UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended ________________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _____________ to ______________
SPECIAL FINANCIAL REPORT FILED PURSUANT TO SECTION 15D-2
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
THIS REPORT CONTAINS ONLY FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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, including area code (801) 575-6600
----------------
Securities registered under section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------ -----------------------------------------
None
Securities registered under section 12(g) of the Act:
None
------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 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 ( )
<PAGE>
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. (
) Not applicable
As of April 23, 1998, there were 11,072,186 shares of the
Issuer's common stock, par value $0.001, issued and outstanding. The
aggregate market value of the Issuer's voting stock held by
nonaffiliates of the Issuer was approximately $38,974,573, computed
at the closing quotation for the Issuer's common stock of $5.50 as
of April 23, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by
reference and the part of the Form 10-K (e.g. Part I, Part II, etc.)
into which the document is incorporated: (1) any annual report to
security holders; (2) any proxy or information statement; and (3)
any prospectus filed pursuant to Rule 424(b) or (c) under the
Securities Act of 1933. The listed documents should be clearly
described for identification purposes. None.
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements are filed as part of this report on pages
F-1 through F-19.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Index to financial statements and Supplemental Schedules
Title of Documents Page No.
Report of Independent Certified Public Accountants. . . . . . . . . . F-1
Consolidated Balance Sheets - December 31, 1997 and 1996. . . . . . . F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996, and for the Period from April
10, 1995 (Date of Inception) through December 31, 1995 . . . . . . F-3
Consolidated Statements of Comprehensive Loss for the
Years Ended December 31, 1997 and 1996, and for the
Period from April 10, 1995 (Date of Inception) through
December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity for the
Period from April 10, 1995 (Date of Inception) through
December 31, 1995, and for the Years Ended December 31,
1996 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997 and 1996, and for the Period
from April 10, 1995 (Date of Inception) through December
31, 1995F-5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . F-6
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Company has caused
this report to be signed on its behalf by the undersigned, hereunto
duly authorized.
WORLD WIRELESS COMMUNICATIONS, INC.
Dated: October 7, 1999 By: /S/ David D. Singer
--------------------------------------
David D. Singer, President, Chairman of
the Board
(President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Dated: October 7, 1999 By: /S/ David D. Singer
------------------------------------
David D. Singer, President,
Chief Executive Officer Principal Financial
Officer and Director
Dated: October 7, 1999 By /S/ Kevin Childress
------------------------------------
Kevin Childress, Vice President - Finance
and Principal Accounting Officer
Dated: October 7, 1999 By /S/ George Denney
-----------------------------------
George Denney, Director
<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 December 31, 1997 and
1996, and the related consolidated statements of operations, comprehensive
loss, stockholders' equity, and cash flows for the years ended December
31, 1997 and 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 audits 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 December 31, 1997 and
1996, and the results of their operations and their cash flows for the
years ended December 31, 1997 and 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
February 27, 1998, except for Note 1- Restatement,
as to which the date is May 10, 1999
F-1
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
-----------------------
1997 1996
----------- ----------
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . $ 218,234 $ 37,278
Investment in securities available for sale . . . . 188,354 -
