UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
Commission file Number 333-38567
WORLD WIRELESS COMMUNICATIONS, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 87-0549700
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2441 South 3850 West, West Valley City, Utah 84120
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number (801) 575-6600
150 Wright Brothers Drive, Suite 560, Salt Lake City, Utah 84116
----------------------------------------------------------------
(Former address, if changed since last report)
Indicate by check mark whether registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No .
As of November 11, 1998, there were 11,290,643 shares of the registrant's
Common Stock, par value $0.001, issued and outstanding.
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statement:
Condensed Consolidated Balance Sheets (Unaudited) -
September 30, 1998 and December 31, 1997 . . . . . . . . . . . . . .1
Condensed Consolidated Statements of Operations (Unaudited)
- for the Three and Nine Months Ended September 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Condensed Consolidated Statements of Cash Flows (Unaudited)
- for the Nine Months Ended September 30, 1998 and 1997. . . . . . .4
Notes to Condensed Consolidated Financial Statements (Unaudited) . .5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation . . . . . . . . . . . . . . . . . . . . . .8
PART II. Other Information
Item 5 Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, December 31,
1998 1997
---------- -----------
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . .$ 128,510 $ 218,234
Investment in securities available for sale . . . . . 130,399 188,354
Trade receivables, net of allowance for doubtful
accounts. . . . . . . . . . . . . . . . . . . . . . 610,775 345,433
Other receivables . . . . . . . . . . . . . . . . . . 123,468 49,208
Inventory . . . . . . . . . . . . . . . . . . . . . . 570,318 496,432
Prepaid expenses. . . . . . . . . . . . . . . . . . . - 232,143
---------- -----------
Total Current Assets . . . . . . . . . . . . . . . 1,563,470 1,529,804
---------- -----------
Equipment . . . . . . . . . . . . . . . . . . . . . . 2,666,619 1,589,248
Less accumulated depreciation . . . . . . . . . . . .(1,056,148) (455,985)
---------- -----------
Net Equipment. . . . . . . . . . . . . . . . . . . 1,610,471 1,133,263
---------- -----------
Goodwill, net of accumulated amortization. . . . . . . 1,007,889 7,214,066
---------- -----------
Other Assets, net of accumulated amortization. . . . . 478,841 535,154
---------- -----------
Total Assets . . . . . . . . . . . . . . . . . . . . .$4,660,671 $10,412,287
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-1-
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30, December 31,
1998 1997
----------- ------------
Current Liabilities
Trade accounts payable. . . . . . . . . . . . . . . $ 935,558 $ 524,093
Accrued liabilities . . . . . . . . . . . . . . . . 492,133 466,183
Notes payable - current portion . . . . . . . . . 2,775,895 814,925
Capital lease obligation - current portion . . . . 455,317 -
----------- -----------
Total Current Liabilities. . . . . . . . . . . . . 4,658,903 1,805,201
----------- -----------
Long-Term Liabilities
Notes payable . . . . . . . . . . . . . . . . . . . 4,224 34,977
Capital lease obligation. . . . . . . . . . . . . . 398,601 -
----------- -----------
Total Long-Term Liabilities . . . . . . . . . . . 402,825 34,977
----------- -----------
Stockholders' Equity (Deficit)
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; issued and outstanding:
11,237,144 shares at September 30, 1998
and 10,225,260 shares at December 31, 1997 . . . 11,237 10,225
Additional paid-in capital. . . . . . . . . . . . . 22,562,218 20,915,068
Unearned compensation . . . . . . . . . . . . . . . - (1,410,509)
Receivable from shareholder . . . . . . . . . . . . (59,078) (18,409)
Accumulated deficit . . . . . . . . . . . . . . . . (22,970,833) (11,037,620)
Accumulated other comprehensive income. . . . . . . 55,399 113,354
----------- -----------
Total Stockholders' Equity (Deficit) . . . . . . . (401,057) 8,572,109
----------- -----------
Total Liabilities and Stockholders'
Equity (Deficit). . . . . . . . . . . . . . . . . . $ 4,660,671 $10,412,287
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-2-
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales. $ 1,184,759 $ 496,125 $ 3,551,716 $ 2,371,619
Cost of Sales. . . . . . . . . . . . 1,184,174 788,072 2,740,751 1,858,169
----------- ----------- ------------ -----------
Gross Profit . . . . . . . . . . . . 585 (291,947) 810,965 513,450
----------- ----------- ------------ -----------
Expenses
Research and development . . . . . 544,105 392,205 2,480,617 2,239,143
