to the Company's Salt Lake City
offices
10.7 Shareholders Agreement dated May 21, 1997 between the Company,
DRCC, Philip A. Bunker and William E. Chipman, Sr.
10.8 Asset Purchase Agreement dated October 31, 1997, between the
Company and Austin Antenna, Ltd.
10.9 Stock Exchange Agreement dated October 31, 1997, between the
Company, TWC, Ltd. and the shareholders of TWC, Ltd.
10.10 Settlement Agreement, Mutual Waiver and Release of All Claims dated Novem-
ber 11, 1197 between Digital Radio Communications Corp. and Digital Scien-
tific, Inc.
10.11 Agreement (undated) between the Company, Xarc Corporation and
Donald J. Wallace relating to the Company's acquisition of Xarc
Corporation.
10.12 Promissory Note dated December 4, 1997, by the Company, payable to William
E. Chipman, Sr. in the principal amount of $125,000
10.13 Promissory Note dated November 13, 1997, by the Company, payable
to T. Kent Rainey in the principal amount of $200,000
10.14 Investment Banking Services Agreement dated November 19, 1997,
between the Company and PaineWebber Incorporated
10.15 $400,000 Promissory Note dated December 24, 1997, payable to Electronic
Assembly Corporation
10.16 $400,000 Promissory Note dated January 8, 1998, payable to
Tiverton Holdings Ltd.
11 Statement of Computation of Per Share Earnings (Loss)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
No. Description Page
- ---------- --------------------------------------------------------------------------- -----
<S> <C> <C>
21 Revised Schedule of Subsidiaries of the Company
*23.1 Consent of Hansen, Barnett & Maxwell, independent certified public accoun-
tants
*23.2 Consent of Connolly Epstein Chicco Foxman Engelmyer & Ewing (included in
Exhibit 5)
*27 Revised Financial Data Schedules
</TABLE>
- ------------
* Indicates an Exhibit filed herewith.
All other Exhibits were filed previously.
<PAGE>
EXHIBIT 5
CONNOLLY EPSTEIN CHICCO FOXMAN OXHOLM & EWING
A PENNSYLVANIA PROFESSIONAL CORPORATION
February 16, 1998
World Wireless Communications, Inc.
150 Wright Brothers Drive, Suite 560
Salt Lake City, UT 84116
Re: Registration Statement on Form S-1
File No. 333-38567
--------------------------------------
Gentlemen/Ladies:
We have acted as counsel to World Wireless Communications, Inc. (the
"Company") in connection with the preparation and filing of the above captioned
Registration Statement (the "Registration Statement") relating to the public
offering of up to 4,039,664 shares of the Company's Common Stock of the par
value $.001 (the "Shares") which are proposed to be sold pursuant to the
Registration Statement by certain shareholders of the Company and, with respect
to a portion of the Shares (the "Option Shares"), by the Company upon the
exercise of outstanding options.
We are familiar with the Registration Statement. We have viewed the
Company's Articles of Incorporation and By-laws, each as amended to date. We
also have examined such public and private corporate documents, certificates,
instruments and corporate records, and such questions of law, as we have deemed
necessary for the purpose of expressing an opinion on the matters set forth
below. In all examinations of documents we have assumed the genuiness of all
signatures appearing on such documents, and the genuineness and authenticity of
all copies submitted to us conformed, photostatic or other copies as true
copies of the original document.
On the basis of the foregoing, we are of the opinion that the
outstanding Shares are, and that the Option Shares when issued and sold upon the
exercise of options as described in the Registration Statement will be, validly
issued, fully paid and non-assessable.
We consent to the filing of this opinion as an Exhibit to the
Registration Statement, and consent to the reference to us under the caption
"Legal Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
CONNOLLY EPSTEIN CHICCO
FOXMAN OXHOLM & EWING
By: /s/ Joseph Chicco
--------------------------
Joseph Chicco
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement and related Prospectus of World Wireless Communications,
Inc. We consent to the use therein of our report dated November 21, 1997 with
respect to the consolidated financial statements of World Wireless
Communications, Inc. and subsidiaries. We also consent to the use therein of our
report dated March 4, 1997, except for the second paragraph of Note 2 of the
consolidated financial statements as to which the date is September 15, 1997,
and except for the sixth paragraph of Note 14 as to which the date is November
21, 1997, with respect to the consolidated financial statements of Digital Radio
Communications Corporation and subsidiaries.
/s/ HANSEN, BARNETT & MAXWELL
--------------------------------
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
February 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF WORLD WIRELESS COMMUNICATIONS, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 723,463 37,278
<SECURITIES> 0 0
<RECEIVABLES> 236,297 131,392
<ALLOWANCES> (35,000) 0
<INVENTORY> 433,060 159,881
<CURRENT-ASSETS> 1,357,820 328,551
<PP&E> 1,262,855 448,237
<DEPRECIATION> (320,476) (121,215)
<TOTAL-ASSETS> 9,621,405 663,042
<CURRENT-LIABILITIES> 975,873 203,351
<BONDS> 49,048 44,808
0 0
0 0
<COMMON> 10,035 5,663
<OTHER-SE> 8,586,450 409,220
<TOTAL-LIABILITY-AND-EQUITY> 9,421,406 663,042
<SALES> 2,371,619 618,505
<TOTAL-REVENUES> 2,371,619 618,505
<CGS> 1,858,169 662,184
<TOTAL-COSTS> 1,858,169 662,184
<OTHER-EXPENSES> 5,435,172 1,882,836
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 34,426 1,310,142
<INCOME-PRETAX> (4,956,148) (3,236,657)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,956,148) (3,236,657)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,956,148) (3,236,657)
<EPS-PRIMARY> (0.52) (0.85)
<EPS-DILUTED> (0.52) (0.85)
</TABLE>