Trade receivables, net of allowance . . . . . . . . 345,433 131,392
Other receivables . . . . . . . . . . . . . . . . . 49,208 -
Inventory . . . . . . . . . . . . . . . . . . . . . 496,432 159,881
Prepaid expenses. . . . . . . . . . . . . . . . . . 232,143 -
----------- ----------
Total Current Assets . . . . . . . . . . . . . 1,529,804 328,551
----------- ----------
Equipment. . . . . . . . . . . . . . . . . . . . . . 1,589,248 448,237
Less accumulated depreciation . . . . . . . . . . . (455,985) (121,215)
----------- ----------
Net Equipment. . . . . . . . . . . . . . . . . 1,133,263 327,022
----------- ----------
Goodwill, net of accumulated amortization. . . . . . 6,934,803 -
----------- ----------
Other Assets, net of accumulated amortization. . . . 535,154 7,469
----------- ----------
Total Assets . . . . . . . . . . . . . . . . . . . . $10,133,024 $ 663,042
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
-----------------------
1997 1996
----------- ----------
Current Liabilities
Trade accounts payable. . . . . . . . . . . . . . . $ 524,093 $ 61,997
Accrued liabilities . . . . . . . . . . . . . . . . 466,183 55,788
Notes payable - current portion . . . . . . . . . . 814,925 85,566
----------- ----------
Total Current Liabilities. . . . . . . . . . . 1,805,201 203,351
----------- ----------
Long-Term Liabilities
Notes payable . . . . . . . . . . . . . . . . . . . 34,977 44,808
----------- ----------
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; 10,225,260
shares in 1997 and 5,663,000 shares in 1996
issued and outstanding . . . . . . . . . . . . . 10,225 5,663
Additional paid-in capital. . . . . . . . . . . . . 20,915,068 3,916,613
Unearned compensation . . . . . . . . . . . . . . . (1,410,509) -
Shareholder receivable. . . . . . . . . . . . . . . (18,409) -
Accumulated deficit . . . . . . . . . . . . . . . . (11,316,883) (3,507,393)
Accumulated other comprehensive income. . . . . . . 113,354 -
----------- -----------
Total Stockholders' Equity . . . . . . . . . . 8,292,846 414,883
----------- -----------
Total Liabilities and Stockholders' Equity . . . . . $10,133,024 $ 663,042
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period
April 10,1995
(Date of
For the Years Inception)
Ended December 31, Through
------------------------ December 31,
1997 1996 1995
----------- ----------- -----------
Sales. . . . . . . . . . . . . . . . .$ 2,913,429 $ 618,505 $ 426,825
Cost of Sales. . . . . . . . . . . . . 2,116,934 662,184 237,356
----------- ----------- -----------
Gross Profit (Loss). . . . . . . . . . 796,495 (43,679) 189,469
----------- ----------- -----------
Expenses
Research and development . . . . . 2,943,404 92,932 -
General and administrative. . . . . 4,234,087 1,789,904 386,612
Amortization of goodwill. . . . . . 1,384,715 - -
Interest .. . . . . . . . . . . . . 43,779 1,310,142 73,593
----------- ----------- -----------
Total Expenses . . . . . . . . . 8,605,985 3,192,978 460,205
----------- ----------- -----------
Net Loss . . . . . . . . . . . . . . .$(7,809,490) $(3,236,657) $ (270,736)
=========== =========== ===========
Basic and Diluted Loss Per
Common Share. . . . . . . . . . . . .$ (0.85) $ (1.03) $ (0.26)
=========== =========== ===========
Weighted Average Number of Common
Shares Used in Per Share Calculation. 9,217,158 3,141,613 1,049,679
=========== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Period
April 10,1995
(Date of
For the Years Inception)
Ended December 31, Through
------------------------ December 31,
1997 1996 1995
----------- ----------- -----------
Net Loss . . . . . . . . . . . . . . .$(7,809,490) $(3,236,657) $ (270,736)
Other Comprehensive Income
Unrealized gains on investment in
securities available for sale. . . 113,354 - -
----------- ----------- -----------
Comprehensive Loss . . . . . . . . . .$(7,696,136) $(3,236,657) $ (270,736)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
(CAPTION>
Common Stock Additional Total
--------------------- Paid-in Accumulated Equity Stockholders'
Shares Amount Capital Deficit Adjustments Equity
----------- -------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance - April 10, 1995
(Date of Inception) - $ - $ - $ - $ - $ -
Shares issued for cash 1,189,394 1,189 394,811 - - 396,000
Shares issued for services 425,758 426 140,074 - - 140,500
Issuance for financing fees 116,988 117 38,489 - - 38,606
Redemption of shares (600,000) (600) (268,400) - - (269,000)
Beneficial conversion feature
