AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1997
REGISTRATION NO. _______________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
Registration Statement Under The Securities Act of 1933
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WORLD WIRELESS COMMUNICATIONS, INC.
(Name of Small Business Issuer in Its Charter)
Nevada 8911 87-0549700
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
150 Wright Brothers Drive, Suite 560
Salt Lake City, Utah 84116
Telephone: 801/575-6600
Facsimile: 801/576-6621
David D. Singer, CEO and President
150 Wright Brothers Drive, Suite 560
Salt Lake City, Utah 84116
Telephone: 801/575-6600
Facsimile: 801/535-2450
(Name, address and telephone number of agent for service)
---------------------
Copies to:
Joseph Chicco, Esquire
Connolly Epstein Chicco Foxman
Engelmyer & Ewing
1515 Market Street - 9th Floor
Philadelphia, PA 19102
Telephone: 215/851-8410
Facsimile: 215/851-8383
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CALCULATION OF REGISTRATION FEE
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Title of Each
Class of Proposed Maximum Proposed Maximum Amount of
Securities to Amount to be Offering Price Aggregate Offer- Registration
be Registered Registered Per Share ing Price Fee
- --------------------------------------------------------------------------------------------------
Common Stock, $.001
par value ...... 3,809,031(1) $ 11.625(2) $ 44,279,985(2) $ 13,417(2)
- --------------------------------------------------------------------------------------------------
Common Stock, $.001
par value ...... 190,969(3) $ 2.00(4) $ 381,532 (5) $ 116.00
- --------------------------------------------------------------------------------------------------
Total ......... 4,000,000 $ 13,533(2)
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(1) These shares are being offered by certain stockholders of the Company.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933. Pursuant to Rule
457(c), the proposed maximum offering price per share and registration fee
are based upon the mean between the bid ($11.25) and asked ($12.00) prices
of the Registrant's Common Stock on October 17, 1997, as reported on the OTC
Electronic Bulletin Board.
(3) These shares are issuable upon the exercise of outstanding stock options
issued in connection with an acquisition.
(4) 223 shares are issuable at an option exercise price of $0.18. The remaining
shares are issuable at an exercise price of $2.00.
(5) Based upon the exercise price of options.
CROSS REFERENCE SHEET
Pursuant to Item 502(f) of Regulation S-B
Between Registration Statement and Form of Prospectus
Item Number and Heading Caption in Prospectus
- ----------------------- ---------------------
1. Front of Registration Statement and Outside
Front Cover of Prospectus .......................... Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus ......................................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk Factors ............... Prospectus Summary -- The Company, -- Risk
Factors, -- Summary Financial Information; Risk
Factors
4. Use of Proceeds .................................... Use of Proceeds
5. Determination of Offering Price ..................... Not Applicable
6. Dilution .......................................... Dilution
7. Selling Security Holders ........................... Principal and Selling Stockholders
8. Plan of Distribution ................................. Inside Front Cover; Plan of Distribution
9. Legal Proceedings .................................... Business of the Company -- Legal Proceedings
10. Directors, Executive Officers, Promoters and
Control Persons ...................................... Management
11. Security Ownership of Certain Beneficial Owners
and Management ..................................... Management; Principal and Selling Stockholders
12. Description of Securities ........................... Description of Securities
13. Interests of Named Experts and Counsel ............... Not Applicable
14. Disclosure of Commission Position on
Indemnification ...................................... Description of Securities
15. Organization With Last Five Years .................. Certain Relationships and Related Transactions
16. Description of Business .............................. Business of the Company
17. Management's Discussion and Analysis or Plan ......... Management's Discussion and Analysis
18. Description of Property .............................. Business of the Company -- Offices and Other
Facilities
19. Certain Relationships and Related Transactions ...... Organization and Capital Transactions
20. Market for Common Equity and Related
Stockholder Matters ................................ Outside Front Cover of Prospectus; Risk Factors;
Market Information
21. Executive Compensation .............................. Management -- Executive Compensation
22. Financial Statements ................................. Financial Statements
23. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .............. Not Applicable
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS -- SUBJECT TO COMPLETION, DATED OCTOBER 23, 1997
WORLD WIRELESS COMMUNICATIONS, INC.
4,000,000 Shares
Common Stock, $.001 Par Value
This Prospectus relates to the public offering of 3,809,031 outstanding
shares of Common Stock (the "Outstanding Shares") of World Wireless
Communications, Inc. (the "Company") by certain shareholders of the Company (the
"Selling Shareholders"). This Prospectus also relates to the offer and sale by
the Company of up to 190,969 shares of Common Stock (the "Option Shares")
presently reserved for issuance upon the exercise of outstanding stock options
issued in connection with the Company's acquisition of Digital Radio
Communications Corporation in February 1997, and may be used by persons who
acquire Option Shares in the resale of such Option Shares. To that extent, such
persons are included within the term "Selling Shareholders" as used herein. The
Outstanding Shares and the Option Shares, to the extent offered for resale by
persons acquiring them from the Company, are hereinafter referred to,
collectively, as the "Shares".
The Shares may be offered and sold by the Selling Shareholders from time to
time as market conditions permit in transactions in the over-the-counter market,
in negotiated transactions, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, at
prices relating to prevailing market prices or at negotiated prices. The Selling
Shareholders may effect such transactions to or through broker/dealers, and such
broker/dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Shareholders and/or the purchasers of the Shares
for whom such broker/dealers may act as agents or to whom they sell as
principals, or both (which compensation as to a particular broker/dealer might
be in excess of customary commissions). To the extent required, information
regarding the Shares to be offered and sold, the names of the Selling
Shareholders, the public offering price, the names of any such broker/dealer or
agent and any applicable commissions or discount with respect to any particular
offer is set forth herein or will be set forth in an accompanying Prospectus
supplement. See "Plan of Distribution".
None of the proceeds from the sale of the Outstanding Shares by the Selling
Shareholders will be received by the Company. Proceeds, if any, to the Company
from the sale of Option Shares by the Company will be a maximum of $381,532
based upon an option exercise price of $0.18 with respect to 223 Option Shares,
and $2.00 with respect to the remaining 190,746 Option Shares. The expenses of
registering all Shares, estimated to be approximately $150,000, will be borne by
the Company.
THE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. PURCHASERS OF
SHARES SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER "RISK FACTORS"
BEGINNING AT PAGE 5, AND "DILUTION".
The Company's Common Stock is traded "over-the-counter". Dealer "bid" and
"asked" prices for the Common Stock are quoted on the OTC Electronic Bulletin
Board maintained by the National Association of Securities Dealers, Inc. (the
"OTC Bulletin Board") under the symbol "WWWC". On October 17, 1997, the closing
bid and asked prices for the Common Stock were $11.25 and $12.00, respectively.
See "Market Information". The Company intends to apply to have the Common Stock
approved for quotation on the SmallCap Market of The Nasdaq Stock Market, Inc.
under the symbol "WWWC" following the date of this Prospectus.
The date of this Prospectus is ------------ , 1997.
PROSPECTUS SUMMARY
This summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
references to and information concerning "the Company" includes World Wireless
Communications, Inc. and its wholly-owned subsidiaries, and historical
information, except for the financial statements, presents the operations of the
Company and its subsidiaries on a combined basis, unless otherwise indicated.
The Company
World Wireless Communications, Inc. (the "Company") and its subsidiaries
design, develop and manufacture wired and wireless communications products,
systems and technology, and provide contract manufacturing services to the
electronics industry. The Company's executive offices are located at 150 Wright
Brothers Drive, Suite 560, Salt Lake City, Utah 84116, and its telephone number
at that address is 801/575-6600.
The Company was incorporated in Nevada on November 15, 1995, to acquire
from an affiliated company certain assets which previously had been used in the
business of Micro Security, Inc., a publicly traded company which had undergone
reorganization, and eventually was liquidated, in bankruptcy court. The
Company's acquisition of these assets, which related to a computer hardware
device, the SecuriKey(R), that is used to prevent unauthorized duplication of
software, was completed in March 1996. Until the last quarter of 1996, sales of
this device represented a substantial majority of the Company's revenues.
In October 1996, the Company began offering contract manufacturing services
through a newly-formed subsidiary, ECA Electronic Contract Assembly, Inc.
("ECA"). On February 12, 1997, a majority of the shareholders of Digital Radio
Communications Corporation ("DRCC") accepted an offer to merge DRCC into a
newly-formed subsidiary of the Company. Upon consummation of this merger, DRCC
shareholders exchanged each of their common shares for 0.557349 shares of the
Company's Common Stock, which resulted in the Company issuing 1,798,100 shares,
and options to purchase an additional 201,900 shares at a weighted-average price
of $1.90 per share. Since its acquisition of DRCC, the Company's strategy has
been to concentrate on the development, manufacture and sale of proprietary
wireless technology and products.
In the first half of 1997, the Company realized revenues from contract
design and development services (43%), contract manufacturing and assembly
services (37%), the sale of certain wireless technology (15%) and sales of
SecuriKey(R) related products (5%). The Company's first sales of proprietary
wireless products occurred in the third quarter of this year.
The Offering
The Shares being offered hereby consist of 3,809,031 Outstanding Shares
which were acquired by the Selling Shareholders or their predecessors in
interest either in direct private placements by the Company, in exchange for
shares of DRCC in connection with the Company's acquisition of DRCC in February
1997, or upon the exercise of options granted in connection with the DRCC
acquisition in exchange for previously outstanding DRCC options (hereinafter
sometimes referred to as "DRCC Conversion Options"), and 190,969 shares reserved
for issuance upon the exercise of outstanding DRCC Conversion Options. The
Outstanding Shares are being offered and will be sold for the accounts of
Selling Shareholders, and the Company will not receive any proceeds from sales
of the Outstanding Shares. All expenses of registering the Shares will be paid
by the Company. See "Plan of Distribution".
3
Summary Consolidated Historical and Pro Forma Financial Information
The following table sets forth summary historical financial data of the
Company for the period indicated and summary pro forma financial data giving
effect to the acquisition of DRCC for the period indicated. This information
should be read in conjunction with the consolidated financial statements of the
Company and notes thereto and the pro forma consolidated financial statements
and notes thereto contained elsewhere in this Prospectus.
Historical Operating Data:
Cumulative
Six Months From Incep-
Ended June 30, Year Ended December 31, tion Through
1997 1996 1996 1995 June 30, 1997
-------------- ------------ ------------ ------------ --------------
Sales ..................... $ 1,875,494 $ 339,283 $ 618,505 $ 426,825 $ 2,920,824
Gross profit ............... 805,397 20,179 (43,679) (189,469) 951,187
Net loss .................. (1,562,697) (288,049) (899,924) (88,668) (2,551,289)
Loss per common share ...... $ (0.19) $ (0.09) $ (0.25) $ (0.10) $ (0.30)
Shares used in per share
calculations ............ 8,421,370 3,049,484 3,601,750 854,640 8,421,370
Pro forma Operating Data:
For the Six For the Year
Months Ended Ended December
June 30, 1997 31, 1996
--------------- ---------------
Sales ..................... $ 2,010,079 $ 2,004,983
Gross profit ............... 851,777 336,433
Net loss .................. (1,790,337) (2,826,035)
Loss per common share ...... $ (0.21) $ (0.52)
Shares used in per share
calculations ............ 8,330,116 5,399,850
Balance Sheet Data:
June 30, 1997
--------------
Working capital ............ $ 1,050,582
Total assets ............... 6,654,713
Long-term liabilities ...... 600,549
Stockholders' equity ...... 5,150,784
Risk Factors
Purchase of the Company's Common Stock involves a high degree of risk.
Persons considering a purchase of Shares should carefully consider all of the
information contained in this Prospectus and, in particular, the facts set forth
under the caption "Risk Factors" below.