Selling, general and administrative 973,414 829,555 3,627,650 2,210,395
Amortization of goodwill . . . . . 122,232 382,638 366,696 985,634
Impairment of goodwill. . . . . . 5,839,481 - 5,839,481 -
Interest expense . . . . . . . . . 523,606 11,829 749,262 34,426
----------- ----------- ------------ -----------
Total Expenses. . . . . . . . . 8,002,838 1,616,227 13,063,706 5,469,598
Gain from Sale of SecuriKey
Business . . . . . . . . . . . - - 319,528 -
----------- ----------- ------------ -----------
Net Loss . . . . . . . . . . . . $(8,002,253) $(1,908,174) $(11,933,213) $(4,956,148)
=========== =========== ============ ===========
Basic and Diluted Loss Per
Common Share . . . . . . . . . $ (0.72) $ (0.20) $ (1.06) $ (0.52)
=========== =========== ============ ===========
Weighted Average Number of
Common Shares Used in Per
Share Calculation. . . . . . . 11,141,692 9,398,213 11,236,703 9,513,177
============ =========== ============ ===========
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
</TABLE>
-3-
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months
Ended September 30,
----------------------------
1998 1997
------------- ------------
Cash Flows From Operating Activities
Net loss . . . . . . . . . . . . . . . . $ (11,933,213) $ (4,956,148)
Adjustments to reconcile net loss
to net cash used by operating activities:
Amortization of goodwill . . . . . . . . . . 366,696 985,634
Impairment of goodwill . . . . . . . . . . . . 5,839,481 -
Depreciation and amortization of other assets
and debt discount . . . . . . . . . . . . . . 661,594 212,149
Purchased research and development. . . . . . . 300,000 1,258,000
Compensation from stock options granted. . . . 322,140 265,500
Interest paid with stock options . . . . . . . 184,750 -
Stock issued for acquisition of contract . . . 75,000 -
Gain on sale of SecuriKey business . . . . . . (319,528) -
Changes in operating assets and liabilities,
net of effects of business acquired:
Accounts receivable . . . . . . . . . . . . (286,011) 148,666
Inventory . . . . . . . . . . . . . . . . . (73,886) (16,694)
Other assets. . . . . . . . . . . . . . . . 614,028 3,170
Accounts payable. . . . . . . . . . . . . . 411,465 (186,415)
Accrued liabilities . . . . . . . . . . . . 123,354 (402,257)
------------- ------------
Net Cash and Cash Equivalents Used By
Operating Activities. . . . . . . . . . . . . . (3,714,130) (2,688,395)
------------- ------------
Cash Flows From Investing Activities
Payments for the purchase of property and
equipment. . . . . . . . . . . . . . . . . . . (187,101) (566,705)
Proceeds from sale of property and equipment . . - 10,754
Proceeds from sale of SecuriKey business . . . . 372,499 -
Advance payments to affiliates to be acquired. . - (224,764)
Loan to an affiliate. . . . . . . . . . . . . . (43,591) -
Proceeds from receivable from shareholder . . . 10,000 -
------------- ------------
Net Cash and Cash Equivalents Provided By
(Used By) Investing Activities. . . . . . . . 151,807 (780,715)
------------- ------------
Cash Flows From Financing Activities
Proceeds from issuance of common stock . . . . . 1,051,323 4,196,218
Proceeds from borrowings, net of discount. . . . 2,900,000 103,678
Principal payments on notes payable. . . . . . . (391,073) (144,601)
Principal payments on capital lease obligation . (87,651) -
------------- ------------
Net Cash and Cash Equivalents Provided By
Financing Activities. . . . . . . . . . . . . . 3,472,599 4,155,295
------------- ------------
Net Increase (Decrease) In Cash and
Cash Equivalents . . . . . . . . . . . . . . . . (89,724) 686,185
Cash and Cash Equivalents- Beginning of Period . . 218,234 37,278
------------- ------------
Cash and Cash Equivalents - End of Period. . . . .$ 128,510 $ 723,463
============= ============
(Continued)
WORLD WIRELESS COMMUNICATIONS, INC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Supplemental Cash Flow Information -
For the Nine Months
Ended September 30,
----------------------------
1998 1997
------------- ------------
Interest Paid . . . . . . . . . . . . . . $ 239,067 $ 34,126
============= ============
Noncash Investing and Financing Activities -
During the nine months ended September 30, 1998, the Company
entered into certain capital leases for computer equipment and
related software valued at $900,993. The Company issued 98,926
shares of common stock of which 10,000 shares, valued at
$75,000, or $7.50 per share, were issued as a preliminary cost
towards obtaining a manufacturing contract, 60,000 shares, valued
at $300,000, or $5.00 per share, were issued as payment for radio
technology, 5,000 shares, valued at $25,000, or $5.00 per share,
were issued for a note receivable, and 23,926 shares were
issued on the exercise of stock options by an employee, for which
the Company received a note in the amount of $47,852.