of convertible debt - - 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 - - 719,781 - - 719,781
Conversion of notes payable 3,092,860 3,093 811,907 - - 815,000
Shares issued for cash 900,000 900 776,797 - - 777,697
Shares issued for services 527,000 527 787,061 - - 787,588
Shares issued for interest due
on convertible notes 11,000 11 4,939 - - 4,950
Compensation related to grant
of stock options - - 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 - - 2,373,849 - (2,373,849) -
Shares and warrants issued
for cash 2,557,857 2,558 4,192,692 - - 4,195,250
Issuance upon exercise of
options 25,098 25 29,836 - (18,409) 11,452
Conversion of note payable 5,630 6 1,964 - - 1,970
Shares issued and 201,900
stock options granted in
acquisition of Digital Radio
Communications Corporation 1,798,100 1,798 8,672,264 - - 8,674,062
Shares issued in acquisition
of TWC 101,200 101 1,048,331 - - 1,048,432
Shares issued in acquisition
of XARC 10,000 10 102,990 - - 103,000
Shares issued in settlement
of lawsuit 40,000 40 323,416 - - 323,456
Issuance for financing fees 24,375 24 253,113 - - 253,137
Amortization of unearned
compensation - - - - 963,340 963,340
Unrealized gain on securities - - - - 113,354 113,354
Net loss - - - (7,809,490) - (7,809,490)
---------- --------- ----------- ------------ ----------- -----------
Balance - December 31, 1997 10,225,260 $ 10,225 $20,915,068 $(11,316,883) $(1,315,564) $ 8,292,846
=========== ========= =========== ============ =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-4
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period
April 10,1995
(Date of
For the Years Inception)
Ended December 31, Through
------------------------ December 31,
1997 1996 1995
----------- ----------- -----------
Cash Flows From Operating Activities
Net loss. . . . . . . . . . . . . . $(7,809,490) $(3,236,657) $ (270,736)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Amortization of goodwill . . . . 1,384,715 - -
Depreciation and amortization
of other assets . . . . . . . . 361,607 83,094 38,853
Purchased research and development 1,561,000 - -
Financing fees and amortization
of debt discount. . . . . . . . 154,200 1,284,415 34,987
Stock issued for services . . . 111,370 787,588 179,106
Compensation from stock options
granted . . . . . . . . . . . . 963,340 441,180 -
Changes in operating assets and
liabilities, net of effects of
businesses acquired:
Accounts receivable, net of
allowance for doubtful
accounts . . . . . . . . . . 7,622 (100,688) (30,621)
Inventory . . . . . . . . . . (41,105) (99,225) (14,799)
Accounts payable. . . . . . . 41,546 30,741 31,256
Accrued liabilities . . . . . (86,981) 54,965 827
Other assets. . . . . . . . . (237,312) (4,143) -
----------- ----------- -----------
Net Cash and Cash Equivalents Used
By Operating Activities. . . . . . (3,589,488) (758,730) (31,127)
----------- ----------- -----------
Cash Flows From Investing Activities
Payments for the purchase of
property and equipment . . . . . . (663,707) (90,544) (49,691)
Proceeds from sale of property
and equipment. . . . . . . . . . . 10,754 - -
Cash paid for subsidiaries, net
of cash received . . . . . . . . . (248,736) - (340,000)
----------- ----------- -----------
Net Cash and Cash Equivalents Used
By Investing Activities. . . . . . (901,689) (90,544) (389,691)
----------- ----------- -----------
Cash Flows From Financing Activities
Payment to redeem common stock. . . - - (19,000)
Proceeds from issuance of
common stock . . . . . . . . . . . 4,206,700 777,697 350,000
Proceeds from borrowings, net
of discount. . . . . . . . . . . . 775,000 (417,008) 77,847
Proceeds from issuance of beneficial
debt conversion feature. . . . . . - 719,781 41,653
Principal payments on notes payable (309,567) (223,600) -
---------- ----------- -----------
Net Cash and Cash Equivalents Provided
By Financing Activities . . . . . . 4,672,133 856,870 450,500
Net Increase In Cash and Cash
Equivalents . . . . . . . . . . . . 180,956 7,596 29,682
Cash and Cash Equivalents -
Beginning of Period . . . . . . . . . 37,278 29,682 -
---------- ----------- -----------
Cash and Cash Equivalents -
End of Period. . . . . . . . . . . . $ 218,234 $ 37,278 $ 29,682
========== =========== ===========
Supplemental cash flow information and noncash investing and financing
activities - Note 7
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION 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. 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.