4
RISK FACTORS
Prospective investors should carefully consider all of the information
contained in this Prospectus before deciding whether to purchase Shares and, in
particular, the factors set forth below. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by the
use of forward-looking terminology such as "believes", "expects", "may",
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology or by discussions of strategy. No assurance can be given
that the future results covered by the forward-looking statements will be
achieved. The following factors include, among other things, cautionary
statements with respect to certain forward-looking statements, including
statements of certain risks and uncertainties that could cause actual results to
vary materially from the future results referred to in such forward-looking
statements.
Limited Operating History; History of Operating Losses. The Company has had
a limited operating history, and has a cumulative net operating deficit of
approximately $2,551,289 from inception through June 30, 1997. In the first six
months of 1997, the Company incurred a net operating loss, on a pro forma basis,
of $1,790,337, and the Company anticipates reporting a loss from operations in
the second half of the year.
As a new enterprise, the Company is likely to remain subject to risks and
occurrences which management is unable to predict with any degree of certainty,
and for which it is unable to fully prepare. While the Company expects its
revenues to increase as new products are introduced and contract design and
development services are expanded, significant additional expenses will be
incurred in developing and marketing its products and in providing its contract
services. Growth in the Company's business could be expected to be accompanied
by strains on the Company's administrative, financial and operating resources.
The Company's ability to manage growth effectively will require it to continue
to expand and improve its operational, financial and management controls, and to
train, motivate and manage its employees. In any event, there is no assurance
that the Company will achieve revenue growth sufficient to offset anticipated
increases in costs, nor is there any assurance that the Company will be
successful in overcoming problems associated with unforeseen costs and
competition, technical problems associated with new products and technology, and
other risks which all business ventures face and which could be especially acute
for a relatively new company attempting to establish and expand its business in
a highly competitive industry characterized by rapid technological development
and change.
For all of the foregoing reasons, as well as the factors described below,
any purchase of Shares should be considered a speculative investment involving a
significant risk of loss.
Need for Additional Capital. The Company has been dependent on equity
funding from outside investors to allow it to conduct operations, and may
require additional funding in the future. Unless the Company is able to continue
to raise funds through such equity or other financing until such time, if ever,
as it is able to operate profitability, the Company could be required to curtail
or cease operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations". There is no assurance that the Company
will be able to obtain additional financing which may be required in the future,
or as to the terms of any financing which is obtained. In this regard,
prospective purchasers of Shares should note that as recently as August 1997,
the Company sold 500,000 shares of "restricted" (i.e., unregistered) Common
Stock at a price of $2.00 per share, which was substantially below the "bid" and
"asked" prices quoted for the Common Stock in the over-the-counter market at the
time of such sale. See "Organizational and Other Transactions -- Principal
Capital Transactions".
Dependence on New Products and Technology. A substantial majority of the
Company's revenues through June 30, 1997, on a pro-forma consolidated basis,
have resulted from contract manufacturing services and design and development
engineering services performed for other companies. Revenues from product sales
during this period (approximately 5% of total sales) were derived from a
hardware device, the SecuriKey(R), which is not in a product category which fits
the Company's present long term strategy of focusing on technology and products
relating to wireless transmission of voice, video and data. A substantial
portion of the Company's research, development, engineering and marketing effort
in the first half of 1997 was devoted to the development of proprietary wireless
products, including a line of products that are designed for use in short and
long distance telemetry, remote data collection, wireless security and similar
applications. The first commercial sales of products in this line occurred in
September 1997. The Company's investment in, and expectations for,
5
this product line are large relative to the Company's existing resources and
prior revenues, but there is no assurance that the Company will be able to
recoup its investment or generate any profits from this line of products, or any
of its existing or proposed products. See "Business -- Existing Products" and
"-- Proposed Products". In particular, prospective purchasers of Shares should
understand that total sales of the products described under the caption
"Business -- Existing Products" have been very limited to date, and that the
products described under the caption "Business -- Proposed Products" are still
in development and testing stages and are not available for sale commercially.
The Company has received only limited indications that any of its proposed
products will be commercially acceptable and, even if one or more of such
products are offered for sale and achieve a degree of commercial success, there
is no assurance that this will result in the Company operating profitably.
Major Customers; Non-Recurring Sales. For the year ended December 31, 1996,
on a pro forma basis, 52.8% of the sales of the Company, or $1,058,398, were to
three customers, each of which accounted for 10% or more of total sales. In the
six month period ended June 30, 1997, also on a pro forma basis, $1,164,000
(57.9%) of sales were to Kyushu Matsushita Electric Co., including a technology
transfer ($300,000) and contract design and development services ($864,000),
both of which are non-recurring items. Sales to Alton Dean, Inc., for contract
manufacturing services, represented an additional 12.7% of sales ($255,322) in
the first half of 1997. See "Business -- Contract Design and Development". The
loss of either of these customers or failure to replace contract work which is
being completed with new contract work from these or other customers would have
a material impact on the Company's business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Competition. The market for wireless communications products is intensely
competitive, with many providers who have greater technical, financial and
marketing resources than the Company, and certain of whom are among the premier,
"high tech" leaders of the industrial world. The Company's strategy includes
entering into license agreements or other forms of "strategic partnership"
arrangements with larger companies in order to exploit their strengths, rather
than to confront them in the marketplace. There is no assurance that this
strategy will succeed, or that the Company will be able to overcome the
competitive disadvantages it faces as a small company with limited capital and
without a history of successfully developing and marketing proprietary wireless
technology, devices or products. In addition to present "mainstream"
competitors, the Company anticipates that numerous potential competitors with
high levels of technical and financial resources are, like the Company,
constantly searching for market niches and specialty products in the
communications industry. See "Business of the Company -- Competition".
Possible Loss of Services of Officers and Key Employees. The ability of the
Company to successfully conduct its business affairs is dependent upon the
capabilities of current officers and key employees. At the present time,
however, only one executive officer and/or key employee of the Company, Philip
Bunker, who is President of DRCC and a director of the Company, has a fixed term
employment agreement with the Company, and his contract is scheduled to expire
on November 1, 1997. If the Company is unable to retain the services of its key
executive and technical employees, its operations could be adversely affected.
There is no assurance that the Company will retain the services of its key
employees, or, if so, as to the terms on which it may be able to do so. The
Company does not presently carry any "key man" insurance on any employee, and
none of its present executive officers or key employees is subject to any
"restrictive covenants" that would prevent such employee from joining a
competitor after leaving the Company's employ. See "Management -- Directors and
Executive Officers".
Intellectual Property Rights. The Company is the assignee of a patent
application on technology relating to, among other technical matters, a method
and apparatus for de-modulating "spread spectrum" wireless signals. At the
present time, the Company has no other patent applications pending, and owns no
patents. The Company uses confidentiality agreements with its customers and
other parties to protect trade secrets and other proprietary data, and claims
copyrights on circuit boards and software used in its products. The use of such
agreements and other measures employed by the Company to protect sensitive
information may not be sufficient, however, to prevent other persons from
obtaining and using the Company's technology or developing other technology
which embodies the companies' technology.
To the extent the Company does not have patents on its products, there can
be no assurance that another company will not replicate one or more of the
Company's products, nor is there any assurance that any patents
6
that are obtained will provide meaningful protection or significant competitive
advantages over competing products. There can be no assurance that any patent
rights that the Company has or may obtain in the future will provide the Company
with competitive advantages or will not be challenged by other companies or
individuals. Furthermore, there can be no assurance that other companies or
individuals will not independently develop similar products, duplicate the
Company's products or design around any of the Company's patents.
The Company's spread spectrum de-modulation technology patent application
is the subject of litigation now pending in the State of Utah, Salt Lake County
Court, in which a former joint venturer with the Company has claimed, among
other things, an ownership interest in the technology. See "Business -- Legal
Proceedings".
The Company presently holds a number of trademarks and/or services marks
relating to the SecuriKey(R) product line. The Company intends to pursue
registration of trademarks associated with its key products as they are
developed and become available for commercial use, and to protect its legal
rights concerning the use of its trademarks. The Company intends to rely upon
common law trademark rights to protect any unregistered trademarks. Common law
trademark rights, however, do not provide the Company with the same level of
protection afforded by a United States federal registration of a trademark. For
example, unlike a registered trademark, common law trademark rights are limited
to the geographic area in which the trademark is actually used.
Product Liability and Other Possible Future Claims. The Company may be
subject to substantial product liability costs if claims arise out of problems
associated with the products which it manufactures. The Company is insured
against such contingencies, but there can be no assurance that the coverage
provided by such policies ($1 million per occurrence, $2 million total) would be
adequate to cover all potential product liability claims and costs in the
future.
In addition, in providing its contract design and development services, the
Company typically is required to warrant that the technology that it develops
under contract will not infringe upon the intellectual property rights of third
parties, and to indemnify its customers from any loss or exposure arising from
any such infringement. Since the technology developed under the Company's design
and development contracts could be incorporated into products which are mass
produced and distributed, the potential loss in the event of an infringement
could be very high, and the Company has no insurance which would cover any such
loss or damages. The Company has not had an indemnification claim made against
it under any of these contracts, but there is no assurance that such a claim
will not be made in the future.
Government Regulations. The Company's wireless communications products are
subject to compliance with regulations pertaining to transmission as adopted by
the Federal Communications Commission ("FCC"). Currently, the Company's product
line operates under Part 15 of the FCC Telecommunications Code, which allows
companies to transmit data without a license in certain radio frequencies, or an
exemption granted by the FCC. None of the products that the Company presently
offers or is in the process of developing would require a user of the product to
obtain a license from the FCC. The availability of Part 15 to wireless
communications products requires that the product undergo testing by an
independent laboratory for such criteria as non-interference with other
communications products, physical antennae hook-up, non-intentional radiation
and transmission power, a process that can be expected to take 30 to 60 days and
cost approximately $20,000. At the present time, none of the Company's radios
has been tested by an independent laboratory for compliance with Part 15. See
"Business -- Regulation".
Possible Delisting -- Penny Stock Regulations. At the present time, the
Company's Common Stock is not listed on The Nasdaq Stock Market, Inc. or on any
exchange. Although dealer prices for the Company's Common Stock are listed on
the OTC Bulletin Board, trading has been limited since such quotations first
appeared in October 1996. See "Market Information". The Company intends to apply
to have its Common Stock approved for quotation on the Nasdaq SmallCap Market
effective on or about the date of this Prospectus. There is no assurance,
however, that approval will be received or, if received, that the Company will
meet the requirements for continued listing on the SmallCap Market. Under Nasdaq
rules, in order to maintain a listing on the Nasdaq SmallCap Market, a company
must have, among other things, either $2,000,000 in net tangible assets, a
market capitalization of $35,000,000 or more, or $500,000 net income in its last
fiscal year or two of its last three fiscal years. In addition, the listed
security must have a minimum bid price of $1.00 per share. Further, Nasdaq
reserves the right to withdraw or terminate a listing on the Nasdaq SmallCap
Market at any time and for any reason in its discretion. If the Company were
unable to obtain or to maintain a listing on the Nasdaq SmallCap Market,
quotations, if any, for "bid" and "asked" prices of the Common Stock would in
the "pink sheets"
7
published by the National Quotation Bureau, Inc. or on the NASD's OTC Electronic
Bulletin Board where the Common Stock has been quoted prior to the date of this
Prospectus. In such event, an investor could find it more difficult to dispose
of or to obtain accurate quotations of prices for the Common Stock than would be
the case if the Common Stock were quoted on the Nasdaq SmallCap Market.