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. 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, the Company advanced $118,764 to Digital Radio. In
conjunction with the acquisition of Digital Radio liabilities were
assumed as follows:
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
==========
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM CONDENSED FINANCIAL STATEMENTS - The accompanying condensed
consolidated financial statements are unaudited. In the opinion of
management, all necessary adjustments (which include only normal recurring
adjustments) have been made to present fairly the financial position,
results of operations and cash flows for the periods presented. Certain
information and note disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the December 31, 1997 annual report
on Form 10-K. The results of operations for the nine month period ended
September 30, 1998 are not necessarily indicative of the operating results
to be expected for the full year.
NEW ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards 133 (SFAS 133),
Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133 is effective for the year
beginning January 1, 2000, and will not require retroactive restatement of
prior period financial statements. The Company has not yet quantified the
impact of adopting SFAS 133 on its financial statements, but does not expect
the impact to be material.
NOTE 2-COMMON STOCK
During the third quarter of 1998, the Company issued 1,958 shares on the
exercise of options for which the Company received $3,916 in cash, with an
average exercise price of $2.00 per share.
NOTE 3-ACQUISITION OF PURCHASED RESEARCH & DEVELOPMENT
In May 1998, the Company acquired proprietary and intellectual property
rights in and to spread spectrum radio technology which has been accounted
for as purchased research and development. The acquisition of this
technology provides the Company with the ability to modify and update the
technology for use in its other radio products. The purchase price was
$305,651, of which $300,000 was paid by the issuance of 60,000 common shares
valued at $5.00 per share, with the balance being paid in cash for closing
and related costs. Additionally, the Company loaned $66,975 to the seller to
retire certain business debts. Of this amount, $41,975 was paid in cash and
carries interest at 10%. The balance of $25,000 was advanced through the
issuance of 5,000 common shares, valued at $5.00 per share, to two creditors
of the seller. The seller executed an unsecured promissory note which is due
on demand after the earlier of registration by the Company of the 60,000
shares of common stock or June 22, 1999.
NOTE 4-BRIDGE LOANS AND WARRANTS
In May 1998, the Company executed certain bridge loans, in the amount of
$2,500,000. The notes were initially issued with interest at 10% per annum,
and later the notes were modified, retroactively, to bear interest at 16%
per annum. The interest is payable quarterly, commencing on August 15,
1998. The notes are due on May 15, 1999 and are secured by substantially all
of the assets of the Company. The notes become due earlier on a pro-rated
basis if the Company receives proceeds from issuance of equity securities.
Proceeds from the sale of securities to the Company's principal shareholder
group are exempt from this requirement.
In conjunction with these notes, the Company issued warrants to purchase
250,000 shares of common stock at an exercise price of $3.00 per share,
which was later reduced to $0.75 per share. The warrants expire on May 15,
2003. In the event the Company fails to repay the notes at their maturity,
the Company can be required to issue warrants to purchase up to an
additional 333,333 shares of common stock, exercisable for up to five years
at an exercise price of $2.50 per share, payable at the rate of 83,333
shares of common stock for each 90-day period during which the default
continues. The Company is obligated to register the underlying shares and
bear the cost burden of such registration.