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. 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 Communications, Inc. and its wholly owned
subsidiaries, ECA Electronic Contract Assembly, Inc. (ECA), TWC, Inc.
(TWC), and Digital Radio Communications Corporation (Digital Radio) which
has subsidiaries, from the dates of their acquisitions. Intercompany
accounts and transactions have been eliminated in consolidation. The
consolidated entities are collectively referred to herein as the Company.
On December 31, 1997, Digital Radio Communications Corporation and its
subsidiaries, and ECA, effected a plan of liquidation into World Wireless
Communications, Inc. and were dissolved.
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.
RESTATEMENT - The Company corrected the amortization period for goodwill
associated with the acquisition of Digital Radio from 15 to 5 years. As a
result of the change in the amortization period, the 1997 amortization of
goodwill increased $279,263 which resulted in an increase in the 1997 net
loss of $279,263, or $0.03 per share.
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 and TWC, 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. As
further described in Note 12, the computer security product line was sold
to an employee/shareholder in January 1998.
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 for the years ended December 31, 1997 and 1996 and for the
period from April 10, 1995 through December 31, 1995, and may require
additional capital to continue operations. Although current liabilities
exceed current assets at December 31, 1997, equity sales and debt issuances
since December 31, 1997 have provided working capital necessary to meet
obligations. Management also intends to obtain additional capital through
issuance of common stock. Management anticipates sales from contracts
currently in force will eventually generate profitable operations. However,
there is no assurance that profitable operations can be obtained or sustained.
F-6
<PAGE>
SEGMENT INFORMATION AND CONCENTRATION OF RISK -The Company operates solely
in the electronics industry and, prior to 1997, its sales were primarily to
customers 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 year ended December 31, 1997 were
$1,661,752 of which 97% or $1,607,706 were to customers in Japan. The
concentration of business in one industry 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 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. Cash and cash equivalents in excess of insured limits was
approximately $81,953 at December 31, 1997. The amounts reported as cash
and cash equivalents, accounts receivable, other receivables, 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.
TRADE ACCOUNTS RECEIVABLE AND MAJOR CUSTOMERS - Sales to major customers
during the years ended December 31, 1997 and 1996 were as follows: Customer
"A" - $1,596,000 and $0, Customer "B" - $413,512 and $0, and Customer "C" -
$77,667 and $102,578, respectively. Sales to major customers subject the
Company to the risk that the Company may not be able to continue the
current level of sales if there were a loss of a major customer. At
December 31, 1997 and 1996, an allowance for doubtful accounts of $30,000
and $0, respectively, 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 AND LONG-LIVED ASSETS -Goodwill and other long-lived assets are
evaluated periodically for impairment when indicators of impairment are
present and undiscounted cash flows estimated to be generated by those
assets are less than their carrying amounts. Goodwill is included along
with other assets acquired as a group when evaluating their recoverability.
Impairment losses are recognized to the extent estimated discounted net
future cash flows expected to be generated from those assets are less than
their carrying amounts. Goodwill is further evaluated separately and
impairment losses are recognized for the excess of the carrying amount of
goodwill over management's estimation of the value and future benefits
expected to be realized from the goodwill. In both of these analyses,
significant management judgement is required to evaluate the capacity of
the assets or the acquired business to perform within projections.
The original amortization periods for goodwill and other intangible assets
are evaluated periodically to determine whether later events and
circumstances warrant revised estimates of their useful lives. If
estimated useful lives are changed, the unamortized cost is allocated to
the remaining periods in the revised useful lives. The Company determines
the useful life of goodwill based upon an analysis of all relevant factors.
F-7
<PAGE>
Goodwill arose from the acquisitions of Digital Radio and TWC Ltd. and is
being amortized over a 5-year period on a straight-line basis. The
amortization expense for 1997 was $1,384,715.
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 three to seven
years. Leased equipment is amortized over the shorter of the useful life of
the equipment or the term of the lease. Depreciation expense was $338,043,
$82,362 and $38,853 for the years ended December 31, 1997 and 1996 and for
the period from April 10, 1995 through December 31, 1995, respectively.