Irrespective of whether or not the Common Stock is included in the Nasdaq
system, there is no assurance that the public market for the Common Stock will
become more active or liquid in the future. In that regard, prospective
purchasers should consider that this offering is being made without underwriting
arrangements typically found in an initial public offering of securities. Such
arrangements generally provide for the issuer of the securities to sell the
securities to an underwriter which, in turn, sells the securities to its
customers and other members of the public at a fixed offering price, with the
result that the underwriter has a continuing interest in the market for such
securities following the offering.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a "penny stock". Commission regulations generally
define a penny stock to be an equity security that has a market price of less
than $5.00 per share and is not listed on The Nasdaq Stock Market, Inc. or a
major stock exchange. The regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith. The Company now
anticipates that, following the offering, the Common Stock will meet one or both
of the principal exceptions to "penny stock" classification, i.e., the
exceptions applicable to Nasdaq-listed securities and to securities with a bid
price in excess of $5.00. If the Common Stock does not meet an exception to
these regulations, i.e., if the Common Stock should fail to qualify for
quotation on Nasdaq and fail to maintain a price of $5.00 or more per share, the
Company's securities would become subject to Rule 15g-9 promulgated under the
Securities Exchange Act of 1934. Under such rule, broker/dealers who recommend
such securities to persons other than established customers and accredited
investors (generally, individuals with net worth in excess of $1,000,000 or
annual incomes exceeding $200,000 or $300,000 together with their spouses) must
take a special written suitability determination for the purchaser and receive
the purchaser's written agreement to a transaction prior to sale. In such event,
the market liquidity for the Shares could be adversely affected because the
regulations on penny stocks could limit the ability of broker/dealers to sell
the Company's securities and thus the ability of purchasers of the Company's
securities to sell their securities in the secondary market.
Market Overhang. As of October 15, 1997, the Company had 10,035,518 shares
of Common Stock outstanding, of which approximately 7,489,758 shares, or
approximately 75% of the total outstanding, were "restricted securities" which
had not been registered with the Securities and Exchange Commission or any state
securities agency and as to which future sales were restricted. The remaining
shares of the Company's outstanding Common Stock are not restricted and, with
the exception of 710,000 shares owned by persons who may be deemed "affiliates"
of the Company, are immediately saleable, without restriction, by their owners
and constitute the "public float" for the Common Stock. The sale of Shares
offered hereby will increase, and if all Shares were sold would increase
dramatically (i.e., from 1,835,760 shares to 5,038,316 shares), the "public
float" of Common Stock, i.e., the number of shares available for immediate and
unrestricted resale. A substantial increase in the public float could negatively
impact the market price for the Company's Common Stock.
In addition to the possible sale of shares in this offering, a substantial
portion of the Company's restricted securities are saleable under Rule 144,
promulgated by the Securities Exchange Commission under the Securities Act of
1933, upon the seller's compliance with the holding period, manner of sale and
other conditions and limitations of that Rule. Rule 144 also requires that
specified information concerning the Company must be available at the time any
such sale is made. Following this offering, the Company will be subject to
reporting requirements of the Securities Exchange Act of 1934, compliance with
which also will satisfy Rule 144 "public information" requirements. See "Market
Information -- Shares Saleable Under Rule 144".
Increases in Operating Costs: Availability of Supplies. An increase in
operating costs could adversely affect the ability of the Company to achieve
profitability. Factors such as inflation, increased labor and employee benefit
costs and the availability of qualified management and hourly employees may
adversely affect operation costs. Many of these costs are beyond the control of
the Company. In addition, the dependence on frequent deliveries of materials,
such as electronic component pieces, could subject the Company to shortages or
interruptions, which could adversely affect its business. See "Business -- Raw
Material and Supplies".
8
NASD Inquiry. On August 5, 1997, the Company was notified by NASD
Regulation, Inc., the market regulation arm of the National Association of
Securities Dealers, Inc. (the "NASD"), that it was reviewing trading activity in
the Company's Common Stock. Based upon the information which NASD Regulation has
requested, and conversations between the Company's counsel and NASD Regulation's
representatives, the Company believes that the NASD review relates to trading in
the Company's Common Stock in the first quarter of 1997, and that the principal
purpose of the review is to determine whether any of such trading involved
purchases or sales of Common Stock by persons who, at that time, had material,
non-public information. The Company is cooperating with NASD Regulation in its
inquiry. At this point, the Company cannot determine what effect, if any, this
inquiry will have on the Company or the market for its Common Stock.
Control of DRCC's Board of Directors under Shareholders Agreement. In
connection with its acquisition of DRCC, the Company and DRCC entered into a
Shareholders Agreement with Philip Bunker, Jeffrey G. Ballif and William E.
Chipman, Sr., who at that time were executive officers, substantial shareholders
and, in the case of Messrs. Chipman and Bunker, directors of DRCC. That
agreement provided, among other things, for the registration under the Act of
all shares of Common Stock issued to former DRCC shareholders, or issuable upon
exercise of DRCC Conversion Options which were granted, in connection with the
DRCC acquisition. That registration is being effected by the registration
statement of which this Prospectus is a part. The Shareholders Agreement also
provided for the election of David Singer and Messrs. Bunker and Chipman (or,
alternatively, of designees selected by Messrs. Bunker and Chipman) as directors
of DRCC, to constitute a majority of its Board of Directors, so long as the
Company owns any capital stock of DRCC. As a result of this Shareholders
Agreement, control of the composition of the Board of Directors of DRCC is, for
all practical purposes, permanently subject to the control of Messrs. Bunker or
Chipman, and the Company's Board of Directors, elected by its stockholders, has
no ability to control the composition of DRCC's Board of Directors,
notwithstanding the fact that DRCC is a wholly-owned subsidiary of the Company.
Limited Liability of Officers and Directors. The Articles of Incorporation
and the Bylaws of the Company limit a director's personal liability to the
Company or its shareholders for monetary damages for any actions taken or any
failure to take action to the fullest extent permitted by Nevada law or any
other applicable law as now in effect or as it may hereafter be amended.
Furthermore, the Company is obligated under its Articles of Incorporation and
Bylaws to indemnify its directors, officers' employees, agents or fiduciaries to
the fullest extent permitted or required by Nevada law. Each of these provisions
could reduce the legal remedies available to the Company and its shareholders
against such individuals. See "Disclosure of Commission Position on
Indemnification for Securities Act Liabilities".
Future Issuance of Stock by the Company. The Company has 50,000,000 shares
of Common Stock authorized, of which 10,035,518 shares were outstanding at
October 15, 1997, and an additional 598,969 shares have been reserved for
issuance upon the exercise of outstanding options. The Company also has
authorized 1,000,000 shares of Preferred Stock, none of which are presently
outstanding. Although the Board of Directors of the Company has no present
intention to do so, it has the authority, without action by the shareholders, to
issue authorized and unissued shares of Common Stock or Preferred Stock.
Preferred Stock, if and when issued, could have rights superior to those of the
Common Stock, particularly in regard to voting, the payment of dividends and
upon liquidation of the Company. See "Description of Capital Stock".
Factors Inhibiting Takeover. Certain provisions of the Company's Articles
of Incorporation and the Nevada General Corporation Law may be deemed to have
"anti-takeover" effects in that they could delay, defer or prevent a takeover
attempt that a shareholder might consider to be in the Company's or the
shareholder's best interests. For example, the ability of the Company's Board of
Directors to designate series of Preferred Stock without any vote or action by
the Company's stockholders could be considered an "anti-takeover" device, since
the terms of Preferred Stock which might be issued could contain terms which
could contain special voting rights or increase the costs of acquiring the
Company. See "Description of Capital Stock -- Anti-Takeover Provisions".
9
DILUTION
At June 30, 1997, after giving retroactive effect to (a) the sale of
500,000 shares of Common Stock at a price of $2.00 per share in August 1997 and
(b) the sale after June 30, 1997, of 10,931 shares of Common Stock at prices
from $.09 to $2.00 per share upon the exercise of DRCC Conversion Options, but
to no other post June 30, 1997 transactions, the net tangible book value of the
Company's Common Stock was approximately $.26 per share. To the extent that a
purchaser pays more than $0.26 per share of Common Stock, the purchaser will
incur dilution in the net tangible book value of his/her investment. For
example, if Shares were purchased at the "asked" price quoted for the Company's
Common Stock on October 17, 1997 (i.e., $12.00), the dilution in the purchaser's
investment would be approximately $11.74 or approximately 98%. Similarly,
purchasers of Option Shares from the Company will incur dilution in their
investment equal to the difference between their DRCC Conversion Option exercise
price and $0.26 per share.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Outstanding
Shares. If all Option Shares are sold, the Company will receive total proceeds
of $381,532 (average price of $2.00 per share). Such proceeds, if received,
would be added to the Company's general corporate funds.
10
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF
WORLD WIRELESS COMMUNICATIONS, INC.
AND PRO FORMA FINANCIAL DATA
The following table sets forth selected consolidated historical financial
data of the Company and selected consolidated pro forma financial data giving
effect to the acquisition of DRCC. The selected historical financial data for
the years ended December 31, 1996 and 1995 are derived from audited consolidated
financial statements of the Company. The historical data presented for the six
months ended June 30, 1997 and 1996 are derived from unaudited financial
statements and include, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the data for the period. The results of operations for the six months ended June
30, 1997 are not necessarily indicative of the results to be expected for the
entire year. This data should be read in conjunction with the consolidated
financial statements and notes thereto and other financial information which are
included elsewhere in this Prospectus.
The unaudited pro forma consolidated financial statements present the
acquisition of DRCC by the Company using the purchase method of accounting as if
the acquisition had been consummated at January 1, 1996. Such information is
derived from, and should be read in conjunction with, the separate historical
consolidated financial statements of the Company and DRCC and notes thereto and
other financial information appearing elsewhere herein. The unaudited pro forma
consolidated statements of operations have been included for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have been obtained if the acquisition had been consummated
at January 1, 1996 or the results of operations which may be obtained in the
future. In addition, future results may vary significantly from the results
reflected in these pro forma statements of operations due to normal market and
industry activities.
Historical Operating Data:
Six Months Year Ended Cumulative
Ended June 30, December 31, From Inception
---------------------------------- -------------------------------- Through June
1997 1996 1996 1995 30,1997
---------------- --------------- --------------- -------------- ---------------
Sales ........................... $ 1,875,494 $ 339,283 $ 618,505 $ 426,825 $ 2,920,824
Cost of sales ..................... 1,070,097 319,104 662,184 237,356 1,969,637
------------ ----------- ----------- ---------- ------------
Gross profit ..................... 805,397 20,179 (43,679) 189,469 951,187
Research and development ......... 588,938 -- 92,932 -- 681,870
General and administrative ...... 1,476,596 294,992 732,636 278,137 2,487,369
Amortization of goodwill ......... 279,963 -- -- -- 279,963
Interest expense .................. 22,597 13,236 30,677 -- 53,274
------------ ----------- ----------- ---------- ------------
Total expenses .................. 2,368,094 308,228 856,245 278,137 3,502,476
------------ ----------- ----------- ---------- ------------
Net loss ........................ $ (1,562,697) $ (288,049) $ (899,924) $ (88,668) $ (2,551,289)
============ =========== =========== ========== ============
Loss per common share ............ $ (0.19) $ (0.09) $ (0.25) $ (0.10) $ (0.30)
============ =========== =========== ========== ============
Shares used in per share
calculations .................. 8,421,370 3,049,484 3,601,750 854,640 8,421,370
============ =========== =========== ========== ============
11
Pro Forma Operating Data:
For the Six For the
Months Ended Year Ended
June 30, December 31,
1997 1996
-------------- --------------
Sales ....................................... $ 2,010,079 $ 2,004,983
Cost of sales .............................. 1,158,302 1,668,550
------------ ------------
Gross profit .............................. 851,777 336,433
Research and development .................. 682,205 533,057
General and administrative ............... 1,568,569 1,822,457
Amortization of goodwill .................. 368,743 753,598
Interest expense ........................... 22,597 67,074
------------ ------------
Total expenses ........................... 2,642,114 3,176,186
------------ ------------
Loss before income taxes .................. (1,790,337) (2,839,753)
Benefit from income taxes .................. -- (13,718)
------------ ------------
Net loss .................................... $(1,790,337) $(2,826,035)
============ ============
Loss per common share ..................... $ (0.21) $ (0.52)
============ ============
Shares used in per share calculations ...... 8,330,116 5,399,850
============ ============
Historical Balance Sheet Data:
December 31,
--------------------------
June 30, 1997 1996 1995
--------------- ------------ -----------
Cash ............................................. $ 707,120 $ 37,278 $ 29,682
Receivables .................................... 824,636 130,509 30,621
Inventory ....................................... 422,206 159,881 60,656
------------ ---------- ---------
Current Assets ................................. 1,953,962 327,668 120,959
Equipment, net .................................... 1,067,069 327,022 300,840
Goodwill, net .................................... 3,488,028 -- --
Other assets .................................... 145,654 8,352 4,141
------------ ---------- ---------
Total Assets ................................. $ 6,654,713 $ 663,042 $ 425,940
============ ========== =========
Trade accounts payable ........................... $ 355,899 $ 61,997 $ 31,256
Accrued liabilities .............................. 146,925 55,788 827
Notes payable and capital lease obligation, current
portion ....................................... 137,952 85,566 284,000
Non-compete obligation ........................... 102,604 -- --
Accrued settlement obligation ..................... 160,000 -- --
------------ ---------- ---------
Current Liabilities ........................... 903,380 203,351 316,083
Notes payable and capital lease obligation ...... 54,084 44,808 44,500
Deferred taxes ................................. 546,465 -- --
Common stock .................................... 9,525 5,663 1,132
Additional paid-in capital ........................ 7,692,548 1,397,812 152,893
Deficit accumulated during the development
stage .......................................... (2,551,289) (988,592) (88,668)
------------ ---------- ---------
Total Liabilities and
Stockholders' Equity ........................ $ 6,654,713 $ 663,042 $ 425,940
============ ========== =========
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When used in this discussion, the words "expect(s)", "feel(s)",
"believe(s)", "will", "may", "anticipate(s)" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties, which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Readers are also urged to carefully review and consider the various
disclosures elsewhere in this Prospectus which discuss factors which affect the
Company's business, including the discussion under the caption "Risk Factors".
