SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number O-24742
U.S. Wireless Corporation
(Exact name of Company as specified in its charter)
Delaware 13-3704059
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2303 Camino Ramon, Suite 200, San Ramon, California 94583
(Address of principal executive offices) (Zip Code)
(925) 327-6200
(Company's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that Company was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X].
We had, on a consolidated basis, $249,178 in revenues from operations during the
fiscal year ended March 31, 2000.
The aggregate market value of the voting stock (consisting of Common Stock, par
value $.01 per share) held by non-affiliates on June 26, 2000 was approximately
$362,601,543 based upon the closing bid price for such Common Stock on said date
($21.25), as reported on the NASDAQ National Market System. On such date, there
were 21,122,906 shares of Company's Common Stock outstanding.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Our Market Opportunity
There are approximately 80 million wireless subscribers in the U.S. today and
that number is projected to rise to over 185 million by 2005. Wireless carriers
competing for this growing subscriber base are exploring new ways to
differentiate their services and increase average revenue per unit. We believe
that location-based wireless services will be a leading new revenue opportunity
for wireless carriers. In addition, wireless subscribers are demanding access
to, and are willing to pay their carriers for, the same data available to wired
telephone users and, increasingly, to wired and wireless Internet users. The
1999 Strategis Group Report estimates a $4 billion market for wireless location
services, excluding E-911 capabilities, such as roadside assistance,
location-sensitive billing, E-411 and traffic and intelligent transportation
systems. The report estimates that 47 million subscribers will be using these
services by 2004.
We have developed a network-based proprietary technology to locate mobile
telephone subscribers by recognizing the pattern of the radio waves radiating
from the subscribers' handsets. Based on the results of our field trial in
Billings, Montana, which we completed in August 1999, and according to the final
report issued by the State of Montana on May 22, 2000, the performance of our
location technology during the trial exceeded the Phase II requirements of the
FCC's wireless E-911 mandate. We plan to deploy a nationwide location network
based on our proprietary technology and operate it as a service bureau, enabling
us to enjoy substantial operating leverage by providing wireless location
information to multiple wireless carriers and other customers for multiple
applications. Initially, we will focus on providing E-911 wireless location
information to carriers and intelligent transportation systems applications to
governmental agencies to assist them in monitoring and managing roadway
congestion. Over time, we anticipate that we will be able to expand our service
offerings to provide a variety of location services to wireless carriers and
others. While these applications are evolving, we anticipate that our service
offerings will include the following:
Carrier Services
o E-911: Our network will provide wireless carriers with location
information that satisfies the accuracy requirements of the FCC 911
mandate.
o Carrier Network Applications: Over time, we will offer wireless
carriers other value-added services, such as monitoring the performance
of their networks, determining under-performance or changes in their
networks' coverage and location-based billing.
o E-411 and other information services: Location-based information
services and applications that are related to the mobility of the end
user (i.e. turn-by-turn directions, real-time traffic information and
localized directory assistance). Additionally, the network could
provide an opportunity for advertisers to sell to customers that are
geographically proximate to their products and services.
<PAGE>
o Fleet Management and Asset Tracking: Our technology will allow carriers
to provide their customers with accurate, real-time information about
the location of their fleets, freight and related equipment.
Other Services
o Intelligent Transportation Systems: Our network will provide Federal
and State governmental agencies with effective solutions to manage
traffic flows and monitor roadway congestion.
o Telematics: Our network will provide motorists with time-dependent
traffic and roadway information. Examples of such in-car, telematic
services include route guidance, in-car traffic alerts, concierge
functions, dynamic re-routing and similar services targeted at
commuters.
FCC Mandate
Recent actions by the FCC are driving the market opportunity for wireless
location technology. Unlike phone calls placed from wireline telephones, calls
for emergency assistance from wireless phones are not traceable. In response to
this public safety issue, the FCC has issued a series of orders since October
1997, requiring wireless carriers to provide the caller's telephone number and
originating cell site and/or sector of a 911 call to qualified requesting
personal safety answering points within six months of their request.
The wireless carriers' obligations to identify and report E-911 calls are
becoming more complex. Commencing in 2001, wireless carriers must be able to
pinpoint and report the location of all 911 callers within specified accuracy
requirements, known as the Phase II requirements. Wireless carriers must file a
report with the FCC by October 1, 2000 describing their plans for achieving
E-911 compliance, including their choice of technology and implementation plan.
The FCC order provides that carriers may use either handset-based or
network-based technologies, or a combination of these technologies, to meet the
E-911 requirement. Carriers may make these decisions on a market-by-market
basis. Network-based solutions include our system, as well as triangulation
systems based on angle of arrival or time difference of arrival techniques.
Handset-based solutions are predominantly those using the global positioning
system.
Timing Requirements
Carriers choosing a network-based solution, like ours, must:
o provide E-911 services to 50% of subscribers within six months of the
request by a local personal safety answering point but not sooner than
October 1, 2001; and
o provide E-911 service to 100% of subscribers within 18 months of the
request by a local personal safety answering point.
Carriers choosing a handset-based solution must:
o begin selling and activating E-911 handsets by March 1, 2001;
o ensure that 50% of newly activated handsets are E-911 capable by
October 1, 2001; and
<PAGE>
o ensure that 95% of newly activated handsets are E-911 capable by
October 1, 2002.
The schedule for carriers providing a handset-based solution is independent of
requests by personal answering points for location services. However, if a local
personal answering point does request E-911 service, the carrier must assure
that 100% of all newly activated handsets are E-911 compliant within six months
of that request. Personal safety answering points can begin making these
requests as early as April 1, 2001. In addition, within two years or by December
31, 2004, whichever is later, each and every handset in operation must be E-911
capable, which would require a carrier electing a handset-based solution to
either replace its subscribers' old handsets or upgrade them.
Accuracy Requirements
The FCC's accuracy requirements also differ for network-based and handset-based
solutions. For network-based solutions, such as ours, the carrier must be able
to identify the caller's location to an accuracy of within 100 meters for at
least 67% of calls, and within 300 meters for 95% of calls. For handset-based
solutions, the carrier must be able to identify the caller's location to an
accuracy within 50 meters for 67% of calls, and within 150 meters for 95% of
calls.
On March 31, 2000, the FCC published guidelines for testing and verifying the
accuracy of E-911 wireless location systems. In these guidelines, the FCC
described empirical predictions and statistical approaches for verifying
compliance with the FCC's accuracy standards. The FCC also indicated that after
the initial location event that there is a benefit during the initial 30 seconds
after the call to obtain additional location information refine the data.
Waivers and Modifications
Various wireless carriers have submitted requests for waivers from the Phase II
requirements of the FCC mandate, and other parties have subsequently filed
comments with the FCC regarding waivers. The FCC is reviewing the issue of
waivers and/or modifications of its mandate in an ongoing public forum.
Given the FCC's recent actions and with the growing number of wireless
subscribers who attach importance to personal safety, we expect that the need
for and awareness of E-911 services will continue to increase demand for E-911
services. In addition, in October 1999, the U.S. Congress passed the Wireless
Communications and Public Safety Act, which designates 911 as the universal
number across the nation for reporting an emergency and requesting assistance
from both wireline and wireless telephones. The Act also grants wireless
communications companies, wireless users and personal safety answering points
the same immunity and liability protection granted in similar circumstances to
wireline 911 services.
Business Strategy
Our objective is to deploy and operate a nationwide wireless location network
that supports the needs of wireless carriers and other customers and provides
other value-added services. Our strategy is to do the following:
<PAGE>
Rapidly deploy our nationwide location network. We believe that we are the only
company to have successfully tested an E-911 solution in an end-to-end trial
within FCC mandated requirements. We intend to continue testing our solution
during the remainder of the year in the Virginia/Washington D.C./Baltimore metro
area. Upon successful completion of our testing, we plan to begin rolling out
our network. We are not aware of any other network-based systems preparing for
commercial launch this year. As a result, we believe that we will have a
significant first-mover advantage in providing wireless location services.
Establish close-knit relationships with leading nationwide carriers. We intend
to focus on the wireless carrier as our primary customer. A key contributor to
our development has been our ability to establish relationships with leading
wireless carriers in the industry. To date, we have undertaken, or are
undertaking, technology trials with Verizon, Nextel Communications, AT&T
Wireless, SBC Communications and Western Wireless, for each to evaluate the
effectiveness of our location technology. We plan to continue to work closely
with these carriers while also developing new relationships with other carriers.
We believe that in the event a carrier selects our system to provide some or all
of its E-911 services, we will be well positioned to market additional
location-based service applications to that carrier.
Create and capitalize on the substantial operating leverage resulting from our
nationwide service bureau. A key component of our strategy is our service bureau
model. This model will allow our users to obtain wireless location information
without making costly investments in infrastructure or replacing handsets. In
addition, we will be able to spread the cost of our network over a larger
customer base, permitting us to offer nationwide location services to our
customers at a lower price than we could offer them to any single customer. For
this reason, we are seeking to design our solution in a manner that will be
compatible with all current wireless technologies and protocols. As a result,
once we complete the roll-out of our network, we will be in a position to serve
all U.S. carriers, including nationwide carriers, and all handsets, including
handsets using roaming signals. We believe that this will be attractive to
carriers because existing GPS solutions have line of sight limitations typical
of satellite-based technologies and would not support handsets using roaming
signals unless the handset is being used in an area that is also served by a
GPS-based system. As our national footprint is built, our service bureau will
enable us to:
o sell multiple services to each carrier, beginning with E-911 service,
adding additional carrier network applications, such as location-based
billing, and ultimately adding subscriber-driven location-sensitive
applications;
o support various carrier network applications for multiple network and
regional carriers;
o provide customized applications that will allow a carrier to create
tailored services for its customer base; and
o offer applications such as intelligent transportation services and
telematics to non-carrier customers.
Provide an innovative solution for monitoring traffic flow and congestion. We
plan to develop and utilize our wireless location network to provide an accurate
and cost-effective method for monitoring traffic flow. We believe that the
current technologies for collecting traffic data have significant limitations,
including limited coverage areas, high maintenance costs and high failure rates.
Because of the growing number of cellular users and our ability to track the
<PAGE>
calls on the roadways, we believe that our location network can provide
meaningful real-time traffic data. We have already entered into agreements with
the States of Maryland and Virginia on a trial basis to provide traffic data,
and we intend to continue to market our innovative solution to the intelligent
transportation systems community. These contracts will subsidize the costs of
the build-out of our wireless location network and serve as a platform for
additional services.
Opportunistically pursue and develop strategic relationships. To execute our
strategy, we will seek to form strategic relationships with leading
telecommunications service providers, networking and data processing firms for
network operating center build-outs, content and application service providers
to distribute our location-based information, and tower firms for site leasing.
We have recently entered into a master license agreement and services agreement
with American Tower Corporation, an owner and operator of broadcast transmission
towers in the United States. Under this agreement, we will license between 1,000
to 2,500 tower facilities during a three-year term and also receive network
build-out services, including radio frequency design and site construction and
installment management.
Services
We believe that our service bureau model will enable rapid implementation of
wireless location information and mobility content services to multiple carrier
and non-carrier customers. While these applications are evolving, we anticipate
that our service offerings will include the following:
Carrier Services
E-911. We have developed proprietary technology and we will initiate our network
deployment upon successful completion of our field trials on a market-by-market
basis, beginning with those markets where we first enter into at least one
agreement with a wireless carrier to enable the carrier to meet the FCC mandate.
Our network will provide a turnkey system for these carriers in order to enable
them to locate wireless E-911 callers and to deliver calls and relevant caller
location data to the appropriate emergency center. We will be able to customize
our E-911 service for each carrier and operating environment and integrate our
service with a wide range of existing wireless and wireline infrastructures, as
well as data delivery mechanisms. We anticipate that our E-911 service will
serve as the platform for additional value-added service offerings.
Carrier Network Applications. Our carrier network applications will also enable
wireless carriers to monitor the performance of their radio frequency networks
and to detect under-performance or changes in their networks' coverage. Because
we monitor performance by tracking actual calls rather than by using special
drive test equipment, carriers are not required to incur additional capital
expenditures. Our technology could eliminate or substantially reduce the need to
drive test coverage zones for wireless network maintenance, the current method
of locating network service problems. Because this process normally takes
carriers between six and 12 months under current methodologies, we can offer a
much more cost-effective and timesaving method of monitoring performance.
Additionally, our system will detect changes or holes in a carrier's network in
real time. By allowing carriers to discover and repair holes in coverage quickly
and efficiently, our system will increase carriers revenues by helping to
eliminate dropped calls and calls that are not able to be placed, due to lack of
service.
<PAGE>
Furthermore, the location data that we provide will enable carriers to
differentiate rate plans by caller location and thus customize customer billing.
Carriers will be able to offer reduced rate plans for subscribers making
wireless calls from predetermined zones, such as the home or office, thereby
creating incentives for subscribers to increase usage of wireless services.
E-411 and other information services. As prices of basic wireless services have
declined, wireless carriers are increasingly seeking to expand their value-added
service offerings. Our network will allow carriers to provide location-based
information that is targeted to the mobile end user. Our ability to locate and
track a user will enable us to provide services such as turn-by-turn directions,
real-time traffic information and localized directory assistance. We will also
be able to utilize our platform to enable advertisers to use our network to
target specific customer segments selectively based on a caller's current
location. Our network will provide businesses with the location of callers,
which may then be used to trigger the delivery of tailored advertising, such as
coupons or promotional material for retailers in close proximity to the caller
(i.e. a caller at a shopping mall may receive coupons of retailers in that
mall.)
Fleet Management and Asset Tracking. We also plan to utilize our wireless
location network to allow wireless carriers to provide fleet management services
to the freight side of the ITS industry, known as the commercial vehicle
operations business, which includes package delivery, taxi services and
emergency, transit and maintenance fleets. Current systems in the commercial
vehicle operations business utilize the global positioning system and require
capital investments in equipment that is installed in the vehicles, which is
expensive to implement and operate. To date, the commercial vehicle operations
business has been limited primarily to the inter-city trucking market because of
the cost and the inability of the global positioning system to work effectively
in an urban, intra-city environment. We plan to utilize our location technology
to enable carriers to offer companies seeking more efficient fleet management a
method of obtaining accurate, real-time information on the location of freight
and related equipment. In addition, our wireless location network will enable
wireless carriers to offer asset-tracking services.
Other Services
Intelligent Transportation Systems. As a result of the increase in traffic
congestion on roadways and the inability of traditional transportation solutions
to effectively monitor and manage traffic, the federal and state governments
have been seeking alternative solutions for monitoring and managing traffic
flow. In response, the transportation industry has developed new approaches to
monitoring and managing traffic, including a technology-based set of solutions
collectively called intelligent transportation systems. The market for
intelligent transportation systems totals about $3 billon today, and estimates
expect it to double over the next three years, with the public sector growing at
10% a year and the private sector at 50%. Traditional systems typically utilize
video camera detection systems and other non-intrusive detection devices, such
as microwave, infrared, ultrasonic and magnetic detectors and inductive loop
detectors buried under roadways to collect traffic data. However, these systems
can capture only information relating to traffic volume, and its velocity in a
limited area. In addition, current detection systems are expensive to maintain
and often exhibit high failure rates, especially in adverse weather. Unlike
traditional detection devices, our location technology tracks wireless phones
used in vehicles, and by aggregating their radio signals, we believe that our
wireless location network will enable us to provide a cost-effective method of
<PAGE>
collecting accurate traffic data. Our wireless location network will collect
detailed data relating to traffic volume and speed from all roadways in a
coverage area and our data results are in digital format, making it easier to
integrate with service and product offerings on the Internet, and in wireless
and other networks.
To date, we have commenced two intelligent transportation system projects. One
for each of the Maryland and Virginia Departments of Transportation to provide
highway and traffic information for selected roadways of these states. These
projects are initial trials in which each of the states incurs the cost of the
trial, approximately $461,000 for the Maryland project and $350,000 for the
Virginia project, and we provide the states with data in order for them to
evaluate our system. Additionally, we have agreements with Etak/Metro Networks
and Cox Interactive Media to distribute data generated from the Virginia trial
in the form of services and end user product offerings. We will seek to expand
these trials to larger coverage areas within the states.
To date, we have placed bids on two additional ITS projects. We joined
separately with each of PB Farradyne Inc., Post, Buckley, Schun & Jernigan, and
SRI to submit bids on the San Francisco Bay Area Metropolitan Transportation
Commission's TravInfo Project. Our portion of the proposal is approximately $8
million over a 6-year period. In addition, we joined with Iteris to submit a bid
to the San Diego Metropolitan Transportation Organization. Our portion of that
proposal is $1,800,000 over 5 years in addition to profit sharing.
Telematics. Today, many automakers are building devices into automobiles to
provide motorists with a new channel of communications based on the integration
of the automobile, the computer and wireless communications. Examples of in-car
services include route guidance, in-car traffic alerts, concierge functions,
dynamic re-routing and similar services targeted at commuters. We plan to
partner with key firms in the Telematics industry to provide time-dependent
driver information. To date, we have been pursuing profit-sharing arrangements
with such companies as Iteris and Traffic Station to jointly provide in-car
services.
Competition
We face intense competition in the market for wireless location-based
technologies. As a result of the FCC mandate, this market is receiving increased
attention, and a number of companies are seeking to develop wireless location
services and products. We believe the principal factors on which companies will
compete in this market are reliability, network coverage, ease of use and price.
Based on the results of our trials, we believe our service will compare
favorably to available alternatives. However, the pace of innovation in the
wireless communications industry is rapid, and we cannot ensure that our service
will achieve or maintain competitiveness with available alternatives in the
future.
Carrier Services
Angle of Arrival and Time Difference of Arrival. These two network-based
technologies rely on triangulation methods, which require multiple sites to
receive signals from a caller to fix the caller's position. Angle of arrival
systems measure the angle at which the signals arrive at wireless base stations,
while time difference of arrival systems measure the time at which the signals
arrive. Both systems then take the information and triangulate the position of
the caller. To date, companies such as TruePosition, Inc., Grayson Wireless,
Cell-Loc, KSI and SigmaOne have proposed angle of arrival or time difference of
arrival location solutions.
<PAGE>
However, the use of triangulation can introduce errors in the location
estimation process because most wireless networks are designed to preclude
multiple sites from receiving a caller's signal in order to limit co-channel
interference. In addition, because these systems require line of sight to two or
more base stations, angle of arrival and time difference of arrival systems have
demonstrated their best performance in open areas with a number of visible base
stations and have been less effective in dense urban areas. They are also at a
disadvantage in sparsely populated areas where it is difficult for signals to
reach two base stations.
Global Positioning System. The global positioning system also relies on a form
of triangulation, but it triangulates a caller's location from four or more
satellites rather than terrestrial base stations. The accuracy of the global
positioning system has been further enhanced by the development of differential
global positioning systems, which involve the use of fixed earth based
transmitters that assist receivers in more accurately measuring their position.
Companies such as SiRF, SnapTrack, (which was recently acquired by Qualcomm,)
and Integrated Data Communications focus on providing the global positioning
system-assisted location solutions.
The main benefits of using the global positioning system include widespread
location coverage, minimal operating costs to the carrier, and potential for a
high degree of accuracy. However, a critical disadvantage of the global
positioning system is that it requires a clear view to four or more satellites.
Although this enables the global positioning system to function well in rural
and suburban areas where a clear view exists, it limits the ability to operate
successfully in densely populated metropolitan areas or indoors, where tall
buildings and urban canyons prevent that access. In addition, because the global
positioning system is a handset-based solution, handsets will require costly
modifications to become enabled with positioning capabilities, including
installation of a separate antenna to receive a satellite signal and a chipset
to process the signal. We do not know of any chipsets, receivers or antennae
available today that can function for both placing wireless calls and obtaining
location information via the global positioning system. In addition, to date, we
are not aware of a commercially available global positioning system handset.