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 December 31, 1997, investment in marketable securities
consisted of common stock of customers classified as available for sale and
are stated at quoted fair market value of $188,354. The cost of the
marketable securities was $75,000. The unrealized gain as of December 31,
1997 was $113,354 which was also the change in net unrealized gains on
marketable securities included as a separate component of stockholders'
equity in the accompanying balance sheet.
SALES RECOGNITION - Sales are recognized upon delivery of products or
services and acceptance by the customer. 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.
STOCK-BASED COMPENSATION - Stock-based compensation to employees is
measured by the intrinsic value method. This method recognizes compensation
expense related to stock options granted to employees based on the
difference between the fair value of the underlying common stock and the
exercise price of the stock option on the date granted.
LOSS PER SHARE - In the fourth quarter of 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128,"Earnings Per
Share." Under SFAS 128, basic loss per common share is computed by dividing
net loss available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted loss per share
reflects the potential dilution which could occur if all potentially
issuable common shares from options or convertible notes payable resulted
in the issuance of common stock. In the Company's present position, diluted
loss per share is the same as basic loss per share because potentially
issuable common shares would decrease the loss per share and have been
excluded from the calculation. Prior periods have been restated, where
appropriate, to conform to the requirements of SFAS 128.
NEW ACCOUNTING STANDARDS -The Company adopted SFAS No. 128, "Earnings per
Share," and SFAS No. 129, "Disclosures of Information About Capital
Structure," in 1997. In accordance with SFAS Nos. 128 and 129, both basic
net loss per share and diluted net loss per share as well as rights and
liquidation preferences of equity securities have been presented in the
accompanying consolidated financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company is
currently analyzing the impact of this statement, which is required to be
adopted in 1999, and does not expect this statement to have a material
impact on the Company's financial position, results of operations or cash
flows.
F-8
<PAGE>
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued.
The Company adopted this standard during the fourth quarter of 1997 which
requires the display of comprehensive income and its components in the
financial statements. In the Company's case, comprehensive income includes
net loss and unrealized gains on investment in securities available for sale.
The Financial Standards Board issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" and SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits,
an Amendment of FASB Statements No. 87, 88, and 106 during 1997 and 1998.
These statements, which are effective for fiscal years beginning after
December 15, 1997, expand or modify disclosures and will have no impact on
the Company's consolidated financial position, results of operations, or
cash flows.
NOTE 2--BUSINESS COMBINATION AND ACQUISITIONS
ECA Electronic Contract Assembly, Inc. (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 entire purchase price
is considered to be a sign up bonus and was allocated to compensation
expense. ECA's 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, 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 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.
F-9
<PAGE> December 31,
----------------------------
1997 1996
------------ -----------
Sales . . . . . . . . . . . . . . $ 3,048,014 $ 2,004,983
Net Loss. . . . . . . . . . . . . (7,107,213) (5,999,903)
Net Loss per Common Share . . . . . . $ (0.77) $ (1.17)
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 acquired substantially all of the assets of Austin Antenna, Ltd.
(Austin Antenna), a New Hampshire corporation. The Company paid $146,000 in
cash by advancing $106,000 and by paying $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 Company also issued 1,200 shares of stock to the
owners of TWC for services valued at $12,431.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 which was charged against
operations. The patents are being amortized over 6.5 years, their estimated
remaining useful life. The excess of the purchase price over the estimated
fair value of the net assets acquired was $434,443 which was allocated to
goodwill and is being amortized over 5 years on a straight-line basis. The
results of operations of TWC are 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 information is 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
development and sales of wireless technology, by issuing 10,000 shares of
restricted common stock valued at $103,000. XARC had no assets or
liabilities prior to the acquisition. The acquisition was 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 are included in the
consolidated financial statements from the date of acquisition.