This discussion should be read in conjunction with the Company's
Consolidated Financial Statements, respective notes and Selected Consolidated
Financial Data included elsewhere in this prospectus. This discussion contains
both historical and forward looking-statements. The Company commenced contract
manufacturing operations during October 1996 and acquired Digital Radio
Communications Corporation ("DRCC") during February 1997. Accordingly, the six
month period ended June 30, 1997 includes the results of operations from these
sources while the comparable period ended June 30, 1996 does not.
Results of Operations
Six months ended June 30, 1997 and 1996
Net sales of $1,875,494, increased by $1,536,211 for the six months ended
June 30, 1997 compared to June 30, 1996. The increase was primarily attributable
to a $300,000 one time sale of technology, a $864,000 partial fulfillment of a
non-recurring technology development contract by DRCC and contract assembly work
of approximately $493,079. The non-recurring sale of technology and technology
development contract involved one customer, and accounted for 62% of the
Company's sales in the six months ended June 30, 1997. Had the acquisition of
DRCC occurred on January 1, 1996, pro forma sales for the six months ended June
30, 1997 would have been $2,010,079.
With the acquisition of DRCC, the marketing and operating focus of the
Company shifted to sales from design and development contracts, and away from
security key product sales. Sales of security key products (the only product or
service offered for sale as of June 30, 1996) actually declined by $239,006, to
$100,277 for the period ended June 30, 1997 when compared to the period ended
June 30, 1996.
Cost of sales increased by $750,993 for the six months ended June 30, 1997
compared to June 30, 1996. The increase was largely due to engineering costs
associated with the non-recurring technology sale discussed above and to direct
costs of manufacturing. Gross profit increased by $785,218 for the six months
ended June 30, 1997 compared to June 30, 1996, from $319,104 to $1,070,097,
primarily due to the one time sale of technology and the partial fulfillment of
the non-recurring technology development contract discussed above. Pro forma
gross profit for the six months ending June 30, 1997 would have been $851,777.
The Company's net loss of $(1,562,697) reflects an increase in net loss of
$(1,274,648) for the six months ended June 30, 1997 compared to June 30, 1996.
The increase was due primarily to $588,938 in research and development costs in
the six months ended June 30, 1997, and a $1,181,604 increase in selling,
general and administrative expense from $294,992 to $1,476,596. The increase in
general and administrative expense was attributable to the additional overhead
associated with DRCC's operations, staffing of the Company's contract
manufacuring operations and, at the corporate level, the hiring of a chief
executive officer, chief financial officer, controller and sales personnel.
Amortization of goodwill added $279,963 to the Company's net loss for the
six months ended June 30, 1997. This represents goodwill of $3,767,991 recorded
as a result of the DRCC acquisition, which is being amortized over sixty months.
Interest expense of $22,597 increased by $9,361 for the six months ended
June 30, 1997 compared to June 30, 1996. The increase resulted from equipment
related long-term debt, capital lease obligations incurred in starting contract
manufacturing operations and DRCC indebtedness.
13
Total expenses in the six months ended June 30, 1997 increased to
$2,368,094 from $308,228 in the year earlier period. Pro forma general and
administrative expenses for the six months ended June 30, 1997 would have been
$2,642,114.
Years Ended December 31, 1996 and 1995
The Company's sales of $618,505 for the year ended December 31, 1996,
represented an increase of $191,680 over sales in the prior year. The increase
was primarily due to 1996 being a full twelve month operating year and the
commencement of contract manufacturing services in 1996. Pro forma sales for the
year ended December 31, 1996 would have been $2,004,983, reflecting the impact
of DRCC's sales for that period. Pro forma gross profit for the same period
would have been $336,433 compared with a historical gross loss of $(43,679),
reflecting the impact of DRCC's $380,112 contribution to gross profit on a pro
forma basis.
Operating expenses in the year ended December 31, 1996, increased to
$856,245 from $278,137 for 1995, primarily from costs associated with the hiring
of a full time CEO and the beginning of building a sales and management team,
including managers for the Company's contract manufacturing operations The above
factors also were the principal cause of the increase in the Company's 1996
operating loss to $(899,924) compared to a loss of $(88,668) during 1995.
For the year ended December 31, 1996, pro forma expenses would have been
$3,176,186 compared to historical expenses of $856,245 for the same period. Of
total pro forma expenses, $753,598 is the result of a single pro forma
adjustment, the amortization of goodwill, which would have been recorded in 1996
had DRCC been acquired by the Company effective January 1, 1996.
Liquidity and Capital Resources
The Company's financial condition though improved is still tentative. The
improvement is a result of the Company's issuance of Common Stock for
approximately $3,195,250 during the six months ended June 30, 1997, which
accounts for the $669,842 increase in cash. The Company raised an additional
$1,000,000 from the sale of Common Stock during August 1997.
At this time, the Company's sales and profitability are not at a level
which will provide the funds necessary for its operations, capital expenditures
and anticipated growth. Consequently, additional financing probably will be
needed during the next two to six months. In manangement's opinion, it will be
necessary for the Company to satisfy this need by raising additional equity
capital. The Company does not have any commitment for equity or any other
financing at the present time, and there is no assurance that management will be
able to obtain the required capital.
Of the $3,195,250 raised from the issuance of Common Stock during the first
six months of 1997, approximately $1,899,478 was used for operations, $131,157
for the DRCC acquisition, $404,382 for equipment purchases and net debt and
capital lease reductions of $90,391. The net of the above items comprises the
net cash increase of $669,842 compared to a net cash decrease of $22,550 for the
same period during 1996.
Receivables have increased by $694,127 to $824,636. Approximately 52%, or
$432,000, of the increase is due to the technology development contract
discussed above, another 8.5% or $70,000 is from development services, with the
balance primarily coming from contract manufacturing customers.
Inventories have increased by $262,325 to $422,206 as of June 30, 1997,
compared to $159,881 for the same period June 30, 1996. The increase is due to
the acquisition of inventory for the contract manufacturing business and the
building of some of the Company's new radio products.
The increase in equipment of $740,047 reflects purchases of $404,382 during
the six months ended June 30, 1997, and $427,006 of DRCC equipment recorded as
part of the DRCC acquisition, less depreciation of approximately $91,341.
Amortization of goodwill increased the Company's net loss by $279,963
during the first six months of 1997, representing amortization of goodwill of
$3,767,991 booked in the DRCC acquisition, which is being amortized over sixty
months.
14
Most of the $700,029 increase in current liabilities to $903,380 from
$203,351 is due to the acquisition of DRCC. The non-compete obligation of
$102,604 represents the present value of four monthly payments of $27,500
commencing September 15, 1997. This obligation stems from DRCC. The $160,000
increase in other long-term obligations represents the proposed settlement of a
lawsuit over certain technology. This lawsuit and settlement also are from DRCC.
Deferred income taxes of $546,465 are a result of the acquisition of DRCC.
The combined increase in Common Stock and Additional Paid in Capital of
$6,298,598 is due to the issuance of common stock for $3,195,250 in cash and the
booking of the DRCC acquisition in the amount of $3,103,348.
Outlook
The statements contained in this Outlook are based on current expectations.
These statements are forward looking and actual results may differ materially.
Management believes that, as deregulation of natural gas and other
utilities continues, multiple utility suppliers will be serving a given city or
neighborhood. Consequently, it will become more difficult and time consuming for
utility companies to read meters as they will generally not be the provider to
every user in the city or neighborhood which will increase the cost
effectiveness of reading utility meters remotely. Management believes that the
Williams Telemetry Network, described elsewhere in this Prospectus, is a viable
alternative to the current practice of manually reading meters. Additionally,
management believes that William's position as an affiliate of a major
transporter of natural gas in the United States positions it to successfully
market its telemetry network, which currently is designed to use collector and
repeater radios supplied by the Company to gather and transmit data.
Management believes that the Company's relationship with Williams will
result in significant increases in sales of its radio products for use in the
Williams Telemetry Network. Significant increases in sales, however, would lead
to working capital requirements which would not be provided for from funds
generated by the initial sales of the products. The Company is currently
investigating the prospects of a private placement and ultimately a secondary
public offering to meet its working capital and operating needs. However, there
is no assurance that sufficient capital or any capital will be raised from such
endeavors.
Additionally, management estimates the Company's current manufacturing
facilities would not be adequate to handle substantial increases in demand for
its products. Management is currently looking into two solutions: (1)
out-sourcing a portion of the manufacturing overload or, (2) expanding its
in-house manufacturing capacity through leasing or purchasing additional
building space and equipment. If a portion of manufacturing is out-sourced the
Company may lose some control over the following areas; cost, timeliness of
deliveries and quality. However, by out-sourcing a portion of its manufacturing,
the Company could avoid delays and expense associated with the expansion of its
own facilities. The magnitude of any expansion of the Company's manufacturing
capabilities that is required would be a direct function of the sales increase
and manufacturing overload, both of which are unknown at this time. However,
management estimates that between $2 million and $5 million may be required for
this purpose. At the present time, the Company does not have any commitment for
or source of these funds.
The Company anticipates an increase in revenues from additional contracts
for design and development services, although no new contracts have been signed.
It is management's intent to model such contracts after the KME contract,
discussed elsewhere in this Prospectus, whereby the Company receives fees during
the early stages of the agreement and is entitled to royalties or gross profit
splits based upon its customer's sales of products into which the technology has
been incorporated. It is management's intent that the fees received will cover
the Company's costs. However, these fixed fee arrangements may not cover all of
the Company's costs incurred in fulfilling any such contract. Royalties or gross
profit splits resulting from sales of products using the technology developed
under the contract would enhance the Company's profitability if and when
received.
15
In anticipation of obtaining additional design and development contracts,
management must continually recruit and hire additional RF (radio frequency),
software, firmware and digital engineers. It is extremely difficult,
time-consuming and expensive to find engineers qualified in those fields. There
is no assurance the Company will be able to locate and hire such qualified
engineers. Associated with the hiring of each engineer is the need for test and
development equipment, software and work stations, which increases the Company's
cash requirements.