Our RadioCamera System. We believe that our location technology has
distinct competitive advantages over both the network-based and global
positioning system assisted solutions, including the following:
o Immune to lack of line of sight. RadioCamera thrives in densely populated
urban areas where line of sight to cell sites is rare and it is difficult
to triangulate a caller's location.
o Performs well in rural environments. Our technology only requires a single
site in order to identify the location of a call, making it also
well-suited for rural environments where cells are not close to one
another.
o Continuous tracking. RadioCamera provides tracking capabilities as well as
initial location. Unlike other network based solutions and handset
solutions that use the control channel to transmit one-time location
information, our system works on a voice channel that is active throughout
a call, allowing the caller's location to be traced continuously.
o Minimal infrastructure adaptation. Our system adapts to the current
cellular infrastructure and, unlike the global positioning system, does not
require alteration to either the base station infrastructure or subscriber
handsets. In addition, compared to the time difference of arrival and angle
<PAGE>
of arrival systems, our system will require minimal data back-haul. We also
believe that due to the time difference of arrival and angle of arrival
systems requirement of seeing multiple sites, they will need additional
site deployments in order to obtain the same coverage as provided by the
RadioCamera system.
o Less stringent calibration requirements. Unlike the angle of arrival and
the time difference of arrival systems that require strict timing
calibration and the use of calibrated antenna arrays, our system requires
only periodic drive tests to update databases of locations and their
associated signal patterns.
Despite competing technologies, we expect to generate revenue from carriers that
select global positioning system solutions by offering to support the carriers'
roamer traffic. We will also be able to market a variety of our applications to
these carriers including location services for legacy handsets and coverage for
those portions of their markets, such as the dense urban areas, where the global
positioning system-based solutions will perform poorly. Thus, even when the
global positioning system solutions reach significant coverage, there will still
be substantial revenue opportunities for us.
In the field of fleet management and asset-tracking, current technologies
typically utilize expensive global positioning system devices. These devices are
often too expensive for many fleet operators and we believe that our technology
will enable carriers to offer their customers tracking services without
requiring them to make capital investments or replace their handsets.
Other Services
We believe that our RadioCamera system also has distinct advantages over our
competitors in the intelligent transportation systems community. Our competitors
typically use conventional technologies to monitor traffic, such as magnetic
loop detectors buried in the road and video cameras in stationary positions and
in aircraft. However, these technologies have significant limitations including
high failure rates of the loop detectors in adverse weather conditions, high
maintenance costs and limited coverage areas. Although we will have to overcome
barriers to entry because our technology is new and not widely accepted by the
intelligent transportation systems community, we believe that we will be able to
win bids for state-funded projects because of our ability to provide accurate
traffic data in a cost effective manner. Typically, consulting firms work as
system integrators that bring together the necessary parties to submit bids to
governmental agencies. We have partnering relationships with several of these
consulting firms, such as Iteris, PB Farradyne, Post Buckley and SRI, and for
certain projects we are competing with the same consulting firms that we partner
with for other projects.
In addition, in the field of telematics, automakers are increasingly building
devices into automobiles to provide motorists with a new channel of
communications. General Motors, for example, stated that they will pre-wire all
of their vehicles for the Onstar system commencing this year. We plan to partner
with firms in order to provide in-car services to motorists. To date, we have
proposed revenue-sharing arrangements with Iteris and Traffic Station.
<PAGE>
Technology
The core of our RadioCamera system is our patented location identification
technology. This technology uses pattern recognition as its fundamental means of
locating a wireless caller. When a wireless subscriber initiates a call, radio
waves radiate from the caller's handset to a base station. These radio waves are
subject to multiple reflections and obstructions from both man-made and natural
structures in the environment. As a result of this interference, a multipath
transmission is created in which the phone's transmitted signal arrives at a
base station with a radio frequency pattern or signature that is unique to the
caller's location. Through a market calibration process, the RadioCamera system
recognizes these signatures or patterns and associates them with the specific
locations from which they originated. The system learns the signature patterns
and logs them into a reference database, and is able to identify calls coming
from the same location by their similar multipath signatures. The process uses
technically sophisticated algorithms and computational methods for pattern
matching, although it does not require extensive data processing equipment in
providing the location information quickly. The process is illustrated in the
chart below:
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1. A call placed from a 2. The signals 3. At the base 4. The network 5. By matching the
mobile phone emits bounce off station, the compares the radio frequency
radio signals. buildings and RadioCamera radio fingerprint pattern of the
other obstacles, system analyzes to a database of caller's signal
reaching their the unique previously with the database
destination (the characteristics patterned of known patterns,
base station) of the signal, locations. the network
via multiple including its identifies the
paths. multipath caller's geographic
pattern. location.
</TABLE>
Rather than creating complex procedures to neutralize the multipath encountered
in all markets, and particularly in dense urban markets, our technology uses the
natural multipath resulting from multiple reflections and obstructions to create
robust signatures that our network can accurately correlate to specific
locations.
Our location technology has enjoyed a number of years of field trials under a
diverse range of market conditions. These tests have confirmed that the pattern
matching technique:
o can be used consistently across almost all analog and digital wireless
transmission standards;
<PAGE>
o is consistent in its ability to accurately estimate caller location
under varied environmental and topographical conditions;
o does not materially change over time and the calibration tables
(multipath signature libraries) need only be updated once or twice per
year; and
o is applicable to both stationary and moving users, in both indoor and
outdoor environments.
In each of these tests, our solution has exceeded the FCC's accuracy
requirements, as shown in the following chart:
<TABLE>
<CAPTION>
-------------------- ------------- --------------------- ------------ ------------ ---------------- -------------------- -----------
Annapolis
Billings, Junction, Baltimore,
Location Oakland, CA MT MD MD Washington, DC Washington, DC Seattle, WA
-------------------- ------------- --------------------- ------------ ------------ ---------------- -------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dates of Trial 1997 - 1997 - 1999 1998 - 1998 - 2000 - present 2000 - present 2000 -
present present present present
-------------------- ------------- --------------------- ------------ ------------ ---------------- -------------------- -----------
Terrain Dense Urban Rural & Light Urban Suburban Dense Urban Mixed urban & Highway Urban
suburban
-------------------- ------------- --------------------- ------------ ------------ ---------------- -------------------- -----------
Base Units in Trial 9 5 3 8 10 6 6
-------------------- ------------- --------------------- ------------ ------------ ---------------- -------------------- -----------
Carrier Technology AMPS, CDMA, AMPS AMPS AMPS, CDMA iDEN AMPS & IS-136 IS-136
iDen
-------------------- ------------- --------------------- ------------ ------------ ---------------- -------------------- -----------
67% Accuracy(1)(2) 69 meters 84 meters 78 meters 81 meters In progress In progress In progress
-------------------- ------------- --------------------- ------------ ------------ ---------------- -------------------- -----------
PSAP Integration N/A Completed August 1999 N/A To be N/A N/A N/A
completed
at end of
2000
-------------------- ------------- --------------------- ------------ ------------ ---------------- -------------------- -----------
Participants GTE US WEST, XYPOINT, Verizon Verizon Nextel SBC Communications AT&T
Wireless, Nortel Networks, Communications Wireless
Nextel Western Wireless,
Williams
Communications,
Billings 911 Center
and the Montana 911
Program
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</TABLE>
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(1) The FCC requires accuracy within 100 meters on 67% of calls and 300
meters on 95% of calls.
(2) The accuracy of these measurements were monitored by various
participants.
The Billings, Montana deployment, which we completed in August 1999, was an
end-to-end simulated E-911 trial designed to continuously update the caller's
location. The trial demonstrated our system's ability to continuously locate
multiple wireless calls originating within the greater Billings, Montana area.
The system identified each caller's phone number, location coordinates and
nearest street address. The information was then sent to the personal safety
answering point, where it was displayed on an electronic map on an operator's
workstation. The RadioCamera base unit continuously updated the location
information, allowing the personal safety answering point to monitor the
caller's location throughout the call. According to the final report issued by
the State of Montana on May 22, 2000, the performance of our location technology
exceeded the Phase II requirements of the FCC's E-911 mandate.
<PAGE>
We are continuing to test and refine our system in order to improve accuracy,
reliability and overall performance. Our trial in the Washington,
D.C./Maryland/Virginia metropolitan area includes the build-out of a network
operating center, which will eventually service markets nationwide and provide
the platform for launching additional services such as intelligent
transportation systems, carrier network and location-based applications in
addition to E-911 services.
Network Architecture/Network Deployment
We are planning the construction of a state-of-the-art network that initially
will serve 100 markets. Once complete, the network will consist of approximately
11,000 RadioCamera base units, each connected to the network with a 128
Kbytes/second frame relay link, sixty T-3 links, and two fully redundant network
operating centers. The diagram below illustrates the basic network architecture:
[OBJECT OMITTED]
Each RadioCamera base unit is connected by a 128K link to a point of presence in
a given market or region. The average distance between each RadioCamera base
unit and the point of presence is approximately three to five miles. We estimate
that we will have sixty points of presence across the country to serve all 100
markets, with certain points of presence serving more than one market. From the
point of presence, the data will be transmitted to the network operating center
by a T-3 link. Each point of presence simultaneously transmits fully redundant
data to a second network operating center. Based on geography, a given network
operating center will be the primary network operating center for a given point
of presence and the other, by default, becomes the redundant network operating
center.
<PAGE>
While the RadioCamera base units collect the multipath radio signature, the
network operating center performs the complex computations that convert this
signature to a latitude and longitude position. Physically, the network
operating center will consist of a collection of Windows NT and UNIX
workstations. Each market will have a dedicated workstation, which will
facilitate the scaling of the network operating center as the network is built
out. We are exploring alternatives for contracting with network operating center
providers for all or part of the network.
Upon the successful completion of our tests in Washington, D.C./Baltimore, we
will begin rolling out our network and we plan to offer service in 100 markets
by year-end 2003. We plan to address the urban markets first.
Research and development
We presently maintain a staff of over 47 scientists, engineers and data
processing professionals who have been drawn from leading laboratories and
universities worldwide. To date, the majority of our expenditures have been
focused on developing prototypes, validating concepts and conducting alpha and
beta trials with leading carriers. We have conducted numerous trials by jointly
working with many of the major wireless carriers.
In the future, we intend to concentrate our internal research and development
activities in further improving the accuracy and reliability of the location
system. Specifically, we plan to:
o complete the development of a GSM version of the RadioCamera system for
the European and other foreign markets;
o improve our ability to apply confidence factors and intervals for our
location estimates;
o develop hybrid network-GPS solutions to offer a more comprehensive
solution set for carriers;
o integrate our location determination capabilities with the major
telecommunication equipment and switch vendors; and
o create customized location sensitive commercial applications.
We will be leveraging on the core competency of our strategic relationship
partners for providing the networking and data processing tools that we will
need to create a turnkey solution. As such, our research and development will be
focused on optimizing the cost, accuracy and reliability of our location
determination capabilities.
Patents, proprietary rights and licenses
We believe our most significant asset is our intellectual property. We rely on a
combination of patent, copyright, trademark and trade secret protection laws and
non-disclosure agreements to establish and protect our proprietary rights. We
have been issued 3 patents and have received 4 additional Notices of Allowance
<PAGE>
and we have an additional 11 patent applications pending. We cannot assure you
that patents will issue from any pending applications or, if patents do issue,
that claims allowed will be sufficiently broad to protect our technology. We
have filed one international patent application under the Patent Cooperation
Treaty, or "PCT", with the World Intellectual Property Organization, which
patent covers the principles included in our issued and allowed patents. We also
own one U.S. trademark registration for the RadioCamera. Any of our current or
future patents or trademarks may be challenged, invalidated, circumvented or
rendered unenforceable, and the rights granted under the patents and trademarks
may not provide sufficient proprietary protection or commercial advantage to us.
Moreover, our patents may not preclude competitors from developing equivalent or
superior products and technology.
We also rely upon trade secrets, know-how, continuing technological innovations
and licensing opportunities to develop and maintain our competitive position.
Others may independently develop equivalent proprietary information or otherwise
gain access to or disclose our information. It is our policy to require our
employees, some contractors, consultants, directors and parties to collaborative
agreements to execute confidentiality agreements upon the commencement of such
relationships with us. However, we cannot assure you that these agreements will
provide meaningful protection of our trade secrets or adequate remedies in the
event of unauthorized use or disclosure of such information or that our trade
secrets will not otherwise become known or be independently discovered by our
competitors.
Our commercial success may also depend in part on our not infringing the
proprietary rights of others and not breaching technology licenses that cover
technology we use in our products. Third-party patents may require us to develop
alternative technology or to alter our products or processes, obtain licenses or
cease some of our activities. If any such licenses are required, we may be
unable to obtain such licenses on commercially favorable terms, if at all. Our
inability to obtain licenses to any technology that we may require to
effectively deploy or market our products and services could have a material
adverse effect on our business. We may have to resort to potentially costly
litigation to enforce any patents issued or licensed to us or to determine the
scope and validity of third-party proprietary rights.
Employees
As of June 15, 2000, we had 65 full time employees, four of whom are executive
officers. Of the remaining employees, 23 comprise the engineering staff, 24 are
field operations personnel, five are in business development, six are in
marketing and communications, five are corporate administrators, and three are
in support functions. We have not experienced any work stoppage and consider our
relations with our employees to be good.
Risk Factors
Investing in our common stock involves risks. You should carefully consider the
risks and uncertainties described below before making an investment decision.
<PAGE>
We have not begun commercial operations and the overall demand for our
location-based services is uncertain, which may make it difficult for you to
evaluate our business prospects.
Our activities to date have consisted primarily of the research, development and
testing of our wireless location technology and the financing of our operations,
and we have not commenced any commercial operations. As a result, we have no
meaningful historical financial information for you to evaluate. You should
consider the likelihood of our success in light of the problems, expenses and
delays frequently encountered by developing businesses. In addition, we are
offering new services in a new and rapidly evolving industry. We cannot assure
you that a market will develop for our services or that we will be successful in
launching or managing our commercial operations. We will continuously review our
business plan in light of various factors, including perceived opportunities,
actual experiences in the marketplace, availability of financial and other
resources, and overall economic and/or competitive considerations, and we may
from time to time change, refine or redirect our business plan based on these
reviews.
If we are unable to establish relationships with wireless carriers to provide
them with our location-based services, our business may not succeed.
Our business strategy contemplates our entering into an agreement with at least
one wireless carrier in each of our targeted markets to provide our
location-based services. We have undertaken, or are in the process of
undertaking, joint technology trials with several wireless carriers, in order
for them to evaluate the effectiveness of our location system. To date, we have
not entered into any commercial agreements with any wireless carriers. We cannot
assure you that we will be able to enter into commercial agreements with any
wireless carriers before we begin deploying our wireless location network or at
all. Our position as a service bureau may limit our ability to enter into
relationships with carriers who may be more interested in obtaining and directly
using our technology. In addition, even if carriers are interested in
participating in our service bureau, they may require substantial control over
the use of our location technology. Our failure to develop and establish
contracts with wireless carriers would severely impair our ability to implement
our business plan. In addition, if we are unable to establish these contracts,
we may not be able to obtain the additional financing needed to deploy our
wireless location network.
We have a history and future expectations of losses and negative cash flow, and
therefore we will require substantial additional financing in order to build and
operate our wireless location network.
We have incurred net losses since our inception. We anticipate that our net
losses will increase significantly during the ongoing build-out of our wireless
location network and our preparation for the commercial launch of our network.
We have not begun commercial operations in any market and, therefore, have
limited revenues to fund expenditures.
Even after we commence commercial operations, we will require significant
additional funds to cover our cash requirements before we generate sufficient
cash flow from operations to cover our expenses. The funds we actually require
to complete the deployment and commercialization of our wireless location
network and to fund operating losses may vary materially from our estimates if
we incur unanticipated costs or alter our plans in order to respond to changes
in competitive or other market conditions. For example, we may incur additional
building and site leasing costs, require substantially more management and other
personnel, or increase our marketing and promotional expenditures in order to
accelerate our growth. We would likely incur many of those expenses in advance
of any payments received from wireless carriers or other revenues. Further, we
may decide to use a portion of our cash resources to license, acquire or invest
in new products, technologies or businesses that we consider complementary to
our business.
<PAGE>
We plan to raise future funds by selling debt or equity securities, or both, and
by obtaining loans or other credit lines from banking or other financial
institutions and through vendor financing. Any sale of equity or
equity-convertible securities could be dilutive to existing holders of our
common stock. We anticipate that a significant portion of this financing will
consist of debt financing, which could require us to operate in a highly
leveraged environment. We may not be able to raise any funds or obtain loans on
favorable terms or at all. Our ability to obtain the financing we require
depends on many factors, including: future market conditions; our success or
lack of success in developing, implementing and marketing our services; our
future creditworthiness; and restrictions contained in agreements with our
investors or lenders. Our failure to obtain additional financing could result in
the delay or abandonment of some or all of our development or expansion plans,
which could have a material adverse affect on our business and prospects.
We face risks that are unique to the intelligent transportation systems
industry.
The risks of operating in the intelligent transportation systems industry
include the following:
o We will have to overcome barriers to entry. Historically,
governmental agencies have relied on fixed point source detection
sources, such as pressure stamps or video surveillance cameras, for
analysis of roadway conditions. Because our location technology is new
and not widely accepted by the intelligent transportation systems
community, we must convince the governmental agencies that our
wireless location network provides a more accurate and cost-effective
method for monitoring traffic flow than historical methods. In
addition, government agencies typically purchase and control their
monitoring equipment. In our case we are offering to provide the
government with the data instead of the equipment. The internal
policies of these agencies may make it difficult to persuade them to
do business with us. Our failure to convince our target governmental
agencies that our wireless location network offers them better
information at a lower cost that their historical detection systems
could adversely affect our business and prospects.
o Most of our contracts will be fixed price contracts, which may cause
our profit margins to fluctuate significantly. We anticipate that most
of our contracts with governmental agencies will be fixed price
contracts. Because of the nature of fixed price contracts, we may be
unable to recover unanticipated costs incurred in excess of our
budgeted costs. As a result, our inability to accurately estimate our
projected costs could adversely affect our profit margins.
o There may be substantial delays in completing a government-funded
project. We may experience substantial delays in obtaining, negotiating
and performing government contracts because, typically, these contracts
involve competitive bidding, qualification requirements, performance
bond requirements, delays in funding, budgetary constraints, extensive
specification development, and compliance with strict government agency
regulations. Any delays in the completion of our projects could
adversely affect our business and prospects.
<PAGE>
Our success depends on our ability to develop or have third parties develop
content for our customers.
We expect to develop, or have developed for us, specific applications and
product offerings for our customers. In addition, we anticipate that many
products will require that we coordinate with and obtain consents from the
carriers in order to distribute the mobility content to the end user. We cannot
assure you that third parties will work with us to develop applications to
provide or distribute location information and mobility content. Even if these
third parties agree to work with us, we cannot be certain that they will be able
to develop the applications that we or end users desire, that we will be able to
integrate their existing systems with our network or that we will be successful
in negotiating favorable terms. We may have to devote our resources to
developing our own software applications in order to distribute content to our
customers. Our inability to work effectively with third party application
developers and content providers could adversely affect our business and
prospects.
Demand for our services may be limited if personal safety answering points do
not request E-911 service.