The detachable warrants had a fair value of $867,856, or $3.47 per warrant
on the date issued, which has been accounted for as a discount of the
related notes and a credit to additional paid-in capital. The remaining
$1,632,144 of the loan's proceeds was allocated to notes payable. The fair
value of the warrants was estimated on the date issued using the
Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0.0%, expected volatility of 64.0%, risk-free interest rate of 5.0%
and expected life of the warrants of 5 years. Interest expense from the
amortization of the discount on the notes payable was $510,195 during the
three months ended September 30, 1998.
NOTE 5-REPURCHASE OF UNVESTED EMPLOYEE STOCK OPTIONS
In April 1998, the Board of Directors approved the repurchase of 638,236
unvested employee stock options for $6,382, or $0.01 per share which were
granted during the fourth quarter of 1997. The Company has recognized
compensation expense, relating to these options, of $412,005 and $94,886 in
the first and second quarters, respectively. As a result of the repurchase,
the Company eliminated $903,619 of unearned compensation.
NOTE 6-LEASE COMMITMENTS
Subsequent to June 30, 1998, the company entered into an operating lease
agreement to lease a building which allows the Company to bring together its
corporate headquarters, manufacturing facilities and its main engineering
facilities.
The future minimum lease payments for leases as of September 30, 1998 are as
follows:
For the Year Ending
December 31, Capital Operating
-------------------- --------- -----------
1998 $ 41,467 $ 90,831
1999 163,172 362,554
2000 130,605 348,492
2001 16,048 287,064
Thereafter - 946,566
--------- -----------
Total Minimum Payments 351,292 $ 2,035,507
===========
Less amount representing (40,100)
---------
Present value of net minimum
lease payments $ 311,192
=========
NOTE 7-CONTINGENCIES
PURCHASED SOFTWARE RETURNED -The Company leased computer aided design
software which did not perform as specified; the software, which cost
$550,887, was returned to the seller. The Company has requested a
cancellation of the $735,207 debt including a technical support agreement
in the amount of $184,320. The seller has retained an attorney in an attempt
to collect the debt. The Company is currently negotiating with the attorney
to settle the matter.
SETTLEMENT OF UNASSERTED CLAIM - Although formal legal action was not
initiated, a former officer of the Company 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. During
November 1998, the former officer and the Company agreed to a General Mutual
Release (the "Release") wherein the Company agreed to pay $4,000 for accrued
salary and other compensation, and to issue the former officer stock options
to purchase 55,000 common shares at $6.50 per share expiring in three years
from the date of the Release. The options had a fair value of $10,063 on the
grant date.
NOTE 8-IMPAIRMENT OF GOODWILL
As of September 30, 1998, the Company evaluated the recoverability of the
Digital Radio goodwill and determined that circumstances now indicate an
inability to recover the carrying amount. Accordingly, impairment loss of
$5,839,481 has been recognized during the third quarter of 1998 to adjust
the carrying amount to its estimated net future cash flows. Based on future
expected cash flows from technology acquired from Digital Radio, the value
of the asset group, including goodwill, was reduced to approximately
$900,000 with goodwill comprising $600,000 of that amount.
NOTE 9-COMPREHENSIVE LOSS
The Company adopted SFAS No. 130, Reporting of Comprehensive Income, as of
the beginning of 1998. SFAS No. 130 establishes standards for the reporting
and display of comprehensive income or loss and its components. Other
comprehensive income of the Company consists of unrealized losses on
investment in securities available-for-sale. SFAS No. 130 does not affect
the measurement of the items included in other comprehensive income; it only
affects where those items are displayed and how they are described.
Comprehensive loss is computed as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net Loss $(8,002,253) $(1,908,174) $(11,933,213) $(4,956,148)
Other Comprehensive Income
Unrealized loss on investment
in securities available-for-sale (39,843) - (57,955) -
----------- ----------- ------------ -----------
Comprehensive Loss $(8,042,096) $(1,908,174) $(11,991,168) $(4,956,148)
=========== =========== ============ ===========
</TABLE>
NOTE 10-SUBSEQUENT EVENTS
Subsequent to September 30, 1998, the Company issued 53,499 shares of common
stock upon the exercise of options for which the Company received $40,333 in
cash, at an average exercise price of $0.75 per share. Additionally, the
Company issued 30,247 shares of common stock in payment of accrued interest
of $15,123 or $0.50 per share.