In summary, while management is cautiously optimistic about the Company's
future, it is fully aware that anticipated revenue increases from product sales,
design and development contracts and royalty income are by no means assured, and
that if such increases do materialize, the requirements for capital are
substantial, for which there is no present commitment.
16
BUSINESS
Background
The Company and its subsidiaries are principally engaged in the design,
development and manufacture of wireless communications technology, systems and
products. The Company also provides contract manufacturing services to the
electronics and wireless communications industry.
Prior to its acquisition of DRCC in February 1997, a substantial majority
of the Company's revenues were derived from sales of SecuriKey(R), a small
hardware device that prevents the unauthorized use of software protected by a
SecuriKey system, and related software products. At the time of its acquisition
by the Company, DRCC was in the process of developing a number of proprietary
wireless communications products, and provided wireless design, development and
manufacturing services on a contract basis. With the acquisition of DRCC, the
Company's business focus shifted to the design, development and manufacture of
wireless communication technology, systems and products, although the Company
continues to provide contract manufacturing services. Sales of SecuriKey
products did not contribute materially to revenues in the first half of 1997
(approximately 5%) and are not expected to contribute materially to revenues in
the future.
Wireless Communications Products
Electronic communications devices take many forms, including mobile
telephone, broadcast television and radio products. The central problem in
modern communications is developing the means to transmit large volumes of data
over long distances without losing or distorting the information in the most
cost effective manner. Wireless communications, using radio transmission rather
than transmission over a wire or cable, is an increasingly important segment of
the communications industry.
As illustrated below, wireless communication devices fall under various
names (television, radio, cellular, microwave, among others), but all utilize
the electromagnetic spectrum. This spectrum is the range of all electromagnetic
waves differentiated according to the frequency of the particular wave. An
electronic communication device is usually named according to the wave frequency
at which the device operates. Frequency is the number of cycles per second in a
wave and is measured in hertz (Hz). One hertz is one cycle per second. The
radiowave spectrum ranges from a few kilohertz (Khz) to 40 gigahertz (Ghz), or
40,000 megahertz (Mhz). Portions of the radiowave spectrum are dedicated to
specific uses, as follows:
Wireless Device Frequency
- --------------- ---------
AM radio 535 - 1635 Khz
Analog cordless phones 44 - 49 MHz
TV channels (VHF) 54 - 88 MHz
FM radio 88 - 108 MHz
TV channels (VHF) 174 - 216 MHz
TV channels (UHF) 470 - 806 MHz
RF wireless modems 800 MHz
Cellular phones 806 - 890 MHz
Digital cordless phones 900 MHz
Personal communication services 900 - 929 MHz
Nationwide pagers 929 - 932 MHz
Two-way pagers 932 - 940 MHz
Satellite phones uplink 1610 - 1626.5 MHz
Satellite phones downlink 2483.5 - 2500 MHz
Satellite TV, large dish 4 - 6 GHz
Satellite TV, small dish 11.7 - 12.7 GHz
Wireless "cable" TV 28 - 29 GHz
Existing Products
The Company's wireless communications products are designed to transmit
and receive voice, video and data in applications where a hard-wired system is
cost prohibitive or simply more expensive. The Company's
17
principal line of existing products is a series of low speed digital radios
(LSDRs) and related devices. These products are suitable for use in a telemetry
network which has been developed by Williams Wireless, Inc., doing business as
"Williams Telemetry Services" (hereinafter "Williams"), a subsidiary of The
Williams Companies, Inc. The initial sales of products in this line were made to
Williams in September 1997.
The Williams Telemetry Network is a fixed wireless network intended by
Williams principally for use by utility companies to collect gas, water and
electric usage data, and to closely monitor usage on a "real time" basis when
required. A wireless monitoring unit mounted on a meter or other device to be
monitored gathers data and transmits it to a local WinGate(TM) collection point,
which then relays the data to a centralized operating center. While automated
meter reading is the most immediate potential application for the Williams
Telemetry Network, its possible uses also include alarm monitoring, a reliable
back up to telephone reporting and other, similar applications.
As described elsewhere in this Prospectus, the Company's initial sales of
wireless communications products occurred in September 1997, and sales to date
have been extremely limited. A number of the Company's wireless communications
products were introduced as part of the Williams Telemetry Network for the first
time in mid-September 1997 at the Automated Meter Reading Association Trade Show
in Chicago. At the present time, Williams is conducting Beta tests of its
telemetry system with a number of national companies, and the Company has been
advised that Williams intends to launch commercial operations of the service in
the third quarter of 1998. Products which the Company has developed for use in
this system, and which currently are being used and/or tested by Williams,
include devices called Telemetry Interface Modules, or TIM(TM)s, which operate
at the point of data origination. For example, in the Williams Telemetry Network
the TIM(TM)s units are designed to be mounted on meters and other devices to be
monitored. The function of these TIM(TM)s is to gather and transmit data to a
data collection and forwarding point called a WinGate(TM) unit, which includes a
wireless receiver/transmitter. The WinGate(TM) unit forwards the data to an
operating center via a wide area network. Once the data arrives at the operating
center, it is recorded and stored in a computer system.
The TIM(TM)s are short range (up to 800 feet) transmitters which transfer
data at rates up to 9600 bits per second, and function over the entire
industrial temperature range (-40oF to 185oF). The Company has two TIM(TM)s
models available, which differ primarily in frequency coverage, modulation type
and power.
The WinGate(TM) units utilize Low Speed Digital Radio ("LSDRs") which are
matched to the TIM(TM)s units from which they receive data. In this context,
"low speed" refers to speed of transmission which, for the Company's LSDRs,
ranges from 1200 to 9600 bits per second ("bps"). By contrast, the Company's
High Speed Digital Radio (HSDR) now under development, which is discussed below
under "Proposed Products", transmits at speeds between 2 million and 4 million
bps (2Mbps to 4Mbps). The Company presently has a number of LSDR models
available, two of which (the LSDR 100 and the LSDR 300) have been sold to
Williams for use and/or testing in the Williams Telemetry Network. Like the
TIM(TM)s units, the various LSDR models differ primarily in frequency coverage,
modulation type, range and power.
The Company's LSDRs are designed to provide a wireless communication link
for multiple locations, with a range of up to 35 miles under "unobstructed" line
of sight conditions. The products are intended for use primarily in remote
monitoring systems in which data must be transmitted from multiple locations and
collected at one central location, e.g., to monitor data such as capacity,
temperatures and flow rates from underground or above ground fuel tanks and oil
and gas pipeline meters. Radios can be spread out over numerous locations to
transmit data large distances within a line of sight and the data will be
collected and processed in one central location for processing. Data and power
requirements for the radios are low, allowing the radios to run on battery or
solar energy. LSDR communications do not require a license from the FCC and
there is no FCC restriction on the type of data being transmitted.
An important feature of certain of the Company's LSDR products involves the
use of spread spectrum (meaning a wide frequency bandwidth) solutions to
facilitate the wireless transmission of data. Spread spectrum wireless devices
are required to modulate and demodulate a signal that is "spread" across a wide
bandwidth to reduce interference and provide enhanced security. "High power"
systems (from 0.10 to 1.0 watts) which operate in the ISM (Industrial,
Scientific and Medical) bands (902 - 928 MHz, 2400 - 2483.5 MHz, and 5725 - 5850
MHz) can only use spread spectrum techniques. Under Part 15 of the FCC
Telecommunications Code, these ISM
18
bands do not require the customer to pursue costly and time consuming FCC
licensing approval and eliminate usage charges involved with transmitting data
via cellular networks. Thus, they are desirable for many wireless applications,
including telemetry systems for use in data collection, high-speed wireless
communication links between buildings on corporate and other campuses, wireless
speaker connections and other peripheral applications.
Other Existing Products. The Company also continues to market its
SecuriKey(R) line of products. See "Organizational and Capital Transactions --
Purchase of Assets of Micro Security, Inc." These sales represented less than 5%
of revenues in the first half of 1997, and are not expected to be material in
the future.
Proposed Products
The Company currently has a number of products in various stages of
development, the two most significant of which are a High Speed Digital Radio
and a Low Cost Spread Spectrum Radio.
High Speed Digital Radio (HSDR): The Company has developed a pre-production
working prototype High Speed Digital Radio. HSDR can be used as a wireless link
to transmit digitized information (data, voice or video) to and from locations
within a "line of sight" at high speeds (i.e., up to 2.048Mbps). This
transmission rate is faster than "T1" wired lines at the present time. T1 is a
data transmission standard at which 1.544 megabits are transmitted per second.
Furthermore, HSDR is a private network so users avoid the access delays caused
by excessive traffic and high costs of using T1 lines.
HSDR technology can be adapted to a variety of applications, depending upon
the user's communication requirements. One HSDR application for data sensitive
companies is to set up data links to off-site data storage and back-up
facilities which are capable of handling large volumes of information. This
application provides a user with an inexpensive real time back-up system in the
event of a disaster or other malfunction to the main or primary line of
transmission.
HSDR also can be used as a "short hop" teleconferencing and/or
video-conferencing system. The private network can connect two or more line of
sight locations with telephone service and/or video service allowing unlimited
access and usage with the cost of local and long distance telephone charges. The
installation of a private communication link is very cost effective because of
the low installation cost and lack of additional usage charges. Moreover, HSDR
can be used to establish a wireless Local Access Network (LAN) to interconnect
multiple computers that need to share information.
HSDR operates at frequencies classified under Part 15 of the Federal
Communications Commission ("FCC") Telecommunication Code, and, as a result of
this classification, no license is required nor is there any restriction on the
type of data being transmitted.
Low Cost Spread Spectrum Radio (LCSSR): The Company has developed
proprietary technology for a low cost, spread spectrum radio which the Company
believes can be sold in quantity for less than $20 per radio. As a result, the
LCSSR has the potential of substantially reducing the cost of such consumer
products as cordless telephones, wireless speakers, wireless telephone jack
extensions, wireless keyboards, wireless printer connections, security devices
and wireless toys. An LCSSR device was the principal product involved in the
Company's design and development contract with Kyushu Matsushita Electric Co.,
discussed below under the caption "Contract Design and Development".
Contract Design and Development
The Company's business has included providing engineering, design and
development services to client specifications on a fee for services basis. At
the present time, the Company is not seeking design and development service
contracts except in "partnering" situations in which the Company would have an
ownership interest in the products and/or technology which are the subject of
the contract. The two most significant such contracts, entered into in 1997 with
Kyushu Matsushita Electric Co. and Williams Wireless, Inc., are described below.
Kyushu Matsushita Electric Co. Contract: In April 1997, DRCC entered into
a contract with Kyushu Matsushita Electric Co., Ltd. ("KME") to develop low
cost spread spectrum radio technology for use in certain
19
KME products. Under the terms of the contract, KME agreed to pay the Company
$1,296,000 for its services in three installments of $432,000, subject to the
Company's satisfaction of certain performance goals. The Company received the
initial installment in May 1997, and the second installment and one-half of the
third installment in September 1997, following KME's evaluation of certain
prototypes furnished by the Company. The Company expects to receive the second
half of the third installment in the fourth quarter of 1997, following KME's
evaluation of final working samples.
As part of its development contract with KME, the Company granted KME a
world-wide, non-exclusive license to use or authorize the use of any patents,
copyrights, technical know-how and other intellectual property rights embodied
in the Company's LCSSR technology in the manufacture of KME products, and agreed
not to license others to use technology which is developed under its contract
with KME in connection with any telephone-related products for a period of two
years from the first shipment of KME products using the technology. In
consideration for these rights and the Company's services, KME agreed to pay
royalties to the Company on sales of KME products using the technology above a
prescribed minimum amount of sales for a period of two years from the initial
shipments of any such products. The Company is unable to predict the amount of
any royalties which it may receive under this license, or whether it will
receive any royalties.