Under the Federal Communications Commission (FCC) mandate, wireless carriers do
not have to implement network-based location solutions unless a personal safety
answering point requests E-911 service. To date, approximately 10% of personal
safety answering points have requested Phase I E-911 service pursuant to which
the personal answering safety point would be informed of the originating cell
site and telephone number of a wireless caller. We cannot assure you that
personal safety answering points will make Phase II E-911 service requests in
the future or that any such request will require the accuracy specified by the
FCC mandate. In fact, their ability to do so may be influenced by the
significant costs they will have to incur to upgrade their systems and the
availability of government and carrier funding to mitigate those costs. If
personal safety answering points do not request E-911 service or delay their
request for E-911 service, then our business and prospects may be materially and
adversely affected. Consequently, we may be in a position when we build our
wireless location network of needing to satisfy carriers of our commitment to
provide wireless location information before personal safety answering points
request Phase II E-911 service. As a result, there could be a significant delay
between the time we make the expenditures necessary to build our wireless
location network in a given market and the time we begin to earn revenues in
that market.
We are subject to evolving government regulation that could cause us to change
our business plans.
Presently there is a limited market for location-based technologies within the
wireless industry. With the mandate of the FCC requiring carriers to locate
cellular subscribers dialing E-911, the market for location-based technologies
for wireless systems may expand. However, the FCC may revise or amend this
mandate, which could delay or eliminate the necessity for implementation of
Phase II E-911 service or render our wireless location technology incapable of
satisfying the requirements. In addition, if the FCC modifies its accuracy
requirements, we cannot assure you that we will be able to comply with the
amended requirements.
<PAGE>
If we are unable to deploy our wireless location network rapidly, our ability to
compete could be limited.
Our business strategy contemplates the rapid and cost-effective deployment of
our wireless location network at a pace that is satisfactory to the wireless
carriers and meets the FCC mandate. The successful completion of our wireless
location network will depend, among other things, upon our ability to accomplish
the following, in a timely manner, at reasonable costs and on satisfactory terms
and conditions:
o assure our technology can support the traffic we expect to be carried
on a nationwide wireless location network;
o obtain the services of independent contractors to install and provide
engineering support for the design and building of our wireless
location network and our network operating centers;
o manage the construction of our wireless location network;
o obtain the use of facilities and other infrastructure, such as towers,
for the build-out of our wireless location network and communication
systems for the delivery of data; and
o integrate our wireless location network with the networks of wireless
carriers and other third parties.
Each stage of the network build-out can take from several weeks to several
months and can be affected by factors beyond our control. We may be unable to
build and operate our wireless location network in any particular market in
accordance with our current plans and schedules. A significant delay in
completing, or our inability to complete, our wireless location network may
result in the termination of relationships with wireless carriers, which could
have a material adverse effect on our business and prospects.
We will depend on third parties to deploy our nationwide wireless location
network, which may affect our ability to meet our deployment schedule.
We will depend on third parties to carry out our network deployment. If any of
these parties have difficulty performing, or is unable to perform, its
obligations in accordance with our schedule and estimated costs, we could face
delays in the deployment of our wireless location network and incur
unanticipated expenses.
Equipment suppliers. The rapid deployment of our wireless location network will
substantially increase the quantity of RadioCamera equipment and other network
and radio equipment that we will need in a relatively short time period. To
date, we have required only limited quantities of this equipment, purchased over
longer periods of time. Additionally, certain component parts, such as those
that are custom designed, require advanced purchasing to ensure availability
when needed. Our failure to order these components in a timely manner may cause
delays in product availability. We cannot assure you that we will continue to be
able to obtain adequate quantities of the components used in our RadioCamera
equipment and other network hardware, or that we will obtain these components
when we expect. Even though we have entered into equipment purchase agreements
with manufacturers and suppliers, those companies may fail to deliver sufficient
quantities of their products to us in accordance with our schedule.
<PAGE>
Engineers and technicians. Our limited staff of scientists, engineers and
technicians is not adequate to design, install, construct and provide
engineering support for our wireless location network outside of the limited
testing area that we have constructed to date. In building our wireless location
network, we intend to rely on independent contractors to develop and implement
network design tools for use in designing our location network and to provide
radio frequency design, radio frequency engineering, site identification, site
acquisition and development, site zoning and permitting, site construction and
installment management, and component purchasing services for us. We cannot
assure you that we will be able to engage the services we need within the time
required or that any such third party contractors will meet their commitments to
us.
Tower companies and other site leasing firms. In building out our network in our
first 100 markets, we estimate that we will require space in approximately
11,000 towers or rooftop facilities. Our success depends on our ability to
obtain use of towers and rooftop facilities and other necessary sites for the
build-out of our network. Given the number of facilities required for our
network, we cannot assure you that there will be a sufficient number of towers
to support the build-out of our wireless location network or that we will be
able to obtain access to specific parts of towers that we will need in order to
effectively cover all frequency bands utilized by wireless carriers. In
addition, we could face delays in obtaining access to towers if tower companies
need local governmental zoning and other approvals in order to maintain their
towers. We cannot assure you that we will be able to timely negotiate leases
with the tower companies or that the tower companies will provide us with
leasing arrangements on favorable terms, if at all.
Data Transport. We will have to enter into agreements with communications,
networking and data processing firms in order to obtain access to high-speed
data transmission facilities in order to transmit the information received from
the RadioCamera base units to our regional data centers and network operating
centers. We anticipate requiring additional expertise in integrating each of the
data links to the network.
Our success depends on the performance and reliability of our wireless location
network.
Even if we build our wireless location network in a timely and cost effective
manner, our success will also depend on the operational performance and
reliability of our network. Our business model depends on our ability to create
a system which is capable of supporting multiple carriers that use a variety of
wireless technologies and multiple applications. We may be unable to accomplish
these goals. In addition, other companies and carriers may also seek to build
their own similar networks or purchase systems from our competitors to own and
operate their own location networks.
We may experience performance and reliability problems with our network
infrastructure during our initial stages of commercial operation. In addition,
the performance of our network could be adversely affected by conditions outside
our control such as extreme weather conditions, physical damage, tampering or
other breaches of security. We will also face challenges in providing effective
customer service. Our wireless location network may not fulfill the expectations
of the users of our network. Any inability to satisfactorily address and resolve
performance issues that affect customer acceptance of location network services
could delay or adversely affect the successful commercialization of our location
network and our business and financial prospects.
<PAGE>
We may be unable to effectively manage our planned rapid growth, which could
harm our business.
Our planned expansion will place significant strains on our personnel, financial
and other resources, and our financial reporting and information technology
systems. Our ability to manage our growth will be particularly dependent on
achieving the following objectives:
o expanding, training and managing our employee base, including attracting
and retaining highly skilled personnel;
o managing sales, advertising, customer support, billing and collection
functions of our business;
o developing internally or outsourcing the design and implementation of
operational and financial systems such as billing and information
management; and
o controlling our expenses related to the development of our network and
expanding commercial services.
We may be unable to achieve any of these objectives, and as a result, our
business and prospects could be materially and adversely affected.
We may be unable to protect our intellectual property rights, which could
adversely affect our business and financial prospects.
We believe that our intellectual property is our most significant asset. We have
filed 18 patent applications with the U.S. Patent and Trademark Office, have 3
issued patents and have received notices of allowance for 4 additional patent
applications. Our 11 pending patent applications may not be granted and our
patents may not be sufficiently broad to protect our technology. Further, any of
our patents or trademarks may be challenged, invalidated, circumvented or
rendered unenforceable, and those patents or trademarks may not provide us with
significant benefits. Moreover, our patents may not preclude competitors from
developing equivalent or superior products and technology.
In addition, although we require all of our executive officers and senior
management to enter into non-disclosure and non-competition agreements, many
states, including California where we are based, do not acknowledge some
provisions commonly contained in non-disclosure agreements and some types of
restrictive non-competition covenants. It is therefore possible that a court
will find that the non-competition clauses in our employment agreements are not
enforceable.
We may be unable to use certain intellectual property developed by other
parties, which could adversely affect our business and financial prospects.
Our commercial success may also depend on our not infringing the proprietary
rights of others or not breaching technology licenses that cover technology we
use in our products. Third-party patents may require us to develop alternative
technology or to alter our products or processes, obtain licenses or cease some
of our activities. If we are unable to obtain, on favorable terms or at all,
<PAGE>
licenses to any technology that we may require to effectively deploy or market
our products and service, our business could be harmed. In addition, there is a
growing trend within our industry for companies to obtain patents on business
methods or procedures. This type of patent is a relatively new development and
the scope and enforceability of these types of patents remain open to questions.
The U.S. Patent and Trademark Office has initiated new procedures to handle the
heavy influx of applications relating to business method "inventions," and
further developments are likely before stability is achieved in this area of
patent and technology law. This creates additional uncertainty for us in
conducting business in this changing legal environment.
If we are unable to continue using the intellectual property that we license
from Qualcomm, our business may not develop as planned.
We entered into a research and development license agreement with Qualcomm
Incorporated in July 1998. Under that agreement, Qualcomm has granted us a
license to purchase certain infrastructure products and use certain software and
related documentation solely for the purpose of developing a wireless location
system that is compatible with Qualcomm's proprietary Code Division Multiple
Access technology. The agreement provides that we have the right to obtain a
commercial license from Qualcomm upon terms to be negotiated. Qualcomm recently
acquired SnapTrack, Inc., a company developing a handset-based competing
wireless location position technology, which may affect our ability to obtain
such a license for the commercial use of our Code Division Multiple Access-based
RadioCamera on commercially reasonable terms or at all. The inability to obtain
a commercial license from Qualcomm could impair the development and marketing of
our wireless location system to Code Division Multiple Access-based carriers,
such as Verizon.
Changes in technology could adversely affect us.
The wireless communications and information services industries are subject to
rapidly changing technology, new product innovations and evolving industry
standards. We may be unable to keep pace with the technological developments in
the telecommunications industry or to implement or change our services or
product offerings to meet new demands within our industry. If we do not develop
and introduce innovative products and services in a timely manner, our business
and prospects may be adversely affected.
Our competitors may have more resources or other advantages that may make it
difficult for us to compete effectively.
The emerging market for location-based technologies is highly competitive. Under
the FCC mandate, carriers may use either handset-based or network-based
technologies, or a combination of these technologies may be used to meet the
E-911 requirement. Network-based solutions include our RadioCamera system, as
well as triangulation systems. Handset-based solutions are predominantly those
using the global positioning system. Some telecommunications infrastructure
manufacturers, such as Qualcomm, are developing alternative location
technologies. In addition, Qualcomm recently acquired our competitor, SnapTrack,
in order to better position itself in the emerging location technologies market.
In the event telecommunications service providers seek to use solutions provided
by their infrastructure providers, even if our technology is superior, our
operations may be adversely affected. In addition, carriers currently have until
October 1, 2000 to select their Phase II E-911 service and even longer periods
to implement this service. No such selection has been made to date.
<PAGE>
Our other competitors include detection device manufacturers, engineering firms
and consulting agencies that provide advanced management and traveler
information systems in the intelligent transportation systems industry, third
party applications and content providers in the E-411 and telematics markets,
and global positioning system-based companies for fleet management and
asset-tracking. Many of our current or possible competitors have greater
financial, technical and marketing resources, longer operating histories and
greater name recognition than we possess. If we are unable to compete
effectively with other companies, our business and prospects would be impaired.
Concerns that mobile communications may invade the individual's right to privacy
may discourage the use of our products and services.
A general concern regarding location technologies is that information about an
individual's location may be exploited for commercial purposes without the
consent of the individual. Although the RadioCamera system identifies the
position of radio signatures, or energy flow, it does not have access to a
caller's identity, or any personal content regarding the caller. The
identification information resides at the carrier's switch, and is only
accessible with the carrier's consent. The actual or perceived risk of privacy
violations in the marketplace could adversely affect us through:
o a reduction in wireless carriers adopting a location capability due to
their fear of a reduction in subscribers;
o a lack of subscriber interest in location-based services;
o apprehension by applications and content providers to offer or develop
services and/or applications; or
o reduced financing available to the mobile communications industry.
We depend on a limited number of key personnel and the failure to attract and
retain qualified employees could affect our ability to conduct business.
We depend upon the personal efforts and abilities of our executive officers and
senior management. The ability to retain these executives and to attract and
retain other qualified executives, sales personnel and technicians is critical
to our ongoing success. Our planned expansion will require us to expand our
management, sales, technical and administrative staff. Competition for employees
in our industry is intense, and we may be unable to attract and retain the
employees we need to execute our business plan. If we lose the services of some
of our key personnel, including Dr. Oliver Hilsenrath, our business could
suffer.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
We entered into a building lease agreement with Annabel Investment Company, a
California partnership, for the lease of its executive offices at 2303 Camino
Ramon, Suite 200, San Ramon, California 94583, commencing December 1997. In
March 2000, we signed an addendum to the lease that extends the lease through
December 31, 2003 and provides for an additional 1,685 square feet of rentable
office space, bringing the total to approximately 12,700 square feet, at a cost
of approximately $300,000 per year.
We recently entered into a sublease agreement with Landmark Systems Corporation,
for a corporate office in Reston, Virginia. The sublease is for approximately
7,764 square feet, with a term of two years through March 2002, with an option
to extend the term for a third year. The cost of the sublease is approximately
$235,000 per year. We also lease approximately 1,120 square feet of office space
in Jessup, Maryland, as a field operations facility, at a total cost of
approximately $14,000 per annum. The lease commenced in September 1998 for a
period of one year, and was extended in September 1999 for an additional term of
one year.
We currently lease an aggregate of 22 rooftop antenna sites, of which 16 are
located in the Washington DC/Maryland/Virginia metro area, two are located in
Oakland, California and four are located in Seattle, Washington, with lease
terms of one to three years with extension periods. In addition, we have the
right to license space on 1,000 towers and sites owned by American Tower
Corporation (which number can be increased if certain milestones are satisfied
by both parties) at preferential pricing. See "Business-Strategic Relationships"
for more information regarding the American Tower licensing agreement.
ITEM 3. LEGAL PROCEEDINGS
On November 5, 1999, Mr. Abraham Bar, whom we dismissed as Vice President in
August 1999, filed a claim with the American Arbitration Association against us
for breach of his employment agreement and breach of the covenant of good faith
and fair dealing. Mr. Bar is seeking damages in excess of $500,000 in lost
wages, vesting of stock and stock options, and the costs of pursuing
arbitration. We intend to vigorously defend the claim and filed a counterclaim
against Mr. Bar for breach of his employment agreement, breach of the covenant
of good faith and fair dealing, and breach of his fiduciary duty. The action is
currently in its discovery phase.
On November 5, 1999, Dr. Mati Wax, whom we dismissed as Chief Technology Officer
in June 1999, filed a claim with the American Arbitration Association against us
for breach of his employment agreement and breach of the covenant of good faith
and fair dealing. Dr. Wax is seeking damages in excess of $500,000 in lost
wages, vesting of stock and stock options, and the costs of pursuing
arbitration. We intend to vigorously defend the claim and filed a counterclaim
against Dr. Wax for breach of his employment agreement, breach of the covenant
of good faith and fair dealing, and breach of his fiduciary duty. The action is
currently in its discovery phase.
In May 2000, we commenced an action in California Superior Court against two
individuals and several related entities who agreed in 1996 and 1997 to provide
financial and investment consulting services to U.S. Wireless. As consideration
for the anticipated consulting services, we entered into restricted stock
agreements and stock option agreements. We allege a number of claims including,
but not limited to, breach of contract arising out of the nonperformance of the
contracts, and seek to rescind the option agreements and to cancel our
obligations under the restricted stock agreements. At issue are the originally
issued 918,000 shares of restricted common stock and 1.2 million common stock
options. We plan to litigate this action aggressively to conclusion.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
March 2, 2000 Annual Meeting
On March 2, 2000, we held an annual meeting of our stockholders, in which the
stockholders elected four (4) persons nominated by the Board of Directors to
serve as Directors until the next annual meeting of stockholders and until their
respective successors shall have been elected and shall have qualified. The
voting tabulations regarding the election of Directors were as follows (there
were no abstentions and no broker non-votes):
<TABLE>
<CAPTION>
Votes Cast Withhold
Nominees For Authority to Vote
<S> <C> <C>
Dr. Oliver Hilsenrath 7,250,379 6,587
Barry West 7,250,379 6,587
Dennis Francis 7,250,379 6,587
Louis Golm 7,250,379 6,587
</TABLE>
Mr. Irwin Gross continued as a director, elected by the holders of the shares of
the Series B Preferred Stock. See "Management" for more information regarding
the voting rights of the Series B Preferred Stockholders.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"USWC." Prior to its listing on the Nasdaq National Market on April 23, 2000,
our common stock was quoted on the SmallCap Market. The following table sets
forth:
o the high and low closing prices per share of our common stock as
reported by the market makers for our common stock on the Nasdaq
SmallCap Stock Market during the period from January 1, 1998 through
April 23, 2000; and
o the intraday high and low sales prices per share of our common stock as
reported on the Nasdaq National Market for the period April 24, 2000
through June 26, 2000.
<TABLE>
<CAPTION>
--------------------------------------- ------------------------- -----------------------------
High Low
--------------------------------------- ------------------------- -----------------------------
Calendar Year 1998
--------------------------------------- ------------------------- -----------------------------
<S> <C> <C>
First Quarter $3.9 $2.5
--------------------------------------- ------------------------- -----------------------------
Second Quarter 3.6 2.3
--------------------------------------- ------------------------- -----------------------------
Third Quarter 3.0 1.5
--------------------------------------- ------------------------- -----------------------------
Fourth Quarter 3.0 1.4
--------------------------------------- ------------------------- -----------------------------
--------------------------------------- ------------------------- -----------------------------
Calendar Year 1999
--------------------------------------- ------------------------- -----------------------------
First Quarter $2.1 $1.1
--------------------------------------- ------------------------- -----------------------------
Second Quarter 4.8 1.6
--------------------------------------- ------------------------- -----------------------------
Third Quarter 4.4 3.1
--------------------------------------- ------------------------- -----------------------------
Fourth Quarter 23.1 3.9
--------------------------------------- ------------------------- -----------------------------
--------------------------------------- ------------------------- -----------------------------
Calendar Year 2000
--------------------------------------- ------------------------- -----------------------------
First Quarter $52.50 $14.75
--------------------------------------- ------------------------- -----------------------------
Second Quarter through June $29.50 $12.00
26, 2000
--------------------------------------- ------------------------- -----------------------------
</TABLE>
Closing prices reflect prices between dealers, do not include resale mark-ups,
markdowns, or other fees or commissions, and do not necessarily represent actual
transactions.
As of March 31, 2000, there were 130 holders of record of our common stock,
though we believe that there are over 5,700 stockholders which hold their shares
in street name. As of March 31, 2000, there were 17,100,658 shares of our common
stock outstanding, including unvested shares totaling 1,523,941. On June 26,
2000, the last reported sales price of our common stock on the Nasdaq National
Market was $21.25 per share.
DIVIDENDS
We have not declared any cash dividends on our common stock over the past two
years. From February through April 2000, we paid $95,355 in accumulated
dividends, upon conversion of the shares of Series A Preferred Stock. In
accordance with the rights and preferences of our Series C Preferred Stock, the
holders have the right to a 6.5% annual dividend paid semi-annually each January
1 and June 1. The dividend is payable in cash or in kind for a period of four
years at our option, and thereafter until converted, payable in cash. We are
<PAGE>
precluded from issuing a dividend on any junior securities in the event the
dividend on the Series C preferred stock is not paid. We currently intend to
retain future earnings, if any, to finance operations and the expansion of our
business. Our board of directors will determine whether to pay, and the amount
of, any dividends on our common stock. That determination will depend on a
number of factors, including our earnings, capital requirements and overall
financial condition. The terms of the Series C preferred stock and future
preferred stock issued by us or any agreements governing our indebtedness may
restrict our ability to declare and pay cash dividends on our common stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
U.S. Wireless Corporation is headquartered in San Ramon, California. U.S.