Item 2. 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 Form
10-Q.
Three- Months Ended September 30, 1998 and September 30,1997
Sales in the three-month period ended September 30, 1998, were $1,184,759
compared to sales of $496,125 during the three-month period ended September
30, 1997. The Company's principal source of revenue for the three-months
ended September 30, 1998, was a design and development contract with
Williams Telemetry, a Williams company, in the amount of $600,663 and design
and development project for Kyushu Matsushita Electric Co. ("KME"), in the
amount of $210,975. Other significant revenues include contract
manufacturing of $161,036 and sales of the Company's own branded goods of
$112,085. Significant revenues for 1997 were derived from an engineering
contract with KME in the amount of $432,000.
Cost of sales for the three-months ended September 30, 1998, were $1,184,174
compared to cost of sales for the three-month period ended September 30,
1997, of $788,072. Cost of sales as a percentage of sales decreased from
159% to100% in the three-months ended September 30, 1998. The related gross
profit for the three-months ended September 30, 1998 was $585 compared to
$(291,947)for the three-month period ended September 30, 1997.
The Company incurred research and development costs of $544,105 during the
three-months ending September 30, 1998, compared to $392,205 during the
three-months ending September 30, 1997. These costs relate to the
development of proprietary data radio technology.
The Company's selling, general and administrative expenses for the
three-months ended September 30, 1998 increased to $973,414 from $829,555
for the three-month period ended September 30, 1997. During the three months
ended September 30, 1998, the Company reduced its employees by approximately
30%. However, the Company had increased the number of its higher paid
employees as a result of acquisitions in 1997. The Company also increased
staffing in anticipation of the launch of the Company's proprietary radio
products. The increase in costs was also attributable to its maintenance of
duplicate administrative facilities and related administrative expenses by
virtue of its two business locations in Utah. Management eliminated
duplicate administrative efforts by consolidating into one facility during
October 1998.
The Company's management evaluated the recoverabilty of the goodwill
attributable to the acquisition of Digital Radio Communications Corporation
and circumstances now indicate the inabilty to recover the carrying amount.
Accordingly, impairment of this asset of $5,839,481 has been recognized
during the three month period ended September 30, 1998
Interest expense for the three-months ended September 30, 1998, increased to
$523,606 from $11,829 for the three-month period ended September 30, 1997,
which increase was attributable to the greater amount of the Company's
outstanding borrowings during the current period. Of which $401,714 resulted
from the amortization of debt discount.
The Company's net loss of $8,002,253 for the three-months ended September
30, 1998, represents an increase from the net loss of $1,908,174 for the
three-months ended September 30, 1997, as a result of the above items.
Nine Months Ended September 30, 1998 and September 30,1997
Sales in the nine-month period ended September 30, 1998, were $3,551,716
compared to sales of $2,371,619 during the nine-month period ended September
30, 1997. The Company's principal source of revenue for the nine-months
ended September 30, 1998, was a design and development contract with
Williams Telemetry, a Williams company, in the amount of $2,366,736. Other
significant revenues include contract manufacturing of $439,108 and sales of
the Company's own branded goods of $331,710. Significant revenues for 1997
were derived from an engineering contract with Kyushu Matsushita Electric
Co. ("KME") in the amount of $1,296,000 and contract manufacturing services,
including sales of SecuriKey products, of $775,619. The SecuriKey business
was sold to a prior employee/shareholder and no revenues were recorded in 1998.
Cost of sales for the nine-months ended September 30, 1998, were $2,740,751
compared to cost of sales for the nine-month period ended September 30,
1997, of $1,858,169. Cost of sales as a percentage of sales decreased from
78% to77% in the nine-months ended September 30, 1998. The related gross
profit for the nine-months ended September 30, 1998 was $810,965 or 23% of
sales compared to $513,450 or 22% of sales for the nine-month period ended
September 30, 1997.