NOTE 3--INVENTORY
Inventory consisted of the following:
December 31,
----------------------------
1997 1996
------------- -----------
Materials . . . . . . . . . . . $ 378,238 $ 20,935
Work in process . . . . . . . 118,194 138,946
------------- -----------
NOTE 4--EQUIPMENT
Equipment consisted of the following:
December 31,
----------------------------
1997 1996
------------- -----------
Computer equipment . . . . . $ 246,117 $ 68,440
Manufacturing equipment . . . 1,059,91 308,458
Office furniture. . . . . . . 164,566 71,339
Software . . . . . . . . . . 118,649 -
------------- -----------
Total . . . . . . . . . . . . $ 1,589,248 $ 448,237
============ ===========
F-10
<PAGE>
NOTE 5--NOTES PAYABLE
December 31,
-------------------------
1997 1996
---------- ----------
10% Notes payable; paid in 1997. . . . . . . $ - $ 3,404
Payable due to shareholder; converted to
common stock in January 1997. . . . . . . - 1,970
Capital lease obligations for equipment
(Note 12) . . . . . . . . . . . . . . . . 40,576 -
15% Note payable to a shareholder; payable
$7,798 monthly through September 1998;
secured by equipment and personally
guaranteed by two stockholders. . . . . . 44,808 125,000
12% Note payable to a shareholder; guaranteed
by an officer and secured by an officer's
common stock; paid in 1998 . . . . . . . . 200,000 -
12% Note payable to shareholder; due
December 31, 1997; unsecured . . . . . . . 125,000 -
10% Note payable to an unrelated party;
due September 30, 1998; unsecured. . . . . 400,000 -
12% Note payable to an employee; payable
$1,408 monthly through December 31, 1998;
unsecured. . . . . . . . . . . . . . . . . 39,518 -
---------- ---------
Total Notes Payable . . . . . . . . . . . . 849,902 130,374
Less: Current Portion. . . . . . . . . . . (814,925) (85,566)
---------- ---------
Long-Term Notes Payable . . . . . . . . . . $ 34,977 $ 44,808
========== =========
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 8) 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 of the
discount which amounted to $1,154,094 (see Note 8). The discount was fully
amortized during the period from the dates the notes were issued through
December 31, 1996. The notes payable were converted into 1,200,000 shares
of common stock from October through December 1996.
F-11
<PAGE>
The annual maturities of notes payable as of December 31, 1997 were as
follows:
Years Ending December 31:
1998. . . . . . . . . . . . $ 810,386
1999. . . . . . . . . . . . 30,103
2000. . . . . . . . . . . . 8,866
2001. . . . . . . . . . . . 547
---------
Total. . . . . . . . . . . . $ 849,902
=========
NOTE 6--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:
For the Years Ended December 31,
-----------------------------------
1997 1996 1995
----------- ----------- ---------
Operating loss carryforwards . . . . $ 3,684,004 $ 864,937 $ 95,813
Accrued liabilities and other. . . . 271,694 168,979 5,169
------------ ----------- --------
Total Deferred Tax Assets. . . . . . 3,955,698 1,033,916 100,982
Valuation Allowance. . . . . . . . . (3,955,698) (1,033,916) (100,982)
----------- ----------- --------
Net Deferred Tax Asset . . . . . . . $ - $ - $ -
=========== =========== =========
For tax reporting purposes, the Company has net operating loss
carryforwards in the amount of $9,443,887 which 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 Years Ended December 31,
-----------------------------------
1997 1996 1995
----------- ----------- ---------
Tax at statutory rate (34%). . . . . $(2,655,227) $(1,100,463) $ (92,050)
Non-deductible expenses. . . . . . . 740,830 283,633 -
Change in valuation allowance. . . . 2,301,134 932,934 100,982
State tax benefit, net of federal
tax effect. . . . . . . . . . . . . (248,497) (106,811) (8,932)
Research and development credit. . . (138,240) (9,293) -
----------- ----------- ---------
Net Income Tax Expense . . . . . . . $ - $ - $ -
=========== =========== =========
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-12
<PAGE>
NOTE 7--SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH
INVESTING AND FINANCING ACTIVITIES
Supplemental Cash Flow Information -
For the Years Ended December 31,
-----------------------------------
1997 1996 1995
----------- ----------- ---------
Interest Paid . . . . . . . . . $ 34,426 $ 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:
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
=========
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 payable 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 year ended December 31, 1997, $1,970 in long-term debt was
converted into 5,630 shares of common stock at $0.35 per share. The Company
purchased equipment totaling $54,887 by issuing a note payable in the same
amount. 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:
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
===========
F-13
<PAGE>
NOTE 8--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 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. 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.