Wireless Corporation was incorporated in the State of Delaware in February 1993.
We develop network-based location systems (known as the RadioCamera system)
designed to enable wireless carriers and others to provide their customers with
value-added, location-based services and applications, including: enhanced 911,
live-navigation assistance, enhanced 411, and asset and vehicle tracking.
Statements contained herein that are not historical facts may be considered
forward looking information with respect to plans, projections or future
performance as defined under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risk and uncertainties,
which could cause actual results to differ materially from those projected.
Results of Operations:
Year Ended March 31, 2000 as Compared to the Year Ended March 31, 1999
During the years ended March 31, 2000 and 1999, we recorded revenues of $249,178
and $40,000, respectively. During fiscal 2000, we were awarded two ITS projects,
one from the Maryland Department of Transportation and the other from the
Virginia and U.S. Departments of Transportation, under which we are to provide
transportation data on selected roadways to those states on a trial basis. Total
contract values for the Maryland and Virginia contracts are $461,000 and
$350,000, respectively. During the year ended March 31, 2000 we recognized
$249,178 in revenue on the Maryland contract. Costs incurred to date on this
contract total $265,445. No revenues or costs to date have been recognized on
the Virginia contract. Fiscal 1999 revenue were limited to a sale generated by
our then consolidated subsidiary, Mantra Technologies, Inc., as our core
wireless activities did not report any operating revenues during that period.
Prior to fiscal 2000, and continuing into fiscal 2000, our focus was primarily
research and development, with respect to the development and testing of the
RadioCamera system. We are in the process of expanding our trial in the
Maryland/Washington DC/Virginia metro area into an operational readiness trial
("ORT"). In addition, we are adding to the ORT, a trial system presently being
built in Seattle, Washington. We plan to continue to expand the ORT and focus on
developing relationships with the cellular carriers prior to the October 2000
FCC mandated deadline for carriers to state their intentions on how they plan to
meet the mandate. During fiscal 2001 we expect to be building our network.
Costs and expenses of operations, including research and development and
operating expenses, totaled $7,733,977 for the year ended March 31, 2000 as
compared to total costs and expenses of operations of $7,357,852 for the year
ended March 31, 1999. Increased operating expenses were primarily due to our
increased field trial activities, including the commencement of our ORT in the
Maryland/Washington DC/Virginia Metro area where we continue to build sites to
increase our coverage area and where we have opened our east coast corporate
offices in Reston, Virginia. There were increased costs incurred for engineering
and research and development, related to the continued refinement, testing and
deployment of our RadioCamera(TM) system. During fiscal years 2000 and 1999, we
received $534,000 and $482,000, respectively, for reimbursements for ongoing
research and development expenses incurred by us with respect to the WTI joint
venture. These reimbursements have been recorded as a reduction of research and
development expense. Research and development expense totaled $2,967,435 and
$4,866,292 for fiscal years 2000 and 1999, respectively. During fiscal 1999, we
recorded compensation expense of $1,283,594 and in-process research and
development of $893,558, both included in research and development expense,
related to the vesting of 1,741,721 shares to both employee-shareholders and
investors as a result of achievement of the second Labyrinth vesting milestone.
This is the principal reason why research and development was $1,898,857 higher
in fiscal 1999, than in fiscal 2000.
<PAGE>
Additionally, certain employees were granted stock options, resulting in
additional compensation due to the difference between the exercise price and the
market value of the stock at the time of grant. Total compensation expense for
employee stock options for fiscal years 2000 and 1999 was $586,034 and $4,067,
respectively. In fiscal 1997, we recorded unearned compensation for the options
granted that year and amortized the expense over the vesting period. As of March
31, 2000, the options granted to employees were fully amortized. The
amortization of unearned compensation for fiscal years 2000 and 1999 was
$244,958 and $516,480, respectively. Compensation expense for options granted to
consultants for the fiscal years 2000 and 1999 was $302,204 and $48,234,
respectively.
For the year ended March 31, 2000, $72,500 of software development costs was
capitalized related to the software for the AMPS RadioCamera System. None were
capitalized at March 31, 1999. Amortization of the capitalized software costs
are required to begin once the software is available to generate revenues.
Our equity in net losses of WTI aggregated $390,208 and $341,370 during fiscal
years 2000 and 1999, respectively, however, losses totaling approximately
$192,000 have not been applied as of March 31, 2000 since the carrying amount of
the investment has been reduced to zero. For the years ended March 31, 2000 and
1999, we earned interest income of $495,638 and $310,074, respectively,
reflecting increased earnings on cash balances generated from our private sales
of equity securities, as discussed below.
As a result of the above factors, we incurred a net loss of $7,772,049 for the
year ended March 31, 2000 as compared to $7,230,277 for the year ended March 31,
1999. The net loss attributable to common shares of $11,463,897 for fiscal 2000
also includes $3,560,000 of deemed dividends with respect to the Series B
Preferred Stock issuance and $131,848 of cumulative dividends on the shares of
Series A Preferred Stock. The deemed dividends on the Series B Preferred Stock
are the result of issuing the preferred stock with a conversion price to acquire
shares of our Common Stock at a discount from the trading price of our Common
Stock at the date we sold the shares of Series B Preferred Stock.
Liquidity and Capital Resources
As of March 31, 2000, we had working capital of $4,786,187 and cash and cash
equivalents of $5,311,209. Such amounts resulted primarily from sales of our
securities in the March 1999 private placement in which we raised net proceeds
of $6,405,000 million. During fiscal 2000, we made cash investments of $364,654
in equipment, and capitalized $72,500 of software development costs. In June
2000, we completed the sale of 112,500 shares of the $.01 par value Series C
Preferred Stock at a price of $200 per share to American Tower Corporation
("ATC"). Proceeds of the Series C Preferred Stock net of offering costs were
approximately $21.0 million.
Based on management's estimates, our capital resources are expected to meet cash
requirements through at least March 31, 2001 for the continuation of research,
development, field trials and ORT operations. We will require additional capital
in order to implement our business plan of deploying a nationwide location
network using our RadioCamera system. Management will continue assessing and
evaluating the timing and resource requirements necessary to implement this
plan.
During fiscal 2000, we continued the development and testing of our AMPS, TDMA,
CDMA and iDEN RadioCamera systems. In addition, we commenced the Maryland
Beltway project, in which we installed six sites and are expecting to expand the
project to ten sites within the next quarter. Total expected revenue for this
project is approximately $461,000 from the state of Maryland. We have earned
$249,178 in revenues on this contract in fiscal 2000. Additionally, we received
a trial project from the state of Virginia, Department of Transportation, for a
portion of the highway in Hampton Roads. We expect to commence this project
during fiscal 2001. We are expecting to receive total revenues for the project
in the amount of $350,000. The Hampton Roads Project also calls for us to
receive 20% of the revenues generated by Iteris from additional ITS applications
offered by Iteris and Cox interactive on this project.
<PAGE>
Concurrent with the private placement discussed above, we entered into two
agreements with ATC and its operating entities: a master license agreement and a
services agreement. Under the terms of the three-year master lease agreement,
ATC will provide site licenses and services in connection with our network
build-out and we have committed to license a minimum of 1,000 tower facilities
over the term of the agreement. We have committed to license a minimum of 1,000
tower facilities at preferential rates starting at $450 per month for each
facility, which commitment could increase to 2,500 sites in the event that we
meet certain market milestones and American Tower satisfies certain tower
building or acquisition milestones. If ATC has 10,000 tower facilities available
by December 31, 2000, we agreed to license 150 sites prior to the end of the
first year, an additional 300 sites prior to the end of the second year and an
additional 550 sites prior to the end of the third year. If the conditions of
the master license agreement are met, we are required to pay for the above
licenses whether we use the facilities or not. The term of each site license
will continue for a five-year period and may be extended for additional
five-year periods at our discretion. Under the services agreement, ATC shall
have a preferential right to provide network build-out services, on a market by
market basis, including radio frequency design, radio frequency engineering,
site identification, site acquisition and development, site zoning and
permitting, site construction and installment management, and component
purchases.
In accordance with our strategy of building a nationwide network, which will
require additional financing, management expects that we will be required to
purchase significant amounts of equipment and significantly increase our
management, technical, marketing, operations and administrative personnel during
the next twelve months.
If our timetable for developing, marketing, and manufacturing the RadioCamera
exceeds current estimates, we may require additional capital resources. The
primary continuing expenses associated with the testing and development of the
RadioCamera are expected to include officer, key employee and consultant
salaries and fees.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition of the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal years beginning after June 15,
2000. As of March 31, 2000, we have not entered into derivative contracts either
to hedge existing risks or for speculative purposes, and do not expect adoption
of the new standard to have a significant effect.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. SAB 101 must be applied to the financial statements
no later than the quarter ending September 30, 2000. The Company does not
believe that the adoption of SAB 101 will have a material affect on the
Company's financial results.
In March 2000, the Financial Accounting Standards Board issued Interpretation
NO. 44 ("FIN 44") Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 2, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
We believe that the impact of FIN 44 will not have a material effect on the
Company's financial position or results of operations.
<PAGE>
Net Operating Loss Carryforwards
As of March 31, 2000, the Company has Federal net operating loss carryforwards
(NOLS) totaling approximately $17,482,000, which expire at various times through
2020. For State purposes, the Company has NOLS totaling approximately
$8,472,000, which expire at various times through 2005. Utilization of a portion
of the NOLS may be limited pursuant to Internal Revenue Code Section 382 due to
ownership changes because they were acquired in connection with the purchase of
Labyrinth. Also, should significant changes to the existing ownership of the
Company occur, the annual amount of NOL carryforwards available for future use
would be further limited. In addition, the Company has approximately $524,000
and $442,000 of Federal and State research and development tax credit
carryforwards. The Federal credits expire at various times through 2020.
Management has chosen to record a 100% valuation allowance against the net
deferred tax assets, principally related to the NOLS, as realization is
evaluated as uncertain at this time.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
See attached financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
In March 2000, we engaged BDO Seidman LLP as our certifying auditors to audit
our financial statements for the year ending March 31, 2000. The Company did not
consult with BDO Seidman, LLP on any matters prior to their retention. Our
decision to change auditors reflects the expansion of our operations and our
desire to have an auditing firm that has national and international
capabilities. We dismissed Haskell & White LLP as our auditors, which firm had
audited our financial statements for the years ended March 31, 1996 through
1999. The change in accountants was not due to any discrepancies or
disagreements between us and Haskell & White, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure. The former accountants' reports on our financial statements for the
years ended March 31, 1996 through 1999 did not contain any adverse opinions or
disclaimers of opinion; nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT
Executive Officers and Directors
The following sets forth certain information regarding our directors and
executive officers as of May 31, 2000:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Dr. Oliver Hilsenrath(1)(2)......... 42 Chief Executive Officer and Chairman
Dale Stone.......................... 52 President, Chief Operating Officer and Director
David Klarman....................... 35 Vice President, Secretary and General Counsel
Jan Klein........................... 49 Vice President, Business and Market Development
Richard Mudge(3).................... 54 President, Compass Services
Howard Blank(3)..................... 58 Vice President - Technology, Compass Services
Barry West(2)....................... 54 Director
Dennis Francis(1)(2)................ 48 Director
Irwin Gross(1)(4)................... 56 Director
Louis Golm.......................... 58 Director
James Eisenstein(5)................. 41 Director
</TABLE>
-----------------------------------
(1) Member of Audit Committee of the Board of Directors.
(2) Member of Compensation Committee of the Board of Directors.
(3) Compass Services is a division in formation.
(4) Elected by the holders of Series B Preferred Stock prior to the Series
B shares being converted in March and April, 2000.
(5) Elected by the holder of Series C Preferred Stock.
Dr. Oliver Hilsenrath has served as Chief Executive Officer and a director
since July 31, 1996, and was appointed Chairman of the Board in March 2000. Dr.
Hilsenrath also served as the President since our inception in July 1996 until
March 2000. From 1992 until April 1996, Dr. Hilsenrath was the Senior Vice
President of Technology of Geotek Communications, Inc. Prior to 1992, Dr.
Hilsenrath served as Chief Engineer of the secure communications division of
RAFAEL, Israel. Dr. Hilsenrath received his Ph.D. in information theory from
Technion - Polytechnical Institute of Israel and has worked in the wireless
communications industry for 20 years.
Dale Stone has served as President, Chief Operating Officer and a director since
March 15, 2000. From June 1998 until May 1999, Mr. Stone served as Senior Vice
President and General Manager of Qualcomm's Wireless Infrastructure Division and
thereafter continued to serve on the Division's senior leadership team after
Ericsson acquired the unit in May 1999. From 1991 until 1997, Mr. Stone was a
member of the senior management of AT&T Bell Labs, and at the time of his
departure he was Vice President of Services Development. He is a Fellow of both
AT&T and Bell Labs and holds several patents in circuit design and wireless
network services. Mr. Stone received the AT&T Consumer Services Malcolm
Baldridge Award, the highest award given for managerial excellence in the U.S.
Mr. Stone holds a B.S. in Electrical Engineering from the Massachusetts
Institute of Technology and an M.S. in Electrical Engineering from Stanford
University. He also completed the Executive Program at Darden.
<PAGE>
David S. Klarman has served as Vice President, General Counsel and
Secretary of the Company since September 1996. He was elected Vice President in
December 1997. In September 1996, Mr. Klarman formed Klarman & Associates, a law
firm specializing in corporate and securities law. From July 1994 to August
1996, Mr. Klarman was an associate with Lampert & Lampert, a law firm
specializing in corporate and securities law in New York, New York. From
February 1991 to July 1994, Mr. Klarman was an associate with Goldstein, Axelrod
& DiGioia, a law firm specializing in corporate and securities law in New York,
New York. Mr. Klarman holds a J.D. from Yeshiva University, Benjamin N. Cardozo
School of Law, and a B.S. in Finance from the University of Maryland.
Jan Klein has served as Vice President, Business and Market Development since
December 1999. Mr. Klein previously provided consulting services to us from May
1999 until December 1999 through DaVinci Solutions, LLC, a company he founded in
January 1999. From March 1996 until March 1998, he served as Vice President of
Geotek Communications, Inc. From March 1994 until March 1996, he served as the
head wireless telecommunications analyst at Dean Witter Reynolds. From August
1984 until March 1994, Mr. Klein was with AT&T, where he held a variety of
management positions in sales, marketing, operations and finance, and he managed
AT&T's commercial business accounts in New York. At the time of his departure
from AT&T, he was Director of Financial Planning - PCS. Mr. Klein also headed
the finance team that executed the 1994 acquisition of McCaw Cellular by AT&T.
Mr. Klein holds a B.S. in Aerospace Engineering from Pennsylvania State
University, an M.B.A. from George Washington University, an Executive MBA from
Cornell University and an Associate Degree in Accounting from the University of
Pittsburgh. He is a Certified Public Accountant in New Jersey, and holds an NASD
Series 7 license.
Dr. Richard Mudge has served as the President of our Compass Services division
since April 2000. He was a co-founder of Apogee Research, Inc., and served as
its Chairman of the Board from 1994 until 1997, when it merged with Hagler
Bailly. Dr. Mudge then served as Senior Vice President and Managing Director of
Hagler Bailly's transportation practice until April 2000. From 1975 to 1986, Dr.
Mudge served in the Congressional Budget Office, where he was Chief of the
Infrastructure Investment Group from 1983, and directed the organization's
advice to Congress on transportation. He is a member of the ITS America
Coordinating Council, and chairs the organization's Committee on Benefits
Evaluation and Costs. He also serves on several technical committees sponsored
by the Transportation Research Board, an arm of the National Academy of
Sciences. Dr. Mudge holds a Ph.D. and an M.A. in Regional Economics from the
University of Pennsylvania, and an undergraduate degree in Geography from
Columbia College.
Dr. Howard Blank has served as Vice President - Technology of our Compass
Services division since April 2000. From 1997 until joining Compass Services,
Dr. Blank worked as an independent telecommunications consultant. From 1995
until 1997, Dr. Blank was a senior partner with the Stanford Research Institute.
From 1983 until 1995, he served as a partner in the Telecommunications Systems
and Business Strategy Practice of Booz Allen & Hamilton. Dr. Blank has also
worked for Computer Sciences Corporation and Bell Telephone Laboratories, and is
a member of the Governing Board and a past General Chairman of INFOCOM, the
joint computer communications conference of the Communications and Computer
Societies of the IEEE. Dr. Blank holds a Ph.D. in Systems Engineering and
Operations Research from the University of Pennsylvania. He additionally holds
an M.S. in Engineering, a B.S. in Electrical Engineering, and is a graduate of
the Bell Telephone Laboratories Graduate Studies Program.
<PAGE>
Barry West has served as a director since May 1998. Since March 1996, Mr. West
has served as Vice President and Chief Technology Officer of Nextel
Communications, Inc. Prior to that, Mr. West served in various senior positions
with British Telecom for more than thirty-five years, most recently as Director
of Value-Added Services and Corporate Marketing at Cellnet, a cellular
communications subsidiary of British Telecom.
Dennis Francis has served as a director since December 1997. Prior to his
election to the board, he was a consultant for us starting in December 1996.
Since May 2000, Mr. Francis has served as Senior Vice President - Network
Operations and Engineering for TeraBeam Networks. From May 1999 until May 2000,
he served as Vice President of New Wireless Technology Support at AT&T Wireless.
From September 1992 through May 1999, Mr. Francis was the Chief Technology
Officer of Vanguard Cellular Services, Inc. prior to its acquisition by AT&T
Wireless. Mr. Francis is the current chairman of the Nortel Technology Officers
Council and had served on the Chief Technology Officer's Council of the Cellular
Telecommunications Industry Association for four years. He graduated from the
University of Texas at Arlington, Texas with a B.S. in Industrial Engineering.
Louis Golm has served as a director since January 2000. Mr. Golm also serves as
a member of the board of Digital Link Corporation as well as Vice Chairman of
the board of Clariti Telecommunications. From 1997 to 1999, Mr. Golm served as
President of AirTouch International, where he was responsible for creating and
initiating a new satellite-based wireless capability in North America,
Globalstar. From June 1994 to February 1997, he served for three years as
President and Chief Executive Officer of AT&T-Japan. Between 1991 and 1994, Mr.
Golm was the Vice President of Business network Sales for AT&T Business
Communications Services, and between 1988 and 1990, he was the Vice President
for the Eastern Sales Region of AT&T Business Sales Division. Mr. Golm graduated
from the University of Denver with a B.S. in Business Administration. He also
has an MBA from the University of Denver as well as an M.S. in Management from
the Massachusetts Institute of Technology.
Irwin Gross has served as a director since April 1999. He was elected by
unanimous written consent of the stockholders of our Series B Preferred Stock.
Mr. Gross has served as Chief Executive Officer and Chairman of the Board of
Directors of Global Technologies, Inc., formerly Interactive Flight
Technologies, Inc., since September 1998. He was the founder and a director of
ICC Technologies, Inc, which designs innovative climate control systems, from
May 1984 until July 1998. In 1998, ICC Technologies merged with Rare Medium
Inc., an Internet services company. In 1998, he also founded Ocean Castle
Partners, LLC, of which he is now a Managing Member. Mr. Gross is currently the
Chairman of the Board of The Network Connection and a member of the Board of
Orbit R/F. In addition, Mr. Gross served as the Chief Executive Officer of ICC
from February 1994 to February 1998. He has a B.S. degree in accounting from
Temple University and a J.D. from Villanova University.