Williams Wireless, Inc. Contract: In September 1997, the Company entered
into a Technical Development and Marketing Alliance Agreement (the "TDMA
Agreement") with Williams Wireless, Inc., pursuant to which the Company has
agreed to assist and cooperate with Williams in developing and manufacturing
"Telemetry Radio Products", which are generally defined in the agreement as
wireless radios for transmitting and/or receiving data as part of the Williams
Telemetry Network. The TDMA Agreement followed a letter of understanding entered
into by the parties in June 1997, and a relationship between the companies which
pre-dated the letter of understanding in the course of which the Company
developed a "proof of concept" radio for use in Williams' information gathering
network.
Under the TDMA Agreement, Williams may, but is not required to, contract
with the Company for specific system engineering and design services to create
Telemetry Radio Products. The Company would have the exclusive right to
manufacture any Telemetry Radio Products which were designed exclusively for use
in Williams' network, so long as the Company met prescribed quality and other
performance criteria. Williams would "own" such products, but the technology
used in creating the products (including components that the Company has
patented or for which it holds a copyright, and all drawings, specifications,
prototypes and circuit boards relating thereto) would remain the property of the
Company. The Company also has a non-exclusive right to market Williams'
information gathering service on terms mutually agreeable to the parties, based
upon a "standard" Williams marketing agreement which is in the process of
development.
As indicated above under the caption "Existing Products", the Company has
designed and developed a number of LSDR products and related devices that have
been sold to Williams for use in the Williams Telemetry Network. While these
products meet the definitions of "Telemetry Radio Products" used in the TDMA
Agreement, since they were developed outside the Agreement, the Company retains
all property rights to such products. Sales prices to Williams for existing
products were negotiated between the Company and Williams. Such terms relating
to further products which Williams may call upon the Company to develop under
the TDMA Agreement would be negotiated at that time.
Contract Manufacture and Assembly
The Company performs assembly and manufacturing services for other
manufacturers and vendors of medical, communications, computer graphics and
consumer electronic products at its Salt Lake City manufacturing facility. In
the current fiscal year, the Company has provided manufacturing and assembly
services for such customers as Alton Dean, Infinity Group, Evans & Sutherland,
Wavephore and TSI.
Markets and Distribution
The principal markets for the Company's wireless communications products
are original equipment manufacturers ("OEM's") which utilize the Company's
products and technology in their own equipment and products, and value added
resellers and systems integrators ("VAR/Integrators") which use the Company's
products, along with hardware and software from other vendors, in systems which
they design and sell to meet their customers' data processing, transmission,
collection, storage, security and other related needs.
20
Marketing to OEM's and VAR/Integrators involves establishing and increasing
prospective customers' awareness of the Company's products and technology. This
is accomplished through direct mail and print advertising, and through
promotional activities which include direct contacts with trade journal editors,
industry analysts and other opinion makers. More direct sales activity includes
research to identify specific OEM's and VAR/Integrators whose products and
services make them potential buyers of the Company's products and technology,
and direct sales efforts to introduce the Company to the potential customers.
Early contacts, if successful, are likely to involve very detailed technical
discussions between the Company's and the prospective customer's engineers and
researchers. The Company's objective at this stage is to demonstrate how its
existing products and technology and/or its capacity to custom design and
develop products can benefit the customer. The prospective customer's objective,
of course, is to find sources of such products and technology.
The Company also markets its wireless products through a manufacturer's
representative. This is a relatively new phenomenon for the Company since it
only recently reached the point at which it has had fully developed products
commercially available. Although it has only one representative at the present
time, the Company expects to add additional representatives as its product line
expands.
The Company's contract design and development capabilities are an integral
part of its overall product and technology marketing effort. All of the
Company's design and development contract revenues in 1997 have resulted from
contracts in which technology was customized and/or further developed to meet
its client's specific product needs, with the Company generally retaining
ownership or partial ownership of technology developed under the Contract and
the right to manufacture and sell to others products which employ that
technology but which are outside the client's applications. As indicated above,
the Company is not seeking design and development contracts on a purely "fee for
services" basis at the present time.
The Company's marketing activities as relate to its contract manufacturing
and assembly capabilities have been limited, and consist primarily of direct
selling efforts directed to past and existing customers, and to prospective
customers who contact the Company or are located in the Company's immediate
geographic area. In the foreseeable future, the Company expects to concentrate
its available marketing resources in the marketing of proprietary products and
technology, rather than its contract manufacturing and assembly service
capabilities.
Competition
The Company has a number of current competitors in all aspects of its
business, many of which competitors have substantially greater financial,
marketing and technological resources than the Company, and which include such
industrial giants as Panasonic, Motorola, Sony and AT&T. The Company intends to
compete with these companies by concentrating on certain product or service
niches within the overall market. However, most of the Company's competitors
offer products which have one or more features or functions similar to those
offered by the Company, and many have the resources available to develop
products with features and functions, competitive with or superior to those
offered by the Company. There can be no assurance that such competitors will not
develop superior features or functions in their products or that the Company
will be able to maintain a lower cost advantage for its products.
A key element of the Company's competitive strategy is to align itself with
major manufacturers by developing proprietary products or technology that can be
incorporated into its "partner manufacturers'" products. In addition to being
compensated for its services relative to the development of the partners'
products, the Company would share in the success of products which used the
Company's component or technology through a royalty or similar arrangement. The
Company believes that its agreements with KME and Williams, described above
under the caption "-- Contract Design and Development", illustrate the manner in
which the Company can "partner" with much larger, established companies to
access mass markets for its proprietary wireless communications products and
technology.
Facilities
The Company's executive offices and principal administrative offices and
manufacturing facilities are located in approximately 20,079 square feet of
space at 150 Wright Brothers Drive in Salt Lake City, Utah, which is leased at a
monthly cost of $11,266 for base rental and allocable common area maintenance
charges. The Company also pays for certain utility expenses. The lease for these
premises expires May 31, 1998.
21
The Company's principal engineering facility is located in the Utah Valley
Business Park, American Fork City, Utah. This facility is leased at a monthly
cost of $9,849 for base rental and allocable common area maintenance charges.
The Company also pays for certain utility expenses. The Company's lease for the
facility expires June 30, 1998. This facility, which occupies approximately
9,685 square feet, was leased by DRCC prior to the Company's acquisition of
DRCC, and housed DRCC's manufacturing facilities. After the acquisition, the
Company consolidated DRCC's manufacturing operations with those of the Company
at the Company's Salt Lake City facility.
The Company owns most of its manufacturing equipment, although a portion is
leased. The aggregate lease payments for leased equipment in 1997 are expected
to be approximately $143,375.
The Company believes that its facilities are satisfactory for its present
scale of operations. The Company presently is considering a number of options to
increase its manufacturing capacity, including, at a minimum, consolidating its
existing manufacturing and engineering facilities into a single larger facility
during 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Outlook".
Employees
As of October 10, 1997, the Company had 67 employees, of whom one was
part-time. Of these employees, 16 were classified as executive or administrative
personnel; 17 engineering; 24 production and manufacturing, including contract
manufacturing; and 10 sales and marketing. The Company's employees do not belong
to a collective bargaining unit, and the Company is not aware of any labor union
organizing activity. The Company considers its employee relations to be
satisfactory.
Patents and Intellectual Property
The Company believes that reliance upon trade secrets, copyrights and
unpatented proprietary know-how in conjunction with the development of new
products is at least as important as patent protection in its business since
most patents provide fairly narrow protection, and are of limited value in areas
of rapid technological change. Further, patents require public disclosure of
information which may otherwise be subject to trade secret protection. The
Company has no patents or patents pending on existing or proposed products or
technology, except for its spread spectrum demodulation technology. Generally,
the Company enters into confidentiality and invention assignment agreements with
its employees, and includes provisions in contracts with its development
contract customers intended to protect its proprietary technology, "know how"
and other trade secrets. The Company also claims copyright protection for its
circuit boards and software. However, there can be no assurance that the
Company's proprietary technology will be protected or remain a trade secret, or
that others will not develop or propose similar technology. See "Risk Factors --
Intellectual Property Rights".
Certain aspects of the Company's spread spectrum demodulation technology
and the related patent application were developed by DRCC at a time when DRCC
was party to a joint venture agreement with Digital Scientific, Inc. ("DSI"), an
otherwise unrelated party. This joint venture was formed in October 1995 to
further develop, commercialize and market an original and proprietary method of
demodulating a spread spectrum signal. Under the terms of the agreement, each
party owned fifty (50%) percent of the joint venture. The Company has terminated
the joint venture, and DSI has initiated litigation claiming that the Company's
termination of the joint venture was invalid, and that it is entitled to certain
rights in the Company's spread spectrum technology and to damages. See "Legal
Proceedings" below.
The Company has registered the trademarks SECURIKEY(R), SECURIDATA(R) and
SECURIMAC(R). The Company intends to pursue registration on all trademarks
associated with its key products, and to protect its legal rights concerning the
use of its trademarks. See "Risk Factors -- Intellectual Property Rights".
Legal Proceedings
Pending Litigation: DRCC is a defendant in civil action commenced by
Digital Scientific Inc. in the Third Judicial Court, Division I, in and for Salt
Lake County, Utah, on July 2, 1997. DSI's Complaint alleges that DRCC breached
its joint venture agreement with DSI, described above under the caption "Patents
and Intellectual Property", and related duties to DSI arising out of the joint
venture agreement and a related marketing
22
agreement. The Complaint also alleges that Matsushita Electric Corporation of
America ("MEC"), Recoton Corporation ("Recoton") and an employee of MEC, who
also are named as defendants in the action, interfered with DSI's contract with
DRCC and that MEC and Recoton converted to their own use and profit certain
technology that was the property of the DRCC/DSI joint venture. The Complaint
seeks unspecified money damages against all defendants, and punitive damages
against DRCC. Among other items of damage, DSI claims that it is entitled to
participate in revenues, profits, etc. derived from sales or licenses involving
the Company's spread spectrum demodulation technology.
The Company has not filed an Answer to the Complaint, as settlement
discussions between DRCC and DSI commenced shortly after the Complaint was
served, and have resulted in a tentative agreement to settle the litigation on
terms which provide that DRCC and DSI would acknowledge termination of the joint
venture effective December 31, 1996; DRCC and DSI each would have a right in the
Company's spread spectrum demodulation technology as disclosed in the Company's
pending patent application and incorporated in certain prototypes developed by
DRCC prior to the termination of the joint venture; the Company would issue
40,000 shares of Common Stock to DSI and grant DSI the right to sell the shares
back to the Company for a limited period of time at a price of $4.00 per share;
and DSI would release DRCC and the other defendants from all claims.
While the settlement has not been finalized, the Company believes that
agreement has been reached on all essential points, and that the litigation will
be settled on the basis described above. The Company has accrued a $160,000
charge to cover its potential obligation arising from DSI's right to sell back
to the Company the 40,000 shares of Common Stock that the Company would issue as
part of the settlement.
Unasserted Claim: Although action has not been initiated, the Company's
former Chief Financial Officer has threatened litigation against the Company
following his resignation from that office and as a director of the Company in
October 1997. The resignation was the result of a dispute over compensation
involving, among other things, a claim by the former officer and director that
the Company had agreed to grant him options to purchase 275,000 shares of the
Company's Common Stock at a price of $2.00 per share in connection with his
employment, and had later disaffirmed such obligation. Because of the number of
shares involved in this unasserted claim, and the difference between the current
market price for the Company's Common Stock and the exercise price of the
options claimed, the expense to the Company for financial reporting purposes
would be material if the former officer should initiate and prevail in
litigation over these claims. The Company intends to vigorously defend any such
action.
23
MANAGEMENT
Executive Officers and Directors
The current executive officers and directors of the Company are as follows:
Name Age Position
---- --- --------
David D. Singer ............... 48 Chairman of the Board of Directors, President, Chief
Executive Officer and a Director
William E. Chipman, Sr. ...... 51 Chief Financial Officer and Director of Mergers and
Acquisitions
Brian W. Pettersen ............ 40 Executive Vice President and a Director
Jonathan D. Rahn ............ 53 Secretary and a Director
Philip A. Bunker ............ 45 President of DRCC and a Director
David Andrus .................. 44 Director of Development Engineering
David D. Singer - Mr. Singer was appointed President of the Company in
November 1996, and became a Director in February 1997. From 1977 to 1983, Mr.