The Company issued 2,557,857 shares of common stock from January 1997
through August 1997 in private placement offerings for $4,195,250 cash.
F-14
<PAGE>
The Company issued 25,098 shares of common stock upon the exercise of stock
options. Proceeds from the issuance were $11,452 of cash and a promissory
note from a shareholder of $18,409.
On November 11, 1997, the Company fulfilled an obligation totaling $323,456
under a settlement reached with an otherwise unrelated joint venture
partner. 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 February 28, 1998, but the option was not exercised
by that date and expired.
During November and December 1997, the Company issued 24,375 shares of
common stock for financing fees in the amount of $253,137.
NOTE 9--EQUITY ADJUSTMENTS
Equity adjustments include unearned compensation from stock options granted
in 1997 which vest through 1999, a receivable from a shareholder which
arose from the shareholder exercising an option in exchange for a
promissory note, and accumulated other comprehensive income relating to
unrealized gain on investment in securities available for sale. Changes in
equity adjustments for the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Accumulated
Other Total
Unearned Shareholder Comprehensive Equity
Compensation Receivable Income Adjustments
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Balance - December 31, 1996. . . . . . . $ - $ - $ - $ -
Compensation related to grant
of stock options. . . . . . . . . . . . (2,373,849) - - (2,373,849)
Amortization of unearned compensation. . 963,340 - - 963,340
Options exercised for note receivable
from shareholder. . . . . . . . . . . . - (18,409) - (18,409)
Unrealized gain on investment
in securities available
for sale. . . . . . . . . . . . . . . . - - 113,354 113,354
----------- --------- --------- -----------
Balance - December 31, 1997. . . . . . .$(1,410,509) $ (18,409) $ 113,354 $(1,315,564)
=========== ========= ========= ===========
</TABLE>
NOTE 10--STOCK OPTIONS
In December 1996, the Company granted options to two members of management
of the Company to purchase a total of 258,000 shares of restricted common
stock at $0.33 per share for services to the Company. In January 1997, one
of the members 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.
F-15
<PAGE>
The Board of Directors approved a stock option plan in September 1997 which
authorized options to purchase 1,500,000 shares of common stock. Options to
purchase 937,044 common shares were granted under the Plan 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 on December 17, 2002. Compensation relating to
the options of $2,108,349, or $2.25 per share, is being recognized over the
period the options vest of which $697,840 was recognized during the fourth
quarter of 1997.
A summary of the status of the Company's stock options as of December 31,
1997 and 1996, and changes during the years then ended are presented below:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996
--------------------- -------------------
Weighted-Average Weighted-Average
Exercise Exercise
Shares Price Shares Price
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year. . . . 258,000 $ 0.33 - $ -
Granted . . . . . . . . . . . . . . . . 1,288,944 5.06 258,000 0.33
Exercised . . . . . . . . . . . . . . . (25,098) 1.19 - -
---------- --------
Outstanding at end of year . . . . . . 1,521,846 4.33 258,000 0.33
========== ========
Options exercisable at year-end . . . . 792,610 2.32 258,000 0.33
========== ========
Weighted-average fair value of
options granted during the year. . . . $ 3.43 $ 1.76
========== ========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise At Contractual Exercise At Exercise
Prices 12/31/97 Life Price 12/31/97 Price
-------------- --------- ------------ --------- --------- ----------
$0.18 224 2.0 years $0.18 224 $0.18
$0.33 - $0.35 408,000 0.6 $0.34 408,000 $0.34
$2.00 176,578 2.1 $2.00 176,578 $2.00
$6.50 937,044 2.0 $6.50 207,808 $6.50
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
$963,340 and $441,180 for the years ended December 31, 1997 and 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:
For the Years Ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ----------
Net loss:
As reported . . . . . . . $ (7,809,490) $ (3,236,657) $ (270,736)
Pro forma . . . . . . . . (8,339,767) (3,249,557) (270,736)
Basic and diluted loss per share:
As reported. . . . . . . $ (0.85) $ (1.03) $ (0.26)
Pro forma. . . . . . . . (0.90) (1.03) (0.26)
F-16
<PAGE>
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 79.2% and 99.6%; risk-free interest rate of 5.3% and 5.0% and expected
life of the options of 2.0 years and 1.5 years.