<PAGE>
James S. Eisenstein has served as a director since May 31, 2000. He was
appointed by American Tower Corporation in accordance with the terms and
conditions of American Tower Corporation's investment and purchase of the shares
of our Series C Preferred Stock. Mr. Eisenstein currently serves as the
Executive Vice President-Corporate Development with American Tower Corporation,
a position that he has held since he helped found American Tower Corporation in
the summer of 1995. From 1990 to 1995, he was Chief Operating Officer of Amaturo
Group Ltd., a broadcast company operating 11 radio stations and four
broadcasting towers. Mr. Eisenstein serves on the Board of Directors of the
Personal Communications Industry Association, the leading international trade
association representing the wireless communications industry.
Provisions Governing the Board of Directors
Terms of Directors
All directors, with the exception of Mr. Eisenstein and Mr. Gross, who were
appointed in accordance with the terms and conditions of the Series C and Series
B Preferred Shares, respectively, hold office until the next annual meeting of
stockholders or until their successors are duly elected and qualified. Vacancies
on the Board of Directors may be filled by the remaining directors. Officers are
elected annually by, and serve at the discretion of, the Board of Directors.
Limitation of Liability
As permitted under Delaware Corporation Law, our certificate of incorporation
eliminates the personal liability of our directors or any of our shareholders
for damages for breaches of their fiduciary duty as directors. As a result of
the inclusion of such provision, stockholders may be unable to recover damages
against directors for actions taken by them that constitute negligence or gross
negligence or that are in violation of their fiduciary duties. The inclusion of
this provision in our certificate of incorporation may reduce the likelihood of
derivative litigation against directors and other types of shareholder
litigation. In addition, we have executed indemnification agreements with all
officers and directors providing indemnification to the fullest extent of the
law.
Directors' Compensation
Directors do not currently receive any cash compensation for services rendered
to us in their capacities as directors. Pursuant to the terms of their
respective stock option agreements with us, directors elected by our common
shareholders receive options to purchase shares of our common subject to vesting
schedules. See "Principal Stockholders".
Employment Agreements
Dr. Oliver Hilsenrath. In March 2000 the Board of Directors approved the
extension of Dr. Hilsenrath's employment agreement for an additional three
years. The agreement is currently being negotiated, however, the board-approved
terms include an annual salary of $275,000 per annum, the possibility of a
yearly bonus of up to 40% of his yearly salary based upon the Company's meeting
certain board-determined milestones, which are to be determined by the board on
an annual basis and an option to purchase an additional 750,000 shares of common
stock at an exercise price of $29.94 per share, vesting over four years, at a
the rate of 1/4 per year starting on the first anniversary of the execution of
the extension. His current agreement restricts Dr. Hilsenrath from competing
with us for a period of two years after the termination of his employment. The
agreement provides for severance compensation to be paid to Dr. Hilsenrath if
his employment with the Company is terminated or if there is a decrease in his
responsibilities or duties following a change in control of the Company. The
severance compensation shall be made in one payment equal to three times the
<PAGE>
aggregate annual compensation paid to Dr. Hilsenrath during the preceding
calendar year. In the event the Company wishes to obtain Key Man life insurance
on the life of Dr. Hilsenrath, he agrees to cooperate with us in completing any
applications necessary to obtain such insurance and in promptly submitting to
such physical examinations and furnishing such information as any proposed
insurance carrier may request. In addition, we shall maintain during the full
term hereof and at our sole cost and expense, a life insurance policy on Dr.
Hilsenrath in the face amount of $1,000,000 payable to his designees. This
policy also includes provisions for the payment of up to 18 months of salary to
Dr. Hilsenrath in the event that he is disabled. Upon the conclusion of this
agreement, all right, title and interest in the policy shall be transferred to
Dr. Hilsenrath, and he shall be responsible for any premiums due after such
transfer.
Dale Stone. In March 2000 Mr. Stone signed a letter offer agreement, the terms
of which were approved by the board, in which Mr. Stone was appointed President
and Chief Operating Officer. A final agreement is currently being negotiated,
however, the agreed upon terms include: the term of the agreement is to be four
years, with an annual salary of $250,000 and the possibility of a yearly bonus
of up to 40% of his annual salary based upon the Company meeting certain
board-determined milestones, which are to be determined on an annual basis by
the board. Mr. Stone was also granted the right to receive 100,000 shares of
common stock, vesting at the rate of 1/4 of the shares per year, with the
initial 1/4 vesting one year from the date of grant, and the balance vesting 1/4
each year thereafter until fully vested. In addition, Mr. Stone is to receive an
option to purchase 400,000 shares of common stock at $29.94 per share, subject
to a four-year vesting period, 1/4 of such shares underlying the option vesting
each year. The option has a clause enabling the acceleration of the vesting of
100,000 shares underlying the option in the event certain milestones, as
determined by the board, are met. Additionally, acceleration shall occur in the
event there is a change in control of the Company and Mr. Stone has the right to
severance compensation upon a change in control or a decrease in his position,
providing for the payment of salary and the immediate vesting of any unvested
options that would have vested.
David Klarman. In October 1999, we extended for a three-year period the
employment agreement of Mr. Klarman. The agreement is currently being
negotiated, however, the board approved terms pursuant to which Mr. Klarman
receives a salary of $140,000 per annum and was granted an option to purchase
75,000 shares of common stock at an exercise price of $2.75 per share, subject
to a three-year vesting schedule under which ? of the shares underlying the
option vest each year. The employment agreement provides that Mr. Klarman will
be Vice President, General Counsel and Secretary. Additionally Mr. Klarman has
the right to an annual bonus commensurate with the bonuses received by senior
management and severance compensation upon a change in control or a decrease in
his position, providing for the payment of salary and the immediate vesting of
all options.
Jan Klein. In December 1999, we entered into an employment agreement with Jan
Klein, who had previously worked with us as a consultant with DaVinci Solutions,
LLC. The agreement has a term of three years, appoints Mr. Klein Vice President
- Business and Market Development, and provides compensation to Mr. Klein of a
$135,000 per year salary and the transfer of the option previously issued to
DaVinci Solutions LLC., to Jan Klein, which option agreement was amended to
reflect (a) the shares exercisable under the option were increased from 100,000
shares to 125,000 shares; (b) the exercise price of the additional 25,000 shares
underlying the option is $11.20 per share, and (c) 25,000 shares being vested in
accordance with the prior consulting agreement and the remaining portion of the
option vesting subject to a three-year vesting schedule under which ? of the
shares underlying the option vest each year. Additionally Mr. Klein has the
right to severance compensation upon a change in control or a decrease in his
position, providing for the payment of salary for the lesser of the remaining
term of his agreement or six months and the immediate vesting of all options.
<PAGE>
Dr. Richard Mudge. In April 2000, Dr. Mudge signed a letter offer agreement, the
terms of which were approved by the board. Dr. Mudge was hired to serve as
President of our Compass Services division. The agreement is currently being
negotiated, however, the agreed upon terms include a salary of $150,000 per
annum, provides for the possibility of a yearly bonus of up to 40% of his yearly
salary based upon the Company meeting certain board-determined milestones, which
are to be determined on an annual basis by the board and an option to purchase
150,000 shares of Common Stock, vesting over a three-year period. The option has
a clause enabling the acceleration of the vesting of 50,000 shares underlying
the option in the event certain milestones, as determined by the board, are met.
Additionally, Dr. Mudge has the right to severance compensation upon a change in
control or a decrease in his position, providing for the payment of salary for
the lesser of the remaining term of his agreement or six months and the
immediate vesting of all options.
Howard Blank. In April 2000, Mr. Blank signed a letter offer agreement, the
terms of which were approved by the board. Dr. Blank was hired to serve as Vice
President of our Compass Services division. The agreement is currently being
negotiated, however, the agreed upon terms include a salary of $145,000 per
annum, provides for the possibility of a yearly bonus of up to 40% of his yearly
salary based upon the Company meeting certain board-determined milestones, which
are to be determined on an annual basis by the board and an option to purchase
145,000 shares of Common Stock, vesting over a three-year period. The option has
a clause enabling the acceleration of the vesting of 50,000 shares underlying
the option in the event certain milestones, as determined by the board, are met.
Additionally, Dr. Blank has the right to severance compensation upon a change in
control or a decrease in his position, providing for the payment of salary for
the lesser of the remaining term of his agreement or six months and the
immediate vesting of all options.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Compensation
The following table shows for the fiscal years ended March 31, 2000, 1999 and
1998 compensation awarded or paid to, or earned by, our chief executive officer
and our most highly compensated officers, referred to as the "Named Executive
Officers":
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Shares of Common
Annual Compensation Stock Underlying All Other
Name and Principal Position (1) Year Salary Bonus Options Compensation
<S> <C> <C> <C> <C> <C>
Dr. Oliver Hilsenrath .............. 2000 $160,000 -- 750,000(1) $1,620(2)
President and 1999 160,000 -- -- 1,620(2)
Chief Executive Officer 1998 160,000 -- -- 1,620(2)
Dale Stone......................... 2000 20,000(3) -- 500,000(4) --
President and Chief Operating
Officer
David Klarman ...................... 2000 140,000 -- 75,000(5) --
Vice President, 1999 120,000 -- -- --
General Counsel and Secretary 1998 120,000 -- -- --
Jan Klein .......................... 2000 33,750(3)(7) 10,000(6) 135,000(5)(6) --
Vice President,
Market and Business Development
</TABLE>
---------------------
(1) Pursuant to an extension of his employment agreement, Dr. Hilsenrath
received an option to purchase 750,000 shares of common stock. See "Item 9
Employment Agreements."
(2) Represents the payment of approximately $1,620 for a life insurance and
disability policy for the benefit of Dr. Hilsenrath's beneficiaries. See "Item 9
Employment Agreements."
(3) Reflects portion of the year worked. Messrs. Stone and Klein commenced
employment with the Company in March 2000 and December 1999, respectively.
(4) In accordance with his employment agreement, which is still under
negotiation, Mr. Stone was granted an option to purchase 400,000 shares of
common stock, vesting over four years, 1/4 each year with the first portion
vesting on the first anniversary of his agreement. Mr. Stone also received a
grant of 100,000 shares of common stock, to vest over a four-year term,
commencing with the initial 25% or 25,000 shares vesting on the first
anniversary of the date of grant. See "Item 9 Employment Agreements."
(5) Mr. Klarman and Mr. Klein were granted options to purchase 75,000, and
125,000 shares of common stock, respectively, vesting over the three-year term
of their agreements. See "Item 9 Employment Agreements."
(6) Jan Klein received a bonus in March 2000, which included $10,000 and
the grant of an option to purchase 10,000 shares of common stock, vesting over a
three-year period.
(7) Mr. Klein was a consultant to the Company from May 1999 until December
1999, at which time he became an employee.
<PAGE>
<TABLE>
<CAPTION>
Compensation Pursuant to Plans
The following table contains information concerning the stock option grants made
to each of the Named Executive Officers during the fiscal year ended March 31,
2000:
Option Grants in Last Fiscal Year
Individual Grants
Number of % of Total
Shares of Options
Common Stock Granted to
Underlying Named Executive Exercise
Options Officers Price per Expiration
Name Granted In 1999 Share Date
<S> <C> <C> <C> <C> <C>
Oliver Hilsenrath 750,000(1) 41% 29.94 03/01/05
Dale Stone 400,000(1)(3) 22% 29.94 03/01/05
David S. Klarman 75,000(2) 4% 2.75 08/30/04
Jan Klein 100,000(2) 5.5% 2.75 05/19/02
Jan Klein 25,000(2) 1.3% 11.20 05/19/02
Jan Klein 10,000(2) 0.6% 30.94 03/01/05
-------------------
</TABLE>
(1) Vesting at the rate of1/4per year.
(2) Vesting at the rate of ? per year.
(3) 100,000 shares underlying the option may be accelerated in the event
that the employee meets certain board-designated performance milestones.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Shares of
Common Stock
Shares of Underlying Unexercised Value of Unexercised
Common Stock Options at In-the-Money Options at
Acquired Value Fiscal Year-End Fiscal Year-Ended(1)
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Dr. Oliver Hilsenrath - - 1,500,000 750,000 $43,500,000 $ 45,000
Dale Stone - - 0 400,000 0 424,000
David Klarman - - 250,000 75,000 7,449,785 2,118,750
Jan Klein - - 25,000 110,000 706,250 2,903,750
</TABLE>
-----------------------------------------------
(1) Value of unexercised options at fiscal year-end is based on the fair
market value of our common stock at March 31, 2000 ($31.00) (based on
the closing sale price reported on the Nasdaq National Market on that
date) minus the exercise price of the option.
Senior Management Incentive Plan
In December 1997, the Board of Directors and our stockholders adopted the Senior
Management Incentive Plan (the "Management Plan"). The Management Plan provides
for the issuance of up to an aggregate of 500,000 shares of common stock upon
exercise of stock options and other rights to executive officers, key employees,
and consultants.
<PAGE>
The adoption of the Management Plan was prompted by the desire to provide the
board with sufficient flexibility regarding the forms of incentive compensation,
which we will have at our disposal in rewarding executive officers, key
employees, and consultants who render significant services to us. Pursuant to
the Management Plan, the Board of Directors intends to offer equity ownership in
U.S. Wireless to such persons through the grant of stock options and other
rights, to enable us to attract and retain qualified personnel without
unnecessarily depleting our cash reserves. The Management Plan is designed to
augment our existing compensation programs and is intended to enable us to offer
a personal interest in our growth and success through awards of either shares of
common stock or rights to acquire shares of common stock.
The Management Plan is intended to attract and retain key executive management
personnel whose performance is expected to have a substantial impact on our
long-term profit and growth potential by encouraging and assisting those persons
to acquire equity in U.S. Wireless. A total of 500,000 shares of our common
stock will be reserved for issuance under the Management Plan. It is anticipated
that awards made under the Management Plan will be subject to three-year vesting
periods, although the vesting periods are subject to the discretion of the
Administrator.
Unless otherwise indicated, the Management Plan is administered by the
compensation committee of the Board of Directors (the board or such committee
shall be referred to in the following description as the "Administrator"). In
accordance therewith, all issuance's under the Management Plan will be approved
by such committee. Subject to the specific provisions of the Management Plan,
the Administrator will have the discretion to determine the recipients of the
awards, the nature of the awards to be granted, the dates such awards will be
granted, the terms and conditions of awards and the interpretation of the
Management Plan, except that any award granted to any of our employees who is
also a director shall also be subject, in the event the persons serving as
members of the Administrator of the Management Plan at the time such award is
proposed to be granted do not satisfy the requirements regarding the
participation of "disinterested persons" set forth in Rule 16b-3 ("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), to the approval of an auxiliary committee consisting of not less than two
individuals who are considered "disinterested persons" as defined under Rule
16b-3. As of the date hereof, we have not yet determined who will serve on such
auxiliary committee, if one is required. The Management Plan generally provides
that, unless the Administrator determines otherwise, each option or right
granted under the plan shall become exercisable in full upon certain "change of
control" events as described in the Management Plan, or subject to any right or
option granted under the Management Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure, or otherwise), the Administrator will
make appropriate adjustments to such plans and the classes, number of shares and
price per share of stock subject to outstanding rights or options. The
Management Plan may be amended by action of the board of directors, except that
any amendment which would increase the total number of shares subject to such
plan, extend the duration of such plan, materially increase the benefits
accruing to participants under such plan, or change the category of persons who
can be eligible for awards under such plan, must be approved by the affirmative
vote of a majority of stockholders entitled to vote. The Management Plan permits
awards to be made thereunder until November 2004.
<PAGE>
Directors who are not otherwise employed by us will not be eligible for
participation in the Management Plan. The Management Plan provides for four
types of awards: stock options, incentive stock rights, stock appreciation
rights (including limited stock appreciation rights) and restricted stock
purchase agreements.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of May 31, 2000 information regarding the
beneficial ownership of our common stock and common stock equivalents by (i)
each person who we know to be a beneficial owner of 5% or more of our
outstanding common stock; (ii) each of our directors and Named Executive
Officers; and (iii) all of our executive officers and directors as a group.
<TABLE>
<CAPTION>
Shares of Common Stock or Common Stock Percentage of Beneficial
Beneficial Owner Equivalents (1)(2) Ownership (3)
<S> <C> <C>
Dr. Oliver Hilsenrath(4)........... 5,356,304 24%
Dale Stone(5)...................... -- *
David Klarman(6)................... 270,000 1%
Jan Klein(7)....................... 59,000 *
Barry West(8)...................... 86,667 *
Irwin Gross(9)..................... 226,333 *
Dennis Francis(8).................. 120,000 *
Louis Golm(8)...................... -- *
James S. Eisenstein(10)............ -- *
Directors and executive officers as a
group (9 persons)(4) - (10) 6,094,304 26%
</TABLE>
-----------------
*Less then 1%
(1) This table is based upon information supplied by directors, executive
officers and principal stockholders and Schedules 13D and 13G filed with
the Securities and Exchange Commission. Unless otherwise indicated below,
the persons named in the table have sole voting and investment power with
respect to all shares beneficially owned by them, subject to community
property laws where applicable. For purposes of this table, shares held
by stockholders include any shares held as tenants in common or joint
tenants with spouses. Percentages are based on a total of shares of
common stock outstanding on June 30, 2000 and shares of common stock
outstanding, adjusted in accordance with the rules promulgated by the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options held by that person
that are exercisable within 60 days of the date of this table and shares
of common stock issuable to that person upon conversion of convertible
preferred stock that is convertible within 60 days of the date of this
table are also deemed outstanding. These shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) The percentage ownership is calculated by dividing the number of shares
beneficially owned by the sum of (i) the total outstanding shares of
common stock of the Company, and (ii) the number of shares of common
stock that such person has the right to acquire within 60 days, whether
by exercise of options or warrants. The percentage ownership does not
reflect shares beneficially owned by virtue of the right of any person,
other than the person named and affiliates of the person, to acquire them
within 60 days, whether by exercise of options or warrants.
<PAGE>
(footnotes continued from previous page)
(3) Does not include (i) the shares of common stock issuable upon the
conversion of 112,500 shares of Series C Preferred stock or the shares of
Series C Preferred Stock issuable in accordance with the dividend on said
shares or the shares of common stock into which those dividend shares may
be convertible, or (ii) any shares of common stock issuable underlying
any outstanding warrants or options issued by us.
(4) All shares are held in the name of the Hilsenrath Family trust, of which
Dr. Hilsenrath is the trustee and his family members are the
beneficiaries. Includes 1,500,000 shares of common stock, issuable upon
the exercise of a vested option and 793,152 shares issued in connection
with the Labyrinth merger which are not vested and subject to a vesting
schedule. Does not include 750,000 shares issuable upon the exercise of
an option granted pursuant to Dr. Hilsenrath's amended employment
agreement in March 2000. See Item 9 "Employment Agreements."
(5) Does not include an option to purchase 400,000 shares of common stock
vesting at the rate of 1/4 per year, with the possibility of the
acceleration of 100,000 shares underlying the option in the event the
Company achieves board-declared incentives and 100,000 restricted shares
issuable pursuant to Mr. Stone's employment, whereby Mr. Stone shall
receive 25,000 shares of common stock on each one-year anniversary of the
date of grant, until fully issued. See Item 9 "Employment Agreements."
(6) Includes 250,000 shares issuable upon the exercise of vested options.
Does not include an option to purchase 75,000 shares of common stock
vesting at the rate of ? per year, granted pursuant to his employment
extension. See Item 9 "Employment Agreements."
(7) Includes 59,000 shares issuable upon the exercise of vested options that
were transferred from DaVinci Solutions LLC to Mr. Klein pursuant to the
terms of his employment agreement. See "Item 9 Employment Agreements."
Does not include 77,000 shares issuable pursuant to option agreements,
which are not yet vested.