The Company incurred research and development costs of $2,480,617 during the
nine-months ending September 30, 1998, relating to the development of
proprietary technology. Included in the $2,480,617 is $305,651 of purchased
research and development expense arising out of the acquisition of radio
technology in May 1998. The amount spent on research and development for the
nine-month period ended September 30, 1998 was greater than the amount spent
for the nine-month period ended September 30, 1997 of $2,239,143 of which
$1,258,000 was for purchased research and development expense arising out of
the acquisition of Digital Radio in February 1997.
The Company's selling, general and administrative expenses for the
nine-months ended September 30, 1998 increased to $3,627,650 from $2,210,395
for the nine-month period ended September 30, 1997. Included in the
$3,627,650 is $506,891 of non-cash compensation relating to the grant of
stock options in December 1997. Such increase also reflected a substantial
increase in the average number of employees of the Company to approximately
90 in the current year as compared to an average of approximately 50
employees in the prior year. During the three months ended September 30,
1998, the Company reduced its employees by approximately 30%. However, the
Company had increased the number of its higher paid employees as a result of
acquisitions in 1997. The Company also increased staffing in anticipation of
the launch of the Company's proprietary radio products. The increase in
costs was also attributable to its maintenance of duplicate administrative
facilities and related administrative expenses by virtue of its two business
locations in Utah. Management eliminated duplicate administrative efforts
by consolidating into one facility during October 1998.
Interest expense for the nine-months ended September 30, 1998, increased to
$749,262 from $34,426 for the nine-month period ended September 30, 1997,
which increase was attributable to the greater amount of the Company's
outstanding borrowings during the current year. Of which $510,195 resulted
from the amortization of debt discount.
The Company's net loss of $11,933,213 for the nine-months ended September
30, 1998, represents an increase from the net loss of $4,956,148 for the
nine-months ended September 30, 1997, as a result of the above items.
During April 1998, the Board of Directors approved the repurchase of
unvested employee stock options at a price of $0.01 per share. These options
were granted during the fourth quarter of 1997. The repurchase enables the
Company to discontinue charging the difference between fair market value in
the stock at the time of option grant and the option exercise price to
operations.
Liquidity and Capital Resources
The Company's liquidity at September 30, 1998 decreased compared to December
31, 1997. Current assets increased by $33,666 although, short term
borrowings increased by $2,853,702.
In order to sustain operations, the Company borrowed $2,500,000 pursuant to
an offering of units consisting of (a) its Senior Secured Notes, maturing on
or around May 15, 1999 and bearing simple interest at the rate of 16% per
annum, payable quarterly (the "Notes") and (b) warrants to purchase 250,000
shares of the Common Stock exercisable for up to five years from the date of
issuance at an excise price of $.75 per share (subject to adjustment under
certain circumstances, such as stock splits). Moreover, in the event the
Company fails to pay the Notes at their maturity date, the Company can be
required to issue warrants to purchase up to an additional 333,333 shares of
the Company's common stock exercisable for up to five years at an exercise
price of $2.50 per share (subject to adjustment under certain
circumstances), payable at the rate of 83,333 shares of Common Stock for
each 90-day period thereafter during which such default continues. Such
offering was made in a private placement transaction exempt from
registration under the Securities Act of 1933, as amended. Nevertheless, in
management's opinion, the Company will not be able to satisfy its needs for
additional capital through borrowing, but will be able to meet these needs
only by issuing additional equity securities. Thus, the Company is
attempting to secure additional financing of up to at least $5,000,000
through the sale of its equity securities but no such financing has been
consummated. The note shall be mandatorily prepaid in the event that the
Company closes an offering of its securities, whether through one or more
private placement or secondary public offerings in which the Company raises
gross proceeds from such transaction or transactions of at least
$2,5000,000. Moreover, there can be no assurance that the Company will be
able to obtain any additional capital or, if so, on terms acceptable to it.
Outlook
The statements contained in this Outlook are based on current expectations.
These statements are forward looking and actual results may differ materially.
The company operates under various contracts with the Williams Company's to
develop principally two systems; an Automatic Meter Reading System (AMRS)
and a wireless pipeline Supervisory Control and Data Acquisition Systems
(SCADA)
Management believes that as deregulation of natural gas and other utilities
continues, multiple utility suppliers will be serving a given city,
neighborhood, or industrial park. 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
in detail in the Prospectus dated February 17, 1998, 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.