Subsequent to December 31, 1997, option holders exercised options to
purchase 336,926 shares of common stock at exercise prices from $0.33 to
$2.00 per share.
NOTE 11-RELATED PARTY TRANSACTIONS
During 1997, an officer and shareholder loaned $125,000 to the Company. The
loan carries a 12% interest rate and was due on December 31, 1997. The
Company issued 9,375 shares of common stock valued at $98,938 as a fee
relating to the loan. A loan to the Company of $400,000 was guaranteed and
secured by the common stock held by an officer. Through the acquisition of
Digital Radio, the Company assumed and subsequently paid a note payable and
accrued wages totaling $128,057 to two officers and shareholders.
During 1995, the principal shareholders and managers of the Company
contributed cash, paid expenses for the benefit of the Company and
contributed services to the Company all valued at $461,256, for which they
received 1,387,140 shares of common stock, valued at $0.33 per share.
Subsequently, one of the shareholders interests were redeemed through the
payment of $46,000, payment by a third party lender of $45,000, and the
issuance of a promissory note bearing interest at 10% in the amount of
$159,000 to the shareholder. The note was paid by March 1996.
NOTE 12--COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company leases office and production facilities
under agreements accounted for as operating leases. Lease expense for the
years ended December 31, 1997 and 1996 and for the period ended December
31, 1995 was $367,301, $123,779 and $17,820, 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. The following is a schedule by years of the
future minimum lease payments required under operating and capital leases
together with the present value of net minimum lease payments as of
December 31,1997:
Capital Operating
Years Ending December 31: Leases Leases
---------- ----------
1998 . . . . . . . . . . . . . . $ 21,448 $ 118,860
1999 . . . . . . . . . . . . . . 18,081 4,981
2000 . . . . . . . . . . . . . . 11,246 -
2001 . . . . . . . . . . . . . . 695 -
Total Minimum Lease Payments. . . . . 51,470 $ 123,481
==========
Less amount representing interest . . (10,894)
----------
Present Value of Net Minimum
Lease Payments . . . . . . . . . . . 40,576
Less Current Portion. . . . . . . . . (21,448)
----------
Capital Lease - Long-Term . . . . . . $ 19,128
==========
COMMITMENT TO ACQUIRE TECHNOLOGY- The Company has entered into an agreement
to acquire certain technology from Asyst, Inc., an otherwise unrelated
company. Under the agreement the Company will issue approximately $300,000
in common stock (not less than 30,000 shares), and will advance $65,000 in
cash, in exchange primarily for Asyst's spectrum technology. Appropriate
accounting treatment of this transaction, should it occur, has not been
determined.
F-17
<PAGE>
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
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 -The Company sponsors a 401K profit sharing plan
but has no commitment to match employee's contributions to the plan, nor
has the Company made any contributions to the plan to date.
NOTE 13--SUBSEQUENT EVENTS
In January 1998, the Company sold its SecuriKey business and related
products to a shareholder/employee for $372,499. The sale resulted in a
gain of approximately $300,000. The results from operations of the
SecuriKey business were not significant during the year ended December 31,
1997.
In January 1998, the Company entered into agreements to lease equipment and
software with future minimum lease payments totaling $1,093,165. The lease
agreements are for periods ranging from two to three years.
On January 8, 1998, the Company issued an unsecured note payable to an
unrelated party in the amount of $400,000. Interest accrues at 10.0% and
the note and related accrued interest are due September 30, 1998.
Between March 17, 1998 and March 30, 1998, the Company issued 500,000
shares of common stock at $2.00 per share in a private placement offering.
(Unaudited).
Subsequent to December 31, 1997, option holders exercised options to
purchase 333,926 shares of common stock at exercise prices from $0.33 to
$2.00 per share. (Unaudited).
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