(8) Includes shares underlying options granted to members of the board of
directors, which have vested. Does not include the unvested portions of
the options. Messrs. Francis, West and Golm were granted options to
purchase 100,000, 100,000 and 50,000 shares of Common Stock,
respectively, of which the vested portions are 100,000, 66,667 and 0.
(9) Includes 33,333 shares issuable upon the exercise of the portion of an
option currently vested and exercisable, equal to ? of the total options
granted and 50,000 shares underlying an option granted to Ocean Castle
Partners, LLC, of which Mr. Gross is managing member and sole
shareholder. The options vest at ? intervals per year. Does not include
(i) 3,000,000 shares owned by Global Technologies, Inc., a company in
which Mr. Gross is the Chief Executive Officer and Chairman of the Board,
and which Mr. Gross disclaims beneficial ownership and (ii) 32,000 shares
held in trust for the benefit of Mr. Gross' children, which Mr. Gross
disclaims beneficial ownership.
(10) Does not include the shares of common stock issuable upon the conversion
of the 112,500 shares of Series C Preferred stock or the shares of Series
C Preferred Stock issuable in accordance with the dividend on said shares
or the shares of common stock into which those dividend shares may be
convertible, owned by American Tower Corporation, in which company Mr.
Eisenstein is the Executive Vice President-Corporate Development. Mr.
Eisenstein disclaims beneficial ownership of the shares held by American
Tower Corporation.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
2000 Private Placement
In May 2000, we consummated a private placement offering of our securities, in
which we sold 112,500 shares of our Series C Preferred Stock to American Tower
Corporation ("ATC"). The holders of the Series C Preferred Stock have the right
to elect one member of our board of directors. The Series C Preferred
Stockholders elected Jim Eisenstein as their appointee. At the same time as we
sold Series C Preferred Stock to ATC, we entered into a Master Lease Agreement
("MLA") and a Services Agreement with ATC.
Under the terms of the three-year master lease agreement, ATC will provide site
licenses and services in connection with our network build-out and we have
committed to license a minimum of 1,000 tower facilities over the term of the
agreement. We have committed to license a minimum of 1,000 tower facilities at
preferential rates, which commitment could increase to 2,500 sites in the event
that we meet certain market milestones and American Tower satisfies certain
tower building or acquisition milestones. If ATC has 10,000 tower facilities
available by December 31, 2000, we agreed to license 150 sites prior to the end
of the first year, an additional 300 sites prior to the end of the second year
and an additional 550 sites prior to the end of the third year. If the
conditions of the master license agreement are met, we are required to pay for
the above licenses whether we use the facilities or not.
Under the terms of the Service Agreement, ATC shall have a right of first
refusal, subject to a competitive bid, to provide to us in each new market all
services relating to radio frequency design and engineering, site
identification, site acquisition and development, site zoning and permitting,
site construction and installation management, component purchases and equipment
installation. ATC shall further supply us with parts and components for the
construction of our RadioCamera sites.
1999 Private Placement
In April 1999, we commenced a private placement offering of securities, in which
we sold 60,000 shares of our Series B Preferred Stock, of which 30,000 shares
were sold to Interactive Flight Technologies, Inc., a company in which Irwin
Gross, is the Chief Executive Officer and Chairman of the Board. The holders of
the 60,000 shares of the Series B Preferred Stock have the right to elect one
member to our board of directors. The Series B Preferred Stockholders elected
Irwin Gross as their appointee.
In addition, we sold an aggregate of 405,000 shares of Common Stock at $1.00 per
share to our officers, directors, employees and several consultants, which is
equal to the conversion price of the shares of Series B Preferred Stock.
In March and April 2000 all the shares of the Series B Preferred Stock were
converted into shares of Common Stock.
<PAGE>
Mantra Technologies, Inc. Restructuring
In February 1999, the board of directors, on behalf of the Company as majority
shareholders of Mantra, approved the recapitalization and restructuring of
Mantra Technologies, Inc., including the issuance of an aggregate of 33% of the
outstanding shares of Mantra to its management team.
<PAGE>
Consolidation of Labyrinth
In March 1998, we consummated the merger of our 51% owned subsidiary, Labyrinth
Communication Technologies Group, Inc. ("Labyrinth"), into the Corporation. In
December 1997, the stockholders of the Corporation approved a proposal to
acquire the remaining 49% of Labyrinth in exchange for an aggregate of 4,498,200
shares of the Corporation's Common Stock, subject to a vesting schedule, as
follows: (i) 20% of the shares issued shall vest one year from issuance; (ii) an
additional 40% shall vest upon the successful completion and operation of the
RadioCamera in its first major market; and (iii) the remaining 40% shall vest
when the Corporation reaches sales of $15,000,000. Milestones (i) and (ii) have
been completed. In addition to the above vesting schedule, the management
employees of Labyrinth were subject to an additional vesting schedule, in
accordance with their employment contracts, whereby the shares underlying
(i)-(iii) above vest at the rate of 1/3 each year. During the year ended March
30, 2000, two employees were terminated and an aggregate of 413,103 shares were
returned to treasury. In June 2000 the third employee resigned, whereby an
additional 73,501 shares have been returned to treasury. There remain 1,450,440
shares that have not vested pursuant to the third milestone, of which we are
seeking to rescind the issuance of 367,200 shares to a former consultant. See
"Item 3 - Legal Proceedings."
See "Executive Compensation-Employment and Consulting Agreements" for a
discussion of the compensation arrangements we have with Labyrinth's Executive
Officers and consultants.
<PAGE>
PART IV
ITEM 13.
All exhibits to this Form 10-KSB, except those designated with an asterisk (*)
which are filed herewith, have previously been filed with the Commission, as
referenced, and pursuant to 17 C.F.R. Section 230.411 are incorporated by
reference herein.
<TABLE>
<CAPTION>
<S> <C>
3.2.1 Amended and Restated Certificate of Incorporation of we
(incorporated by reference from our Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1999 (the "1999 Form
10-KSB"))
3.2.2 Certificate of Amendment of the Certificate of Incorporation of we (incorporated by reference from the 1999
Form 10-KSB)
3.2.3 Certificate of Amendment of the Certificate of Incorporation of we (incorporated by reference from the 1999
Form 10-KSB)
*3.2.4 Certificate of Designation of the Series C Preferred Stock which we filed on May 17, 2000.
3.4 By-Laws of we (incorporated by reference from our Registration Statement on Form SB-2 dated March 28, 1994
under File No. 33-68306-NY (the "1994 Form SB-2"))
3.4.1 Amendment to the By-Laws dated November 25, 1997 (incorporated by
reference from our Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1998 (the "1998 Form 10-KSB"))
3.5 Form of Common Stock Certificate (incorporated by reference from the 1994 Form SB-2).
* 3.6.2 Form of Series C Preferred Stock Certificate.
10.74 Form of Employment Agreement with Dr. Oliver Hilsenrath (incorporated by reference from our
Report on Form 8-K dated July 11, 1996).
10.77 Amended Employment Agreement with Dr. Oliver Hilsenrath 1997 (incorporated by reference from our
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1997 (the "1997 Form 10-KSB"))
*10.89 Employment Agreement with Jan Klein dated January 1, 2000.
*10.90 Master License Agreement with American Tower Corporation dated May 31, 2000.
*10.91 Services Agreement with American Tower Corporation dated May 31, 2000.
16.1 Letter on Change in Certifying Accountant (incorporated by reference from the Form 8-K dated March 15, 2000)
*27.01 Financial Data Schedule
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, we has duly
caused this report to be signed on its behalf by the undersigned; thereunto duly
authorized this 27th day of June 2000.
U.S. WIRELESS CORPORATION
By: \s\ Dr. Oliver Hilsenrath
Dr. Oliver Hilsenrath
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company, in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
\s\ Dr. Oliver Hilsenrath Chief Executive Officer and Director June 27, 2000
-----------------------------------------
Dr. Oliver Hilsenrath (Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
\s\ Dale Stone President and Chief Operating Officer June 27, 2000
-----------------------------------------
Dale Stone and Director
\s\ Louis Golm Director June 27, 2000
-----------------------------------------
Louis Golm
\s\ Dennis Francis Director June 27, 2000
-----------------------------------------
Dennis Francis
\s\ Barry West Director June 27, 2000
-----------------------------------------
Barry West
\s\ Irwin Gross Director June 27, 2000
-----------------------------------------
Irwin Gross
\s\ James Eisenstein Director June 27, 2000
-----------------------------------------
James Eisenstein
</TABLE>
<PAGE>
U.S. Wireless Corporation and Subsidiary
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Reports of Independent Auditors F - 2 to F - 3
Consolidated Financial Statements
Consolidated Balance Sheets F - 4 to F - 5
Consolidated Statements of Operations F - 6
Consolidated Statements of Stockholders' Equity F - 7 to F - 8
Consolidated Statements of Cash Flows F - 9 to F - 11
Notes to Consolidated Financial Statements F - 12 to F - 34
</TABLE>
F-1
<PAGE>
Report Of Independent Auditors
To the Board of Directors and Stockholders
U.S. Wireless Corporation and Subsidiary
San Ramon, California
We have audited the accompanying consolidated balance sheet of U.S. Wireless
Corporation and Subsidiary (the "Company") as of March 31, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 U.S. Wireless
Corporation and Subsidiary at March 31, 2000 and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
San Francisco, California
May 15, 2000, except for Note 12 which is dated June 21, 2000
F - 2
<PAGE>
Report Of Independent Auditors
To the Board of Directors and Stockholders
U.S. Wireless Corporation
We have audited the accompanying consolidated balance sheet of U.S. Wireless
Corporation (the Company") as of March 31, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of the Company as of March 31,
1999, and the consolidated results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
HASKELL & WHITE LLP
Irvine, California
May 13, 1999
F - 3
<PAGE>
U.S. Wireless Corporation and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, 2000 1999
--------------------------------------------------------------------------- --------------------- --------------------
Assets
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 5,311,209 $ 5,788,288
Stock subscription (Note 6) - 2,300,000
Costs and earnings in excess of billings (Note 4) 110,746 -
Other current assets 9,969 2,323
--------------------------------------------------------------------------- --- ----------------- ----- --------------
Total Current Assets 5,431,924 8,090,611
--------------------------------------------------------------------------- --- ----------------- ----- --------------
Equipment, Improvements And Fixtures 1,226,693 817,822
Less Accumulated Depreciation (978,210) (436,205)
--------------------------------------------------------------------------- --- ----------------- ----- --------------
Equipment, Improvements And Fixtures, net (Note 8) 248,483 381,617
--------------------------------------------------------------------------- --- ----------------- ----- --------------
8,265 -
Investment In And Advances To Mantra (Note 1)
Investment In Joint Venture (Note 3) - 58,630
Capitalized Computer Software Development Costs 72,500 -
Other assets 143,035 25,035
--------------------------------------------------------------------------- --- ----------------- ----- --------------
Total Assets $ 5,904,207 $ 8,555,893
--------------------------------------------------------------------------- --- ----------------- ----- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F - 4
<PAGE>
U.S. Wireless Corporation and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, 2000 1999
---------------------------------------------------------------------------- -------------------- --------------------
Liabilities And Stockholders' Equity
Current Liabilities
<S> <C> <C>
Accounts payable and accrued expenses $ 507,534 $ 335,543
Dividend payable (Note 6) 50,055 -
Accrued vacation 77,089 -
Capital lease obligations, current portion (Note 8) 11,059 34,486
--------------------------------------------------------------------------- --- ----------------- ---- ---------------
Total Current Liabilities 645,737 370,029
Capital Lease Obligations, Less Current Portion (Note 8) 33,156 4,632
--------------------------------------------------------------------------- --- ----------------- ---- ---------------
Total Liabilities 678,893 374,661
--------------------------------------------------------------------------- --- ----------------- ---- ---------------
Minority Interest In Subsidiary (Note 2) - 76,434
--------------------------------------------------------------------------- --- ----------------- ---- ---------------
Commitments and Contingencies and Subsequent Events (Notes 8 and 12)
Stockholders' equity (Notes 2, 3, 6, and 7)
Series A preferred stock, convertible, 6% cumulative, $.01 par value
(liquidation preference of $400,000 and $1,400,000) 200 700
Series B preferred stock, convertible, $.01 par value (liquidation
preference of $3,840,000 and $5,000,000) 384 500
Common stock, $.01 par value, 40,000,000 shares authorized,
17,100,658 and 13,556,188 shares issued and outstanding; 1,523,941
and 1,973,699 of which are subject to vesting 171,007 135,563
Additional paid-in capital 40,708,256 32,504,598
Unearned compensation - (244,958)
Common stock subscribed 64,476 -
Accumulated deficit (35,719,009) (24,291,605)
--------------------------------------------------------------------------- --- ----------------- ---- ---------------
Total Stockholders' Equity 5,225,314 8,104,798
--------------------------------------------------------------------------- --- ----------------- ---- ---------------
Total Liabilities And Stockholders' Equity $ 5,904,207 $ 8,555,893
--------------------------------------------------------------------------- --- ----------------- ---- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F - 5
<PAGE>
U.S. Wireless Corporation and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended March 31, 2000 1999
-------------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C> <C>
Net Revenues (Note 4) $ 249,178 $ 40,000
-------------------------------------------------------------------------- -- ------------------ ------ --------------
Costs and Expenses:
Cost of revenues 265,445 -
Research and development (Notes 2 and 3) 2,967,435 4,866,292
Operating expenses (Note 8) 4,766,542 2,491,560
-------------------------------------------------------------------------- -- ------------------ ------ --------------
Total Costs and Expenses 7,999,422 7,357,852
-------------------------------------------------------------------------- -- ------------------ ------ --------------
Loss Before Other Income and Minority Interest (7,750,244) (7,317,852)
Other Income (Expense):
Interest income 495,638 310,074
Equity in loss of joint venture (Note 3) (390,208) (341,370)
Equity in loss of Mantra (Note 1) (127,235) -
-------------------------------------------------------------------------- -- ------------------ ------ --------------
Loss Before Minority Interest (7,772,049) (7,349,148)
Minority Interest In Net Loss (Note 2) - 118,871
-------------------------------------------------------------------------- -- ------------------ ------ --------------
Net Loss (7,772,049) (7,230,277)
Series A Cumulative Preferred Dividends (Note 6) (131,848) -
Deemed Dividend for Series B Preferred Stock (Note 6) (3,560,000) -
-------------------------------------------------------------------------- -- ------------------ ------ --------------
Net Loss Attributable to Common Shares $ (11,463,897) $ (7,230,277)
-------------------------------------------------------------------------- -- ------------------ ------ --------------
Basic And Diluted Loss Per Common Share (Note 1):
Net loss per common share $ (0.92) (0.83)
Weighted average number of common shares outstanding 12,445,253 8,762,442
-------------------------------------------------------------------------- -- ------------------ ------ --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F - 6
<PAGE>
U.S. Wireless Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
(Notes 2, 3, 6 and 7)
<TABLE>
<CAPTION>
Series A Preferred Series B Preferred Common Stock
Stock Stock
----------------------- ---------------------- -------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------- ------------ ---------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1998 - $ - - $ - 11,823,444 $ 118,234
Conversion of debentures to common stock - - - - 961,538 9,615
Amortization of unearned compensation - - - - - -
Issuance of common stock options for compensation - - - - - -
Issuance of stock in connection with private placements,
net of offering costs 70,000 700 50,000 500 668,206 6,684
Exercise of common stock options - - - - 103,000 1,030
Acquisition of minority interest - - - - - -
Net loss - - - - - -
--------------------------------------------------------- ------------ --- ------ --------- ---- ------- ----------- --- ---------
Balances, March 31, 1999 70,000 700 50,000 500 13,556,188 135,563
Amortization of unearned compensation - - - - - -
Common stock subscription - - - - - -
Issuance of stock in connection with private placement,
including compensation expense of $429,000 - - 10,000 100 554,425 5,544
Conversion of preferred stock (50,000) (500) (21,600) (216) 2,498,982 24,990
Retirement of non-vested, forfeited shares
related to minority interest acquisition - - - - (413,103) (4,131)
Exercise of common stock options - - - - 719,912 7,199
Other common stock sales, including compensation
expense of $41,791 - - - - 169,254 1,692
Compensation related to stock option grants to employees and
consultants - - - - 15,000 150
Vesting of shares related to minority interest
acquisition - - - - - -
Increase in investment in joint venture - - - - - -
Deemed dividend for Series B Preferred Stock - - - - - -
Series A Preferred dividends - - - - - -
Net loss - - - - - -
--------------------------------------------------------- ------------ --- ------ --------- ---- ------- ----------- --- ---------
Balances, March 31, 2000 20,000 $ 200 38,400 $ 384 17,100,658 $ 171,007
--------------------------------------------------------- ------------ --- ------ --------- ---- ------- ----------- --- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F - 7
<PAGE>
U.S. Wireless Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
(Notes 2, 3, 6 and 7)
<TABLE>
<CAPTION>
Additional Unearned Common Accumulated Total
Stock
Paid-in Capital Compensation Subscribed Deficit
----------------------------------------------------- ---------------- ------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Balances, March 31, 1998 $ 19,912,890 $ (761,438) $ - $ (17,061,328) $ 2,208,358
Conversion of debentures to common stock 2,490,385 - - - 2,500,000
Amortization of unearned compensation - 516,480 - - 516,480
Issuance of common stock options for compensation 703,859 - - - 703,859
Issuance of stock in connection with private
placements, net of offering costs 7,013,842 - - - 7,021,726
Exercise of common stock options 206,470 - - - 207,500
Acquisition of minority interest 2,177,152 - - - 2,177,152
Net loss - - - (7,230,277) (7,230,277)
----------------------------------------------------- ---------------- -- ---------- ----- ------- --- ------------ -- -----------
-
Balances, March 31, 1999 32,504,598 (244,958) (24,291,605) 8,104,798
Amortization of unearned compensation - 244,958 - - 244,958
Common stock subscription - - 64,476 - 64,476
Issuance of stock in connection with private placement,
including compensation expense of
$429,000 1,828,356 - - - 1,834,000
Conversion of preferred stock (24,274) - - - -
Retirement of non-vested, forfeited shares related to
minority interest acquisition - - - - (4,131)
Exercise of common stock options 847,280 - - - 854,479
Other common stock sales, including compensation
expense of $41,791 640,100 - - - 641,792
Compensation related to stock option grants to employees
and consultants 949,033 - - - 949,183
Vesting of shares related to minority interest
acquisition 71,585 - - - 71,585
Increase in investment in joint venture 331,578 - - - 331,578
Deemed dividend for Series B Preferred Stock 3,560,000 - - (3,560,000) -
Series A Preferred dividends - - - (95,355) (95,355)
Net loss - - - (7,772,049) (7,772,049)
----------------------------------------------------- --- ------------ -- ---------- ----- ------- --- ------------ -- -----------
Balances, March 31, 2000 $ 40,708,256 $ - $ 64,476 $ (35,719,009) $ 5,225,314
----------------------------------------------------- --- ------------ -- ---------- ----- ------- --- ------------ -- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F - 8
<PAGE>
U.S. Wireless Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended March 31, 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C> <C>
Net loss $ (7,772,049) $ (7,230,277)
Adjustments to reconcile net loss to net cash used for operating activities:
Equity in loss of joint venture 390,208 341,370
Equity in loss of Mantra 127,235 -
Purchased research and development and compensation expense related to
minority interest acquisition 67,454 2,177,152
Minority interest in losses of subsidiary - (118,871)
Amortization of unearned compensation 244,958 516,480
Compensation expense related to stock awards and option grants 1,419,974 48,234
Depreciation expense 542,000 260,000
Increase (decrease) in assets & liabilities:
Cost and earnings in excess of billings (110,746) -
Other current assets (7,646) (2,323)
Other assets (118,000) -
Accounts payable and accrued expenses 249,082 82,835
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Used For Operating Activities (4,967,530) (3,925,400)
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchases of equipment, improvements and fixtures (364,654) (241,721)
Capitalized computer software development costs (72,500) -
Advances to Mantra (69,114) -
Investment in joint venture - (400,000)
Other (142,818) -
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Used For Investing Activities $ (649,086) $ (641,721)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F - 9
<PAGE>
U.S. Wireless Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended March 31, 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
<S> <C> <C>
Proceeds from issuance of debentures $ - $ 2,500,000
Proceeds from issuance of Series A preferred stock - 1,400,000
Proceeds from issuance of Series B preferred stock, net of offering costs 1,000,000 2,700,000
Proceeds from issuance of common stock, net of offering costs 1,005,001 1,484,851
Proceeds from common stock subscribed 64,476 -
Proceeds from exercise of common stock options 854,479 -
Collection of stock subscription 2,300,000 -
Preferred dividends paid (45,300) -
Principal repayments on obligations under capital leases (39,119) (15,192)
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 5,139,537 8,069,659
-----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash and Cash Equivalents (477,079) 3,502,538
Cash And Cash Equivalents, beginning of year 5,788,288 2,285,750
-----------------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents, end of year $ 5,311,209 $ 5,788,288
-----------------------------------------------------------------------------------------------------------------------------
Supplemental Data
Income taxes paid $ 12,160 $ -
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Schedule of non-cash During the year ended March 31, 2000, 50,000 shares
investing and financing of Series A Preferred Stock were converted into
activities: 338,982 shares of common stock and 21,600 shares of
Series B Preferred Stock were converted into
2,160,000 shares of common stock. In addition,
352,952 shares of common stock were issued to
consultants upon the cashless exercise of stock
options.