Slower than anticipated market adoption of the Williams AMRS has diminished
projected revenues fro the original estimates of $70 million over the years
1998-2000. the company continues to develop and improve AMRS products under
contract with Williams, however, there are no firm commitments from Williams
for AMRS products at this time.
SCADA: Management believes that deregulation of utilities will also increase
the need for petroleum transporters to monitor and control the distribution
of their product. Management believes that wireless data collection and
transmission systems are optimal solutions for energy transporters whose
pipelines often traverse remote locations not economically served by
traditional communicatin systems such as telephones.
The Company has delivered initial quantities of SCADA systems to Williams,
and anticipates receiving orders from Williams for several million dollars
that will ship during 1999.
Management believes that the completion of development of AMRS and SCADA
systems, along with completion of proprietary radio products may result in
significant increases in sales. However, that may 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.
On October 15, 1998 the Company entered into a 7-year lease for a 34,000
square foot facility in West Valley City, Utah. The Company consolidated
its American Fork, and Salt Lake City, Utah operations and staff into the
new facility. Management expects the new facility to provide sufficient
manufacturing and office space for the foreseeable future. However, if
additional capacity were required, management would consider out-sourcing a
portion of the manufacturing overload.
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 costs 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.
The Company anticipates an increase in revenues from the sale and
manufacturing of the Company's proprietary radio products. The Company will
market a line of radios to OEM that incorporate them into products such as
wireless smoke and security alarm systems, ambulatory patient wireless
monitoring systems, retail point-of-sale systems, and the like. The Company
has begun providing initial sales samples, and believes there is strong
customer interest for the products; however, there can be no assurance that
the Company will be able to manufacture or sell sufficient quantities at
adequate gross margins to achieve profitability.
The Company completed development under a contract with (KME) that calls for
royalty payments upon shipment of certain KME products. Shipments of KME
products containing the company's technology have began during the third
quarter of 1998, and management expects royalty payments from the contract
may begin during the fourth quarter of 1998. Additionally, the company
entered into follow-on fixed fee contracts with KME. 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.
In anticipation of obtaining additional design and development contracts,
management must continually recruit and hire additional RF (radio
frequency), software, firmware, digital engineers and sales engineers with
RF experience. 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 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. Moreover, there can
be no assurance that such capital or other financing will be obtained when
needed, or, if so, on terms acceptable to the Company.
Impact of the Year 2000
Many computer systems experience problems handling dates beyond the year
1999. The Company continues to evaluate its computer systems and believes,
based upon representations from its software suppliers, that its operating
systems are substantially year 2000 compliant. In addition, the Company is
implementing validation procedures designed to evaluate the year 2000
exposure of its significant suppliers, other vendors and customers whose
systems may impact the Company's operations. However, it is impossible for
the Company to monitor the systems of all with whom it interacts, and there
can be no assurance that the failure of their systems would not have
material adverse impacts on the Company's business and operations.
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS
None
REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
World Wireless Communications
Date: November 19, 1998 By: /S/ David D. Singer
-------------------------------
David D. Singer
President and Chief Executive
Officer
Date: November 19, 1998 By: /S/ James L. O'Callaghan
-------------------------------
James L. O'Callaghan
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet as of September 30, 1998, and statements of operations for the nine months
ended September 30, 1998, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 128,510
<SECURITIES> 130,399
<RECEIVABLES> 734,263
<ALLOWANCES> 0
<INVENTORY> 570,318
<CURRENT-ASSETS> 1,563,470
<PP&E> 2,666,619
<DEPRECIATION> (1,056,148)
<TOTAL-ASSETS> 4,660,671
<CURRENT-LIABILITIES> 4,658,903
<BONDS> 402,825
0
0
<COMMON> 11,237
<OTHER-SE> (412,294)
<TOTAL-LIABILITY-AND-EQUITY> 4,660,671
<SALES> 3,551,716
<TOTAL-REVENUES> 3,551,716
<CGS> 2,740,751
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<OTHER-EXPENSES> 12,314,444
<LOSS-PROVISION> 0
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<INCOME-CONTINUING> (11,933,213)
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<NET-INCOME> (11,933,213)
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