Singer was President of CSL Energy Controls, Inc., a company specializing in
third party energy conservation. From 1983 to 1985, Mr. Singer was a special
consultant to the General President of the Sheetmetal Workers Association. From
1985 to 1988, Mr. Singer was Vice President First Municipal Division, Bank One
Leasing Corporation. From 1988 to 1991, Mr. Singer was President of Highland
Energy Group. From 1991 to 1996, Mr. Singer was President and Chief Operation
Officer of Navtech Industries, Inc., an electronic assembly company. Mr. Singer
holds a Bachelor's Degree in Electrical Engineering from the Lawrence Institute
of Technology.
William E. Chipman, Sr. - Mr. Chipman has served as Director of Mergers and
Acquisitions for the Company, with the primary responsibility for seeking
acquisition opportunities, and negotiating and implementing acquisitions by the
Company, since the DRCC acquisition, and has served as acting Chief Financial
Officer of the Company since October 22, 1997. Mr. Chipman was the Chief
Financial Officer and a director of DRCC from August 1994 to February 1997 when
the Company acquired DRCC. From 1992 to 1994, Mr. Chipman served as CFO of MHB
Technology, Inc., a technology holding company specializing in contract
manufacturing, security access products and high speed modems. Mr. Chipman
received a Bachelor's Degree in Business Administration from Merrimac College.
Brian W. Pettersen - Mr. Pettersen has served as Executive Vice President
and Director of the Company since February 1997. From 1980 to 1992, Mr. Petersen
served as Trading Manager for Covey & Co., a retail full service securities
brokerage firm. From 1992 to 1995, Mr. Pettersen served as a Wholesale Trader
for the Paulson Investment Company. From 1995 to the present, Mr. Pettersen has
served as President of Utah Internet Services, a full service Internet provider.
Mr. Pettersen received a Bachelor's Degree in Marketing from the University of
Utah in 1979.
Jonathan D. Rahn - Mr. Rahn has served as Secretary and a Director of the
Company since its inception. From July 1996 to the present, Mr. Rahn has served
as Executive Vice President and a Director for PacificHealth Laboratories, Inc.
He is also the President and sole stockholder of J.R. Consultants, Inc., an
independent consulting firm. Mr. Rahn has over 30 years experience in
accounting and financial analysis. Mr. Rahn is a licensed Certified Public
Accountant in the Commonwealth of Pennsylvania, and received a Bachelor's
Degree in Economics from The Wharton School of Business of the University of
Pennsylvania.
Philip A. Bunker - Mr. Bunker was a co-founder, and is President and Chief
Executive Officer, of DRCC, and has served as a Director of the Company since
its acquisition of DRCC. From 1982 to 1986, Mr. Bunker was Vice President of
CAECO, Inc. ("CAECO"), a semiconductor circuit design software company. While
at CAECO, Mr. Bunker and his engineering team developed a computer-aided
program used in advanced integrated
24
circuit design programs such as Motorola's 68020 and 68030 and National's 32000
microprocessors. CAECO was subsequently sold to Mentor Graphics. From 1986 to
1991, Mr. Bunker was the President of Desert Digital, a company that was
acquired by DRCC in 1992. Mr. Bunker received a Bachelor's Degree in Electrical
Engineering from the University of Utah.
David Andrus - Mr. Andrus joined the Company has Director of Development
Engineering in April 1997. Prior to joining the Company, Mr. Andrus owned and
operated Innovatronics Engineering, a Radio Frequency and Data Communications
Consulting Firm which he formed in 1987. Mr. Andrus received a Bachelor's
Degree in Electrical Engineering from California State Polytechnic Institute.
Other Significant Employees
In addition to its Executive Officers and Employees, the Company believes
that the following employees will make significant contributions to the Company:
Jeffrey G. Ballif ...... 31 Manager of Digital and Software Services
Stuart Biddulph ......... 59 Director of Engineering
Lance King ............ 36 Director of Marketing
Jeffrey G. Ballif - Mr. Ballif was a co-founder of DRCC and, since 1992,
has been one of its principal project leaders. He has directed and/or
participated in a variety of embedded system hardware and software design
projects for the DRCC and, since the Company's acquisition of DRCC in February
1997, for the Company. Projects and responsibilities have included: modem
firmware modifications, fax modem debugging, telephone line switching product
design, digital modem design and firmware data modems to meet European
requirements. Prior to 1992, Mr. Ballif was an engineer at Desert Digital. Mr.
Ballif received a Bachelor's Degree in Electrical Engineering from Brigham Young
University.
Stuart Biddulph - Mr. Biddulph is the Company's Director of Research and
Engineering. He was Vice President of Engineering of DRCC prior to its
acquisition by the Company. Prior to joining DRCC in June 1996, Mr. Biddulph
was Director of Engineering at Comsat RSI Plexus Corporation, a position held
since 1995. From 1989 to 1995, Mr. Biddulph was a Project Manager for Sattel
Technologies, Inc. Mr. Biddulph is responsible for the day-to-day engineering
operations of the Company. He received a Bachelor's Degree in Physics degree
from Brigham Young University.
Lance King - Mr. King is the Company's Director of Marketing, and was the
Director of Marketing of DRCC prior to its acquisition by the Company. Mr. King
served as Director of Marketing of MHB Technology, Inc. from 1992 to 1994,
prior to which he was Vice President of Sales and Marketing for Intelligent
Modem Corp.
Corporate Governance Standards
The Company intends to apply to have its Common Stock approved for
quotation on The Nasdaq Stock Market, Inc. SmallCap Market. Issuers whose
securities are quoted on the SmallCap Market are required to comply with certain
corporate governance standards, including a requirement that at least two
directors of the issuer be "independent" directors, and that the issuer have an
audit committee, a majority of the members of which are "independent" directors.
The Company expects to be in compliance with these requirements prior to the
effective date of the registration statement of which this Prospectus is a part.
Compensation of Executive Officers
David D. Singer, the Company's Chairman, President and Chief Executive
Officer, has been functionally employed in those positions since October 1996,
although he was not formally appointed to those positions by the Board of
Directors until February 1997. Mr. Singer's current annual salary is $120,000.
He does not have a fixed term employment contract with the Company.
25
The table below sets forth information concerning compensation paid in 1996
to Mr. Singer and to Gary Peterson, who served as the Company's President and
Chief Executive Officer until October 28, 1996. Except as indicated in the table
below, no executive officer of the Company received compensation of $100,000 or
more in 1996.
Summary Compensation Table
Annual Compensation
-----------------------------------------
Other Annual
Compensation
Name and Principal Positi Year Salary ($) Bonus ($) ($)
- ------------------------- ------ ------------ ----------- --------------
Gary Peterson, ......... 1996 $29,047 -0- (2)
President(1)
David D. Singer, ...... 1996 $27,512 -0- (2)
President(1)
Long Term Compensation
-------------------------------------------------------------
Awards Payouts
----------------------------------- ------------------------
All
Restricted Securities Other
Stock Underlying LTIP Compen-
Name and Principal Positi Award(s)($) Options/SARS(#) Payouts($) sation($)
- ------------------------- ---------------- ----------------- ------------ ----------
Gary Peterson, ......... -0- 54,000 -0- -0-
President(1)
David D. Singer, ...... 156,750(3) -0- -0- -0-
President(1)
- ------------
(1) Mr. Peterson was President and Chief Executive Officer of the Company
through October 28, 1996. Mr. Singer was acting President and Chief
Executive Officer of the Company from October 1996 to February 3, 1997, when
he was formally appointed President, Chief Executive Officer and Chairman of
the Board of Directors.
(2) Neither of the executive officers named received compensation reportable as
"Other Compensation" in 1996 which exceeded 10% of such officer's salary.
(3) Mr. Singer received 475,000 shares of Common Stock, valued at the time of
issuance at $.33 per share, in connection with his employment as President
and Chief Executive Officer of the Company. These shares vested immediately,
and Mr. Singer is entitled to all rights as a stockholder with respect to
these shares.
The following tables set forth certain information regarding options
granted to Mr. Peterson in 1996, and options owned by Mr. Peterson at December
31, 1996:
Option/SAR Grants in Last Fiscal Year
Number of Percent of Total
Securities Options/SARs Exercise
Underlying Granted to or Base
Options/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
- ---------------------- -------------- ----------------- --------- -----------
Gary Peterson ...... 54,000 26% $.33 6/30/98
Aggregated Option/SAR Exercises in 1996 Last Fiscal Year and
Option/SAR Values at 12/31/96
Number of Securities Underlying
Unexercised Value of Unexercised
Shares Options/SARs at Fiscal Year-End In-The-Money Options/SARs at
Acquired (#)(1) December 31, 1996 ($)
on ------------------------------ -----------------------------
Exercise Value
Name (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ---------- ------------- ------------- --------------- ------------- --------------
Gary Peterson ...... -0- -0- 54,000 -0- 1,080 -0-
For the purpose of computing the value of "in-the-money" options at
December 31, 1996, in the above table, the fair market value of the Common
Stock at December 31, 1996, is deemed to be $.35 per share, which was the fair
market value of such shares as determined by the Board of Directors. Mr. Singer
held no options at December 31, 1996.
Directors' Compensation
None of the Company's directors received compensation for their services as
directors in 1996, and the Company has no formal plan to compensate directors
for their services.
26
PRINCIPAL AND SELLING SHAREHOLDERS
The Company had 10,035,518 shares of Common Stock outstanding at October
15, 1997. The following table sets forth certain information regarding the
ownership of the Company's Common Stock as of October 15, 1997, and adjusted,
assuming the sale of all Shares, to reflect such ownership by (i) each of the
Company's executive officers and directors, (ii) all executive officers and
directors as a group; and (iii) each other person known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock.
Amount and Nature of
Beneficial Ownership Adjustments for Offering
-------------------------------- --------------------------------------------------
Ownership
As of Shares Assuming the Sale
Name and Address of October 15, Percent Registered of All Shares
Beneficial Owner 1997(1) of Class(2) for Sale No. of Shares(1) Percentage(2)
- -------------------------------------- ---------------- ------------- ------------------ ---------------- -------------
(i) Directors and Executive
Officers
David D. Singer, President, Chief..... 475,000 4.7% -0- 475,000 4.7%
Executive Officer and Director
2873 South Ursula Court
Aurora, CO 80014
William E. Chipman, Sr., Chief ...... 480,345(3) 4.8% 480,345 -0- -0-
Financial Officer and Director
of Mergers and Acquisitions
150 Wright Brothers Drive
Suite 560
Salt Lake City, UT 84116
Brian W. Pettersen, Executive Vice 314,000(4) 3.1% -0- 314,000 3.1%
President and Director
2025 East Lincoln Circle
Holladay, UT 84124
Jonathan D. Rahn, Director ......... 360,500(5) 3.6% -0- 360,500 3.6%
413 Gatewood Road
Cherry Hill, NJ 08003
Philip A. Bunker, Secretary ......... 317,099(6) 3.2% 317,099 -0- -0-
and Director
946 East 880 North
Orem, UT 84057
David Andrus, Director of ......... -0- -0- -0- -0- -0-
Development Engineering
212 North 2520 West
Provo, UT 84601
(ii) All Directors and Executive . 1,946,944(7) 19.4% 797,444 1,149,500 11.5%
Officers as a Group
(6 Persons)
(iii) Other 5% Beneficial Owners
Michael Lauer ........................ 2,538,000(8) 25.3% 1,967,500(3) 570,500 5.7%
200 Park Avenue
Suite 3900
New York, NY 10166 ..................