During fiscal 2000, the Company entered into capital
leases for equipment with a cost totaling $44,215.
F - 10
<PAGE>
U.S. Wireless Corporation and Subsidiary
Consolidated Statements of Cash Flows
In connection with the issuance of the Series B
Preferred Stock in fiscal year 2000, the Company recorded a
deemed dividend of $3,560,000 as a result of a beneficial
conversion feature (see Note 6).
In fiscal year 2000, the Company recorded $50,055 of
Series A Preferred Dividends that were unpaid as of March
31, 2000.
As of March 31, 1999, the Company had $2,300,000 in
stock subscription receivables related to the sale of 23,000
shares of its Series B Preferred Stock. Such receivables
were collected in full in April 1999.
In July 1998, $2,500,000 of convertible debentures were
converted into 961,538 shares of the Company's common stock.
F-11
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
1. Summary of Organization and Business
Accounting Policies
U.S. Wireless Corporation is headquartered in San
Ramon, California. U.S. Wireless Corporation was
incorporated in the State of Delaware in February 1993. The
Company develops high-performance, network-based location
systems (known as the RadioCamera system) designed to enable
wireless carriers and others to provide their customers with
value-added, location-based services and applications,
including: enhanced 911, live-navigation assistance,
enhanced 411, and asset and vehicle tracking.
The Company began its current business operations in
July 1996 by acquiring 51% of Labyrinth Communications
Technologies Group, Inc. ("Labyrinth") and 51% of Mantra
Technologies, Inc. ("Mantra"). In January 1998, the Company
acquired the remaining 49% minority interest in Labyrinth
(Note 2).
In July 1999, U.S. Wireless Corporation established its
wholly-owned subsidiary, U.S. Wireless International, Inc.
(together referred to as "the Company"), which was
incorporated in the British Virgin Islands. Its primary
asset is an investment in a foreign joint venture, Wireless
Technology, Inc. ("WTI"). The Company and Anam Instruments,
Inc. ("Anam") entered into a Joint Venture Agreement whereby
WTI was formed to develop and manufacture a Code Division
Multiple Access interface ("CDMA") for the RadioCamera. WTI
has the right to market the RadioCamera throughout Korea,
Asia and Australia.
Mantra is a U.S. based corporation that develops
network-management systems. In February 1999, Mantra's board
of directors approved the recapitalization of Mantra, which
provided for the issuance of an additional 33% of Mantra's
outstanding common stock to its management. Such shares
vested one-third upon issuance, and additional vesting is
dependent upon the achievement of defined revenue targets.
This recapitalization reduced the Company's ownership of
Mantra to 44% at the beginning of the year, and further
reductions will occur if vesting targets are achieved.
Mantra ceased operations in September 1999. At March 31,
2000 the remaining recorded assets of Mantra consists
primarily of cash balances totaling approximately $63,000.
F-12
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
Principles of consolidation
The consolidated financial statements for the year
ended March 31, 2000 include the accounts of the Company and
its wholly-owned subsidiary U.S. Wireless International,
Inc. As a result of the reduction in ownership of Mantra to
44% pursuant to the recapitalization, Mantra has not been
consolidated with the Company and has been accounted for
under the equity method for the year ended March 31, 2000.
The consolidated financial statements for the year ended
March 31, 1999 include the accounts of the Company and
Mantra. All significant intercompany balances and
transactions have been eliminated in consolidation for both
years.
Cash and cash equivalents
The Company considers all highly liquid investments
purchased with a maturity of three months or less on the
date of acquisition to be cash equivalents. The Company's
cash balances at March 31, 2000 and 1999 consist primarily
of investments in mutual funds whose underlying investments
consist primarily of adjustable rate senior loans.
Equipment, improvements, and fixtures
Equipment, improvements, and fixtures are recorded at
cost. Depreciation is calculated using the straight-line
method over the estimated useful lives of the respective
assets, generally two to five years. Maintenance and repairs
are charged to operations as incurred and improvements are
capitalized.
Long-Lived Assets
Long-lived assets are evaluated for possible impairment
whenever events or changes in circumstances indicate that
the carrying amounts may not be recoverable, or whenever
management has committed to a plan to dispose of the assets.
Such assets are carried at the lower of book value or fair
value as estimated by management based on appraisals,
current market value, and comparable sales value, as
appropriate. Assets to be held and used affected by such
impairment loss are depreciated or amortized at their new
carrying amount over the remaining estimated useful life;
assets to be sold or otherwise disposed of are not subject
to further depreciation or amortization. In determining
whether impairment exists, the Company compares undiscounted
future cash flows to the carrying value of the asset.
F-13
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
Income taxes
The Company uses the liability method of accounting for
income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". Deferred income tax assets and liabilities are
recognized based on the temporary differences between the
financial statement and income tax basis of assets,
liabilities and carryforwards using enacted tax rates.
Valuation allowances are established for deferred tax assets
to the extent of the likelihood that the deferred tax assets
may not be realized.
Stock-based compensation
The Company has adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Under this
standard, companies are encouraged, but not required, to
adopt the fair value method of accounting for employee
stock-based transactions. Under the fair value method,
compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service
period, which is usually the vesting period. Companies are
permitted to continue to account for employee stock-based
transactions under Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees", but are
required to disclose pro forma net income (loss) and
earnings (loss) per share as if the fair value method had
been adopted. The Company has elected to continue to account
for employee stock-based compensation under APB No. 25.
Research and development costs and related software
development costs
Research and development costs that do not have
alternative future uses are expensed as incurred, in
accordance with SFAS No. 2 "Accounting for Research and
Development Costs".
F-14
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
Costs incurred in the research and development of new
software are expensed as incurred, until technological
feasibility has been established. After technological
feasibility is established, any additional costs are
capitalized in accordance with SFAS No. 86, "Accounting for
the Cost of Computer Software to Be Sold, Leased or
Otherwise Marketed" until released to market. The
establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software
development costs requires considerable judgment by
management with respect to certain external factors, such
as: anticipated future revenues, estimated economic life,
and changes in software and hardware technologies. During
the year ended March 31, 2000, $72,500 of software
development costs were capitalized related to the software
for the AMPS RadioCamera System. None were capitalized at
March 31, 1999. Amortization of the capitalized software
costs will begin once the software is available to generate
revenues.
Net loss per share
Basic earnings (loss) per share is computed by dividing
net loss attributable to common shares, by the weighted
average number of common shares outstanding during each
period. The weighted average common shares are exclusive of
the contingent unvested shares related to the Labyrinth
purchase (Note 2). Diluted earning (loss) per share is
similar to basic earnings (loss) per share, except that the
weighted average number of common shares outstanding is
increased to reflect the dilutive effect of potential common
shares, such as those issuable upon the exercise of stock
options or warrants, contingent shares and the conversion of
preferred stock, as if they had been issued.
For the fiscal years 2000 and 1999, there is no
difference between basic and diluted loss per common share,
as the effects of the exercise of common stock options, the
conversion of preferred stock, and the issuance of any
contingent shares related to the acquisition of the minority
interest of Labyrinth are anti-dilutive, given the net loss
recorded in each year presented. For the fiscal years 2000
and 1999, the following were excluded from the computation
of diluted earnings per shares since their effect would be
antidilutive:
F-15
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
<TABLE>
<CAPTION>
Number of Shares Convertible
--------------------------------------
2000 1999
------------------------------------------------------ -------------- -----------------------
<S> <C> <C>
Options 6,279,871 4,950,500
Preferred A Stock 135,593 474,576
Preferred B Stock 3,840,000 5,000,000
Contingent Shares Subject to Vesting 1,523,941 1,973,053
-------------------------------------------------- --- -------------- ------ ----------------
11,779,405 12,398,129
-------------------------------------------------- --- -------------- ------ ----------------
</TABLE>
Revenue Recognition
The Company accounts for revenue from long-term
contracts under the percentage of completion method,
measured by comparing total costs incurred to date to
estimated total costs at completion.
Segment Reporting
The Company is organized in a single operating segment
for purposes of making operating decisions and assessing
performance. The chief executive officer (the chief
operating decision maker), evaluates performance, makes
operating decisions, and allocates resources based on
financial data consistent with the presentation in the
accompanying consolidated financial statements.
Use of estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, revenues and
expenses, and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual
amounts could differ from those estimates. Significant
estimates made by the Company include those related to
establishment of technological feasibility and assessment of
recoverability of capitalized computer software development
costs and estimated costs to complete under the
percentage-of-completion method.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board
Issued SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133 requires companies to
recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure
F-16
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
them at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss
recognition of the hedging derivative with the recognition
of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the
gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 2000. As of March 31, 2000, the
Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes, and does
not expect adoption of the new standard to have a
significant effect.
In December 1999, the SEC staff released Staff
Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and
disclosure of revenue in the financial statements. SAB 101
must be applied to the financial statements no later than
the quarter ending September 30, 2000. The Company does not
believe that the adoption of SAB 101 will have a material
affect on the Company's financial results.
In March 2000, the Financial Accounting Standards Board
issued Interpretation NO. 44 ("FIN 44") Accounting for
Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of
employee for purposes of applying Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed
stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business
combination. FIN 44 is effective July 2, 2000, but certain
conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. We believe that the
impact of FIN 44 will not have a material effect on the
Company's financial position or results of operations.
Reclassifications
Certain prior year amounts in the consolidated
financial statements have been reclassified to conform to
the current year presentation.
2. Acquisition of
Minority Interest
In January 1998, the Company submitted Exchange Offer
Agreements (the "Exchange Offer") to stockholders
representing the 49% minority interest in Labyrinth.
Pursuant to the terms of the Exchange Offer, the Company
exchanged 4,498,200 shares of its common stock for 490,000
shares of common stock of Labyrinth. The Exchange Offer
provides that the shares of the Company's common stock will
vest subject to the following vesting schedule:
(i) 20% of shares vest one year from issuance.
(ii) 40% of shares shall vest upon successful
completion and operation of the Company's
primary product in a major market.
(iii)40% of the shares shall vest when the
Company achieves cumulative sales of $15
million.
As of March 31, 2000 and 1999, an aggregate of
2,561,156 shares and 2,524,500 shares, respectively, of the
Company's common stock have vested, as defined by the
Exchange Offer.
In addition, certain Labyrinth employees, primarily
engaged in research and development activities, were
previously issued stock in Labyrinth in accordance with
their employment agreements, subject to restricted share
agreements. Such awards were subject to a three-year vesting
schedule with one-third vesting each year. Consequently,
these employees were subject to vesting both under the terms
of their restricted share agreements as well as the Exchange
Offer.
F-17
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
In accordance with the provisions of Accounting
Principles Board Opinion ("APB") Opinion No. 16 and the
related interpretations, vesting of the first 20% of the
shares has been accounted for using the purchase method of
accounting. At the time of the Exchange Offer Agreements,
Labyrinth was engaged in ongoing research and development
activities related to the hardware and software for the
RadioCamera and accordingly, this initial vesting of shares
was characterized by the Company as purchase consideration
for in-process research and development.
With respect to employees, the vesting of the
additional 80% of the shares is accounted for as a
compensatory arrangement due to the performance criteria for
vesting and because continued employment with the Company is
necessary for vesting of additional shares to occur.
Accordingly, at the date of achievement of the remaining
performance milestones, the Company will record compensation
expense based upon the number of shares vesting at the
trading price of the Company's stock. With respect to
vesting of the additional 80% of the shares by non-employee
investors, upon the achievement of the vesting milestones
the Company will record additional purchase consideration
for the number of shares that vest at the trading price of
the Company's stock.
During fiscal 2000 the Company recorded in-process
research and development of $30,294 and compensation expense
of $41,291 related to the vesting of 36,353 shares to an
employee-shareholder. During fiscal 1999, the Company
recorded compensation expense of $1,283,594 and in-process
research and development of $893,558 related to the vesting
of 1,741,721 shares to both employee-shareholders and
investors as a result of achievement of the second
milestone. During the year ended March 31, 2000,
F-18
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
two of the employee shareholders left the Company,
forfeiting an aggregate of 413,103 shares (Note 8). As of
March 31, 2000, there are 1,523,941 shares (866,959 held by
employees) remaining to vest upon achievement of the third
and final milestone.
3. Investment in Joint
Venture
In connection with the formation of WTI, pursuant to
the terms and conditions of the Joint Venture Agreement (as
amended), in fiscal year 1999, the Company sold 20,000
shares of Series A Preferred Stock to Anam for $400,000 (see
Note 6). The cash proceeds from this sale were then
contributed by the Company to WTI, while Anam contributed
cash of $800,000. Accordingly, the Company had a 33%
ownership interest in WTI, and Anam had a 67% ownership
interest at March 31, 1999.
In July 1999, WTI sold additional shares of stock to
outside investors at a significant premium to shares
purchased by the Company, decreasing the Company's ownership
to approximately 11% as of March 31, 2000. Based on the
value reflected by the additional capital investment in WTI,
the Company recorded a $331,578 increase in the carrying
amount of the investment, which was credited to Additional
Paid-in Capital. Due to the Company's representation on the
Board of Directors of WTI and its control over the
technology being developed with WTI, the Company accounts
for this investment using the equity method of accounting.
The Company's equity in net losses of WTI aggregated
$390,208 and $341,370 during fiscal years 2000 and 1999,
respectively. However, losses totaling approximately
$192,000 have not been applied as of March 31, 2000 since
the carrying amount of the investment has been reduced to
zero.
The Company has a Joint Development Agreement with WTI.
Under the terms of the contract, WTI will reimburse the
Company for ongoing research and development expenses
associated with the development of the CDMA interface for
the RadioCamera and provide technical support. In addition,
pursuant to the Joint Development Agreement, WTI agreed to
reimburse the Company for $650,000 of research and
development expenses incurred prior to formation of the
joint venture, subject to defined financing and performance
objectives. No reimbursements have been received to date.
The Company has not recorded an accounts receivable for this
reimbursement because management believes that while these
funds are due and payable to the Company, collection is
uncertain. The Company retains sole ownership of the
developed technology. WTI, in return, receives the right to
manufacture and market the CDMA version of the RadioCamera
throughout Korea, Asia and Australia. WTI will be required
to pay the Company a royalty for each CDMA product sold,
exclusive of product sales to the Company, based upon
commercially acceptable terms that have yet to be
determined. The Company will be required to pay WTI a
similar royalty for each product sold by the Company which
has not been manufactured by WTI. The Company also agrees to
use WTI as its preferred supplier of the CDMA version of the
RadioCamera subject to WTI being able to provide the product
on competitive terms.
F-19
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
During fiscal years 2000 and 1999, the Company received
$534,000 and $482,000, respectively, for reimbursements for
ongoing research and development expenses of the product
incurred by the Company unrelated to the reimbursable amount
noted above. These reimbursements have been recorded as a
reduction of research and development expense.
4. Costs and Earnings
in Excess of Billings
This account represents costs and earnings in excess of
billings on a contract with a state government agency to
provide traffic flow information. The total contract amount
is $461,000 and completion is expected during the fiscal
year ended March 31, 2001. The contract price is paid on a
quarterly basis, with the final 10% due upon completion of
the project. The revenues under this contract represented
principally all of the revenues earned in fiscal year 2000.
F-20
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
<TABLE>
<CAPTION>
5. Income Taxes The major components of the deferred tax assets and liabilities are as follows:
March 31, 2000 1999
----------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 6,693,000 $ 3,385,799
Deferred research and development expenses 1,726,000 -
Research and development tax credit carryforwards 966,000 -
Stock-based compensation 687,000 552,646
Other 418,000 58,765
----------------------------------------------------------------------------------------------
Gross deferred tax assets 10,490,000 3,997,210
Deferred tax liabilities:
State income taxes (595,000) (430,869)
----------------------------------------------------------------------------------------------
Net deferred tax assets before valuation allowance 9,895,000 3,566,341
Valuation allowance (9,895,000) (3,566,341)
----------------------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
----------------------------------------------------------------------------------------------
</TABLE>
At March 31, 2000 and 1999, the Company established a
100% valuation allowance for the net deferred tax assets
because management could not determine that it was more
likely than not that the deferred tax assets could be
realized. The change in valuation allowance totaled
$6,328,659 and $1,760,824 for fiscal years 2000 and 1999,
respectively.
As of March 31, 2000, the Company has Federal net
operating loss carryforwards (NOLS) totaling approximately
$17,482,000, which expire at various times through 2020. For
State purposes, the Company has NOLS totaling approximately
$8,472,000, which expire at various times through 2005.
Utilization of a portion of the NOLS may be limited pursuant
to Internal Revenue Code Section 382 due to ownership
changes because they were acquired in connection with the
purchase of Labyrinth. Also, should significant changes to
the existing ownership of the Company occur, the annual
amount of NOL carryforward available for future use would be
further limited.
F-21
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
In addition, the Company has approximately $524,000 and
$442,000 of Federal and State research and development tax
credit carryforwards. The Federal credits expire at various
times through 2020.
A reconciliation of income taxes computed at the
federal statutory tax rate to income tax expense at the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended March 31, 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
Federal statutory income tax (benefit) rate (34.0)% (34.0)%
Increases (decreases) resulting from:
State tax benefit, net of federal liability (11.2)% (3.0)%
Permanent differences (30.7)% 11.0%
Research and development tax credit carryforwards (6.8)% -%
Net change in valuation allowance 81.5% 26.0%
Other 1.2% -%
---------------------------------------------------------------------------------------------
Effective income tax (benefit) rate (-)% (-)%
---------------------------------------------------------------------------------------------
</TABLE>
6. Stockholders'
Equity Series A Preferred Stock and Common Stock Private Placement
During fiscal year 1999, the Company completed a
private offering of its securities, in which the Company
raised gross proceeds of $5,123,284 through the sale of
668,206 shares of common stock and 70,000 shares of the
Company's Series A Preferred Stock (Series A), including
20,000 shares sold to Anam in connection with the formation
of WTI (Note 3). Concurrent with the private offering was
the conversion by debenture holders of the Company of
$2,500,000 principal amount of secured debentures in
exchange for 961,538 shares of common stock. The debentures
were originally issued in May 1998.
F-22
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
In connection with the offering, the Company paid
$150,000 in commissions plus warrants to purchase 110,000
shares of common stock at $4.00 per share, and 110,000
shares of common stock at $5.00 per share, exercisable for
three and five years, respectively. Additionally, the
Company issued options to purchase 150,000 shares of the
Company's common stock at $2.00 per share, exercisable for
five years commencing one year from issuance. The estimated
fair value of these warrants and options was determined in
accordance with SFAS No. 123, and aggregated $651,558. Total
cash and non-cash offering costs of $801,558 have been
netted against gross proceeds received in the private
placement.
The shares of Series A carry a cumulative dividend at
the rate of 6% per annum, payable in cash or shares of
Series A upon the earlier of redemption or conversion to
common shares. Holders of the Series A have the right to
convert each share into shares of common stock at a
conversion price of $2.95 per share, at any time commencing
90 days from issuance. The shares of Series A have no voting
rights and carry a liquidation preference of $20 per share.
The Company may redeem the Series A upon the earlier of
three years from issuance, or when the closing price for the
Company's common stock has been at least $5.90 for any
consecutive 30-day period.
During fiscal year 2000, 50,000 shares of Series A were
converted into 338,982 shares of the Company's common stock.
At March 31, 2000 and 1999, the Company had 20,000 and
70,000 shares, respectively, of Series A stock issued and
outstanding. Total authorized preferred stock is 1,000,000
shares with 300,000 shares being designated as Series A and
60,000 shares being designated as Series B.
The Company recorded dividends of $95,355 for fiscal
year 2000, of which $50,055 was accrued at year end. In
addition, dividends in arrears aggregated approximately
$36,000 at March 31, 2000 and were included in the
calculation of net loss attributable to common shares.
F-23
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
Series B Preferred Stock and Common Stock Private Placement
During fiscal year 1999, the Company initiated a
private placement of up to 50,000 shares of its Series B
Preferred Stock (Series B) at $100 per share, which was
subsequently increased to 60,000 shares during fiscal year
2000, and shares of common stock.
Each share of Series B has a liquidation preference of
$100 per share and is convertible into 100 shares of the
Company's common stock, commencing 90 days after the
offering's closing date. However, if conversion was elected
within 12 months of issuance, each share of Series B
Preferred Stock was convertible into only 67 shares of the
Company's common stock. Further, the Series B shares shall
automatically convert into shares of common stock when the
closing price for the shares of common stock has been at
least $5.00 for 30 consecutive days. Holders of the Series B
vote as a separate voting group, and are entitled to elect
one member to the Company's Board of Directors, until the
earlier of such time as: (i) 50% of the shares of Series B
Preferred Stock have been voluntarily converted into common
stock, and (ii) in the event of a mandatory conversion of
the Series B Preferred Stock, an aggregate of 50% of the
total numbers of shares of common stock issued upon
conversion have been resold. Series B holders shall also
vote on the issuance of any stock that ranks senior to, or
on parity with, the Series B, and on any change in the terms
of the Series B.
During fiscal year 1999, the Company entered into
subscription agreements with three private investors and
sold an aggregate of 50,000 shares of Series B Preferred
Stock at $100 per share. At March 31, 1999, 27,000 of the
Series B shares were issued, and the Company received gross
proceeds of $2,700,000. The remaining 23,000 shares of
Series B were issued and held in escrow at March 31, 1999.
The shares were released from escrow upon shareholder
approval and receipt of $2,300,000 by the Company in April
1999.
During fiscal year 2000 the Company consummated the
sale of an additional 10,000 shares of Series B to private
investors as well as 405,000 shares of common stock to
employees, officers and directors, and consultants. In
F-24
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
connection with the sale of the common stock, the Company
recorded compensation expense for the difference between the
offering price of $1.00 per share, and the trading price of
the Company's stock on the date of sale, totaling $429,000.
The Company issued options to purchase 200,000 shares
of the Company's common stock to consultants for their
services in connection with the offering. These options
expire in 2002 and 2004, have an exercise price of $2.50 per
share and are exercisable one year from issuance. The fair
value of these options totaling approximately $335,000 have
been treated as offering costs. In addition, the Company
awarded 149,425 shares to a private placement agent in
connection with the Series B placement. The total value of
these shares (based upon the trading price at the date of
award) was $243,563 and has been treated as offering costs.
In March 2000, 21,600 shares of Series B Preferred
Stock were converted into 2,160,000 shares of the Company's
common stock.
Of the 60,000 shares of Series B Preferred stock
authorized, 38,400 and 50,000 shares were issued and
outstanding at March 31, 2000 and 1999, respectively.
After March 31, 2000 the remaining 38,400 shares of
Series B Preferred Stock were converted into 3,840,000
shares of common stock.
The conversion price to common stock for the Series B
Preferred stock was $1.00/per share, which was at a discount
from the trading price of the Company's common stock at the
date of investment. Accordingly the Company recorded a
deemed dividend for this beneficial conversion feature
during fiscal 2000 totaling $3,560,000.
7. Stock Options
and
Stock Awards
The Company issues non-qualified common stock options
to its employees, officers and directors, and to various
consultants performing services for the Company. Options
granted to employees generally vest over three or four
years, expire five years from the date of grant or six
months following termination of employment, and have
exercise prices ranging from $2 to $32.00 per share. Options
granted to consultants generally vest immediately upon
performance of the services required, or upon completion of
a funding transaction (where the options are issued to
placement agents), or over three years. The options expire
three-to-five years from the date of grant. Current
outstanding options granted to consultants have exercise
prices ranging from $2 to $8 per share. The following table
summarizes transactions pursuant to the Company's
non-qualified stock option agreements:
F-25
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Per
Share Outstanding
------------------------------------------------ --------------------- -----------------------
<S> <C> <C>
March 31, 1998 $ 2.30 4,754,000
Granted 2.86 852,500
Exercised 2.01 (103,000)
Cancelled 3.39 (553,000)
------------------------------------------------ ------------ -------- -----------------------
March 31, 1999 2.28 4,950,500
Granted 15.55 2,671,500
Exercised 2.29 (719,912)
Cancelled 2.66 (622,217)
------------------------------------------------ ------------ -------- -----------------------
March 31, 2000 $ 7.89 6,279,871
------------------------------------------------ ------------ -------- -----------------------
Weighted Average
Exercise Price Per Outstanding
Share
------------------------------------------------ --------------------- -----------------------
Options Exercisable at:
March 31, 1999 $ 2.24 3,758,317
March 31, 2000 $ 2.37 4,267,705
------------------------------------------------ ------------ -------- -----------------------
</TABLE>
The Company issued 1,982,500 and 379,500 stock
options to employees and officers and directors
during the years ended March 31, 2000 and 1999,
respectively. The Company applies APB Opinion No.
25, "Accounting for Stock issued to Employees,"
and related Interpretations in accounting for
stock options granted to employees and officers
and directors. Under APB 25, the difference
between the exercise price and the market value of
the underlying stock on the date of grant is
recorded as compensation and expensed over the
related vesting period. Total compensation expense
for employee stock options for fiscal years 2000
and 1999 was $586,034 and $4,067, respectively. In
1997, the Company recorded unearned compensation
for the options granted that year and amortized
the expense over the vesting period. As of March
31, 2000, the options granted to employees were
fully amortized. The amortization of unearned
compensation for fiscal years 2000 and 1999 was
$244,958 and $516,480 respectively.
F-26
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
The following table summarizes information about the
Company's stock options outstanding and exercisable at March
31, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------------- ---------------------------
Weighted Weighted
Average Average
Range Of Outstanding At Contractual Exercise Exercisable At Exercise
Exercise Prices March 31, 2000 Period In Years Price March 31, 2000 Price
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2.00 - 3.00 4,204,955 5 2.12 3,690,288 $ 2.08
3.00 - 10.00 748,166 5 4.51 577,417 4.36
10.00 - 25.00 164,250 5 15.58 0 0
25.00 - 32.00 1,162,500 5 29.94 0 0
----------------------------------------------------------------------------------------------
</TABLE>
During fiscal year 2000, the Company awarded 15,000
shares of stock to a public relations firm pursuant to a
consulting agreement. In connection with this issuance, the
Company recorded $60,945 of marketing expense, which is
included in operating expenses.
In December 1997, the Company adopted the Senior
Management Incentive Plan (the "Plan"). The Plan provides
for the issuance of up to an aggregate of 500,000 shares of
the Company's common stock upon exercise of stock options
and other rights to officers, key employees, and
consultants. Awards made pursuant to the Plan will generally
vest over three-year periods. As of March 31, 2000, no stock
options, or other rights, have been issued under the Plan.
Under SFAS 123, "Accounting for Stock Based
Compensation", compensation associated with stock options
issued to consultants is measured based on the estimated
fair value of services received by the Company, or the fair
value of the options issued by the Company, whichever is
more reliably measurable. The Company estimates the fair
value of each stock option at the grant date by using the
Black-Scholes model with the following assumptions used for
grants in 2000 and 1999: no dividend yield for any year;
expected volatility ranging from 90% to 113% and 108% to
132%, generally; risk-free interest rates of approximately
6.5% and 6.0%; and expected lives of 3 to 5 years,
generally.
F-27
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
The Company issued 689,000 and 103,000 options to
consultants and recorded $302,204 and $48,234 in related
compensation expense for fiscal years 2000 and 1999,
respectively.
If the Company had accounted for all options under the
fair value provisions of SFAS 123, the Company's net loss
would have increased to the proforma amounts indicated
below:
<TABLE>
<CAPTION>
Year Ended May 31, 2000 1999
----------------------------------------------------------------------------------------------
Net Loss Attributable to Common Shares
<S> <C> <C>
As reported $ 11,463,897 $ (7,230,277)
Proforma (12,782,076) (9,513,947)
Per share as reported (0.92) (0.83)
Per share pro forma (1.03) (1.08)
----------------------------------------------------------------------------------------------
</TABLE>
8. Commitments
and
Contingencies Operating leases
The Company leases office facilities in California and
Virginia under non-cancelable operating leases. Minimum
monthly rental payments are $23,879 and $19,710, and the
leases expire in December 2003 and March 2002, respectively.
The Virginia lease contains a one-year renewal provision and
provides for a security deposit in the form of a $100,000
letter of credit, which was delivered to the landlord
subsequent to March 31, 2000. Both leases also contain base
rent escalation provisions. The Company also leases 13
rooftop-testing facilities under one-year terms with monthly
payments starting at $400. Subsequent to March 31, 2000, the
Company entered into an additional nine rooftop-testing
leases, with similar terms.
F-28
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
At March 31, 2000, aggregate future minimum lease
payments due under non-cancelable operating leases with
terms greater than one year, are as follows:
<TABLE>
<CAPTION>
Year ending March 31, Amount
---------------------------------------------------------------------------------------------
<S> <C>
2001 $ 520,000
2002 517,500
2003 239,900
---------------------------------------------------------------------------------------------
Total minimum lease payments $ 1,277,400
---------------------------------------------------------------------------------------------
</TABLE>
Rent expense was $314,190 and $273,964 for fiscal years
2000 and 1999, respectively.
Capital leases
The Company leases equipment under non-cancelable
capital leases. The minimum monthly rental payment on
capital leases is $1,464, and the related leases expire in
March 2003. At March 31, 2000, aggregate future minimum
lease payments due under capital leases are as follows:
<TABLE>
<CAPTION>
Year ending March 31, Amount
---------------------------------------------------------------------------------------------
<S> <C>
2001 $ 17,600
2002 17,600
2003 17,600
---------------------------------------------------------------------------------------------
52,800
Less amounts representing interest (8,585)
---------------------------------------------------------------------------------------------
Total future minimum lease payments, net 44,215
Less current portion due within one year (11,059)
---------------------------------------------------------------------------------------------
Long-term portion of obligation under capital leases $ 33,156
---------------------------------------------------------------------------------------------
</TABLE>
Equipment, improvements, and fixtures include equipment
under capital leases of $125,250 and $81,035, and
accumulated amortization of $78,443 and $51,431 as of March
31, 2000 and 1999, respectively.
F-29
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
401(k) Plan
The Company sponsors a 401(k) Plan (the "Plan")
covering eligible employees of the Company. Employees are
eligible to participate in the Plan after completing one
month of service. The Company's contributions to the Plan
are discretionary, and are determined on a plan year-end
basis which is December 31. The Company did not make
contributions to the Plan during fiscal 2000 or 1999.
Employment agreements
The Board of Directors have approved the terms of
employment agreements for officers and key employees as
follows, however, certain terms of the agreements are still
under negotiation with the Company at March 31, 2000:
Chairman of the Board and Chief Executive Officer - The
current five-year employment agreement was extended for a
period of three years, terminating July 2004. Annual salary
set at $275,000 with an annual bonus of up to 40% of base
salary subject to meeting certain board determined
milestones. In addition 750,000 stock options were granted
at an exercise price of $29.94 per share with vesting over
four years, one-fourth per year at each anniversary date of
the agreement. The agreement contains provisions providing
for a two-year non-compete period upon termination of
employment and severance compensation in the amount of three
times the aggregate annual compensation paid during the
preceding calendar year prior to termination or in the event
of a change in control or decrease in his position, as well
as a $1,000,000 life insurance policy, payable to his
designees.
President and Chief Operating Officer - The term of the
agreement is for a period of four years commencing from the
date of employment. Annual salary is set at $250,000 per
year with a yearly bonus of up to 40% of base salary subject
to the Company meeting certain Board determined milestones.
Under the agreement, 400,000 options are granted at an
exercise price of $29.94 per share with vesting over the
term of the agreement at a rate of one-fourth per year at
each anniversary date. In the event certain Board determined
milestones are met or if there is a change in control of the
Company, the option vesting period for 100,000 of the
options would be accelerated. In addition, the Company
granted 100,000 shares of common stock in April 2000 vesting
at a rate of 25,000 shares per year on the anniversary date
of the grant. The agreement also provides for severance
compensation equal to the lesser of six months salary or
salary for the remaining term of the agreement, in the event
of a change in control of the Company or decrease in his
position, as well as immediate vesting of unvested options
that would have vested within the following six months.
F-30
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
General Counsel, Vice President - Business and Market
Development, President - Compass Services Division, Vice
President - Compass Services Division and certain other key
employees. These agreements, generally with three year
terms, provide for individual annual salaries ranging from
$100,000 to $150,000 and provide for individual option
grants ranging from 75,000 shares to 150,000 shares, which
generally vest over the term of the employment agreement on
each anniversary date with acceleration in the event certain
board determined milestones are met. In addition, the
agreements contain severance provision providing salary for
the lesser of six months or the remaining term of the
agreements and immediate vesting of all unvested options, in
the event of a change in control or decrease in
responsibilities with the Company.
Legal Matters
During the year ended March 31, 2000 two former
employees filed suit against the Company seeking lost wages,
stock options and unvested common stock as a result of their
terminations. These former employees were also Labyrinth
employee-shareholders (Note 2). Company management has
estimated the possible claims, including money damages and
stock awards sought, at approximately $1,000,000 to
$2,000,000 (based upon current stock prices). The Company
denies all claims and allegations and intends to vigorously
defend these actions, and has filed counterclaims seeking
unspecified damages. These matters have been submitted to
binding arbitration. Company management believes, after
consultation with legal counsel, that they have meritorious
defenses and will prevail in this matter. Management does
not believe that ultimate resolution of these suits will
have a material effect on the Company's financial condition,
operations or cash flows.
F-31
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
9. Concentration
Of Credit Risk
As of March 31, 2000 and 1999, the Company had amounts
on deposit that exceeded federally insured limits by
$5,311,209 and $5,114,463, respectively. Furthermore, 87% of
the cash on hand is located in one cash account.
10. Related Party
Transactions
One Board member is the managing director of Ocean
Castle Investors, LLC a consultancy firm which the Company
has used for investor relations services. As payment for
those services the Company issued 50,000 options to Ocean
Castle Investors during fiscal 2000. These options have an
exercise price of $2.00 per share and expire during 2002.
The fair value of these options totaling $41,207 has been
included in operating expenses.
This Board member is also the Chief Executive Officer
and Chairman of the Board of Global Technologies, Inc. which
purchased 30,000 shares of the Series B Preferred Stock
during fiscal year 1999, which was subsequently converted to
3,000,000 shares of common stock during fiscal year 2000.
11. Fourth Quarter
Adjustments
The Company recorded certain adjustments totaling
$3,838,113 in the fourth quarter that related to
transactions in earlier quarters in the current fiscal year.
The nature and amounts of such adjustments are as follows:
stock compensation adjustments of $848,268, recognition of
equity in losses of Mantra and the joint venture of
$316,479, depreciation expense of $119,166, deemed dividend
for the Series B Preferred Stock of $2,670,000,
miscellaneous other equity adjustments relating to stock
option exercises and unvested common stock forfeitures
totaling $16,042, and other miscellaneous expense
adjustments totaling ($131,842). The Company has restated
its unaudited quarterly financial statements.
12. Subsequent
Events
In May 2000, the Company authorized 150,000 shares of
Series C Preferred Stock with a $.01 par value. This issue
has a stated liquidation preference of $200 per share plus
unpaid and accrued dividends, and is senior to all common
stock. It is redeemable by the Company at a redemption price
of $200 plus unpaid and accrued dividends at any time upon
the earlier of June 1, 2004 or the date after the closing
price for the Company's Common Stock has been at least $45
for a consecutive thirty-day period. Dividends are
cumulative and payable semi-annually beginning June 1, 2000
at an annual rate of 6.5% per share. Each share of Series C
Preferred Stock will convert into the number of shares of
common stock equal to the liquidation value of $200 divided
by the initial conversion price of $19.03 at any time at the
holder's option. The Series C Preferred Shareholders have
the right to vote on all matters voted on by the
stockholders except the election the Board of Directors.
However, they are allowed to elect one member of the Board
of Directors until at least 50% of the shares of Series C
Preferred Stock have been converted into shares of Common
Stock. The Series C Preferred Stockholders are entitled to
that number of votes equal to the number of shares of Common
Stock that such holder is entitled to receive upon
conversion of such of Series C Preferred Stock.
F-32
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
In June 2000, the Company completed the sale of 112,500
shares of the $.01 par value Series C Preferred Stock at a
price of $200 per share to American Tower Corporation (ATC).
Proceeds of the Series C Preferred Stock net of offering
costs were approximately $21 million.
Concurrent with this private placement the Company
entered into two agreements with ATC and its operating
entities: a master license agreement and services agreement.
Under the terms of the agreements, ATC will provide site
licenses and services in connection with the Company's
network build-out. Under the term of the agreements, the
Company will license a minimum of 1,000 tower facilities at
rates starting at $450 per month for each facility. The
license fee will be increased a rate of 5% per year,
beginning in the third year. If ATC has 10,000 tower
facilities available by December 31, 2000, the Company will
license 150 sites prior to the end of the first year, an
additional 300 sites prior to the end of the second year and
an additional 550 sites prior to the end of the third year.
This commitment will increase in the event that the Company
meets certain market milestones and ATC satisfies certain
tower building or acquisition milestones. The term of the
agreement will be effective for three years. The term of
each site license will continue for a five-year period and
will be extended for additional five-year periods unless
notified by the Company. Under the services agreement, ATC
will provide network build-out services, including, radio
frequency design, radio frequency engineering, site
identification, site acquisition and development, site
zoning and permitting, site construction and installment
management, and component purchases.
F-33
<PAGE>
U.S. Wireless Corporation and Subsidiary
Notes to Financial Statements
Subsequent to March 31, 2000, the Company also entered
into agreements with two manufacturer's to build
RadioCameras and other component parts. Total commitments
under these agreements total approximately $1,100,000.
F-34