27
Amount and Nature of
Beneficial Ownership Adjustments for Offering
-------------------------------- --------------------------------------------------
Ownership
As of Shares Assuming the Sale
Name and Address of October 15, Percent Registered of All Shares
Beneficial Owner 1997(1) of Class(2) for Sale No. of Shares(1) Percentage(2)
- -------------------------------------- ---------------- ------------- ------------------ ---------------- -------------
Lancer Partners LP ............... 1,095,650(9) 10.9% 1,043,750 51,900 *
200 Park Avenue
Suite 3900
New York, NY 10166
Lancer Offshore, LP ............ 873,750(9) 8.7% 773,500 100,000 *
200 Park Avenue
Suite 3900
New York, NY 10166
Abraham J. Salaman ............ 638,250(10) 6.4% -0- 638,250 6.4%
c/o Trinity American Corp.
800 Kings Highway North
Suite 500
Cherry Hill, NJ 08034
Daniel and Roslyn Maxwell ...... 520,000(11) 5.1% -0- 520,000 5.1%
5970 Cilma Drive
West Valley City, UT 84128
- ------------
* Less than one percent.
(1) Unless otherwise indicated, this column reflects shares owned beneficially
and of record and as to which the named party has sole voting power and sole
investment power. This column also includes shares issuable upon the
exercise of options or similar rights which are exercisable within 60 days
from the date of this Prospectus.
(2) In computing the percentage of shares beneficially owned by any person,
shares which the person has the right to acquire upon the exercise of
options or other rights held by such person within 60 days from the date of
this Prospectus are deemed outstanding. Such shares are not deemed to be
outstanding in computing the percentage ownership of any other person.
(3) Includes 17,316 shares issuable upon the exercise of DRCC Conversion
Options.
(4) Includes 95,000 shares owned jointly with his wife and 204,000 shares
issuable upon the exercise of options granted in December 1996 and January
1997 in recognition of past services.
(5) These shares are held directly and of record or in brokerage accounts by JR
Consultants, Inc., a company controlled by Mr. Rahn.
(6) Includes 283,052 shares owned jointly with his wife, a total of 16,731
shares owned of record by his wife for his minor children under the Utah
Uniform Gift to Minors Act, as to which Mr. Bunker disclaims beneficial
ownership, and 17,316 shares issuable upon the exercise of options received
in conversion of DRCC options in connection with the Company's acquisition
of DRCC ("DRCC Conversion Options").
(7) Includes 34,712 shares issuable upon the exercise of DRCC Conversion
Options, and 204,000 shares issuable upon other options granted by the
Company.
(8) Of these shares, 400,000 are owned by Mr. Lauer in street name; 873,750 are
held directly and of record by Lancer Offshore, Inc.; 1,095,650 are held
directly and of record by Lancer Partners, LP; and 168,600 are held directly
and of record by Lancer Voyager. Mr. Lauer is believed to control the voting
and disposition of these shares by virtue of being the investment manager
for these entities. He is also the general partner of Lancer Partners LP.
(9) Michael Lauer is deemed to be an indirect beneficial owner of these shares.
28
(10) Includes 363,250 shares owned directly and of record by Trinity American
Corp. (113,250 shares) and Cherry Hill, Inc. (250,000 shares). Also
includes 275,000 shares owned of record by Robsal, Inc. which Mr. Salaman
has the right to vote, but as to which he disclaims any other beneficial
interest.
(11) Includes 370,000 shares owned directly and of record by Roslyn Maxwell,
Daniel Maxwell's wife, and 150,000 shares issuable upon the exercise of
options granted to Mr. Maxwell in December 1996 in recognition of past
services.
Selling Shareholders not named above, and the number of shares of
Outstanding Shares owned by each such Selling Shareholder prior to the offering,
is set forth in the table below. Unless otherwise indicated, all shares owned by
the Selling Shareholders listed are being registered for sale and, if sold,
would reduce the Selling shareholder's ownership interest in the Company to
zero.
NO. OF
NAME OUTSTANDING SHARES
---- ------------------
Jeffrey G. Ballif .......................................... 222,419(1)
Robert Kresge ............................................. 5,460
Robert Short ............................................. 36,982
Penny Warr & Dorothy Warr ................................. 1,394
Albert Walla ............................................. 2,231
Smith Barney, Inc. custodian FBO Robert K. Beardall ...... 5,460
Russell J. Verducci ....................................... 2,231
Dennis A. Joaquin & Jeff M. Joaquin ..................... 1,673
Vito Catalano ............................................. 1,115
Ronald Z. Plotkin and Kenneth Mendelson .................. 1,115
Hans Rech & Rose Marie Rech .............................. 3,346
Salvatore J. Galletto .................................... 4,462
Patricia A. McDonald ....................................... 1,115
Michael McGlone .......................................... 1,115
Xiaoming Xiong ............................................. 558
Yixing Qi ................................................ 558
William Hungerville ....................................... 10,039
Timothy Alsdorf .......................................... 1,115
Frank Michel ............................................. 4,462
Michael Plaza & Carol Plaza .............................. 2,231
Barbara A. Schwartz & John H. Rech JTWROS ............... 1,115
Thomas D. Rech & Valerie Rech ........................... 1,115
Jerald W. Davidson & Marian Davidson ..................... 2,231
Louis H. Merzario ....................................... 1,115
Jose D. Clemente, Jr. .................................... 1,115
Andreas F. Pozzi .......................................... 1,004
Maurice Shmueli .......................................... 112
Ronald L. Piasecki ....................................... 40,000
Jeff Walker ................................................ 558
Richard T. Mallen ....................................... 11,154
Tony Mei ................................................ 558
Nelson Wai ................................................ 558
Winn B. Pierce & Janet Pierce .............................. 167
Lon R. Hunsaker Trust .................................... 167
Mike Woodard & Debbie Woodard ........................... 558
Russell Woodard & Jana Lee Woodard ........................ 335
Halina Mjerezjewska ....................................... 2,231
Howard A. Berger & Dorothy G. Berger, JTWROS ............ 1,115
XLCR, Inc. ................................................ 2,625
Gail Isaksen ............................................. 1,115
29
NO. OF
NAME OUTSTANDING SHARES
---- ------------------
Vito Catalano, C/F Matthew Healy ................................. 557
Vito Catalano, C/F Joseph Healy ................................. 558
Ronald T. Steinberg, Robert Steinberg, Arthur Steinberg
& Mitchell Steinberg, JTWROS .................................... 1,115
Bill B. Cowser ................................................... 1,701
Craig Wise C/F Kyle Chipman ....................................... 1,115
Craig A. Wise ................................................... 5,577
Loomis J. Grossman, Jr. .......................................... 6,065
Joyce A. Demorest ................................................ 2,231
Henry P. Juco ................................................... 1,115
Bruce Ender ...................................................... 558
Rodney M. Juco ................................................... 1,115
Pensco Pension Service for Aileen Belarmino ..................... 558
Vincent P. Sharrock ............................................. 558
John F. Folan ................................................... 2,231
Paul J. Fiorello ................................................ 1,115
Pensco Pension Service for Johannes C. Kaashoek .................. 1,115
Richard A. Grossman ............................................. 6,065
Harald Justnes, Jr. ............................................. 2,231
Russel J. Redgate ................................................ 2,500
Robert L. Weeks ................................................ 217,516
Charter Small Business Network .................................... 26,771
Stephen R. Field ................................................ 1,115
William G. Schwartz ............................................. 6,065
Robert Beyersdorier, Jean Beyersdorier ........................... 223
Daniel B. French ................................................ 18,195
Douserv Group Holdings Co. ....................................... 12,129
Stephen C. Sadtler ............................................. 35,695
John C. Decas ................................................... 4,462
Decas Companies Pension Plan .................................... 3,346
Martin H. Garvey ................................................ 30,000
Craig Wise C/F Ryan Chipman .................................... 1,115
Kent Huff ...................................................... 5,577
Dianne Gill ...................................................... 1,115
Gibbs V. Bray ................................................... 4,183
Paine Webber CF Domina H. Suprenant .............................. 1,115
Vera Rose Burd ................................................... 2,231
Robert Abreu ................................................... 1,115
James Hurley ................................................... 1,115
Dennis Saluti ................................................... 2,231
Thomas R. Reilly ................................................ 2,231
Herbert T. Etzold ................................................ 1,115
Edward Turi & Lisa Turi .......................................... 6,693
J. P. Ranch ...................................................... 71,526
Capital Holdings Partnership .................................... 86,132
Prudential Securities Agreement CF SRF ........................... 120
Robert L. Field & Stephen R. Field, Ttees ........................ 22,586
SRF TTEE of the Profit Sharing Plan of the Law Office of SRF ... 1,360
Michael S. Davis ................................................ 5,577
W. H. Highleyman TTEE Sombers Assoc., Inc. Profit Sharing Plan ... 1,115
Alix Michel ...................................................... 2,231
Jay Rosenberg ................................................... 5,577
30
NO. OF
NAME OUTSTANDING SHARES
---- ------------------
James A. Burke .......................................... 1,115
Nava Sarver ............................................. 4,462
Donald Lyman & Gloria Lyman .............................. 3,718
Karen McGuire ............................................. 112
Robert J. Witt .......................................... 2,231
Chris Watkins ............................................. 3,000
Kim D. Isaacson .......................................... 3,135
David Politis ............................................. 10,513
Stephen Cowser .......................................... 139
Jack Berg ................................................ 279
George Denny ............................................. 40,000
Houise Trader Investments ................................. 6,163
Kevin & Tracey Tolbert .................................... 3,083
Stan & Beth Tolbert ....................................... 3,083
----------
TOTAL .............................................. 1,078,719
- ------------
(1) Does not include Option shares, as set forth in the table below.
Holders of DRCC Conversion Options, and the number of Option Shares which
has the right to purchase upon the exercise of such options, are as follows:
NO. OF
NAME OUTSTANDING SHARES
---- ------------------
Jeffrey G. Ballif ........................................... 13,943
Stuart Biddlph .............................................. 39,041
Lance King ................................................. 37,926
David Politis .............................................. 8,366
Arthur Larsen .............................................. 334
Bob Kresge ................................................. 1,116
Charlotte Hankins ........................................... 781
Christina Piep .............................................. 112
Floyd Bailey ................................................. 112
Glade Johnson .............................................. 10,597
Judy Harris ................................................. 558
Judy Sperry ................................................. 10,039
Lesie Carter ................................................. 112
Megan Green ................................................. 112
Nancy Croft ................................................. 224
Rich Sawyer ................................................. 3,012
Rob Carrier ................................................. 223
Shayne Miller .............................................. 893
Solomone Liukaina ........................................... 502
Stephen Cowser .............................................. 27,887
Thu Lam .................................................... 112
Tondra Duran ................................................. 335
--------
TOTAL ....................................................... 156,337
--------
31
PLAN OF DISTRIBUTION
Outstanding Shares will be sold for the account of Selling Shareholders,
and none of the proceeds from the sale of Outstanding Shares will be received by
the Company. Option Shares will be sold by the Company upon the exercise of DRCC
Conversion Options. If all DRCC Conversion Options were exercised, the Company
would receive $381,532 in payment for Option Shares.
Outstanding Shares may be offered and sold, and Option Shares acquired by
holders of DRCC Conversion Options may be resold, from time to time as market
conditions permit in transactions that may take place in the over-the-counter
market, including block trades, ordinary brokers' transactions, privately
negotiated transactions or through sales to one or more broker/dealers for
resale of such securities as principals, at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or at negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by these holders in connection with such sales. The
Company will bear all expenses (other than underwriting discounts and selling
commissions, state and local transfer taxes, and fees and expenses of counsel or
other advisors to the Selling Stockholders) in connection with the registration
of the Shares.
With limited exceptions in the case of resales of Option Shares, the
registration statement of which this Prospectus forms a part must be current at
any time during which a Selling Stockholder sells any Shares. Any material
changes which the Company, in its sole discretion, determines should be
disclosed prior to the sale of Shares will be set forth in an accompanying
supplement to this Prospectus (the "Prospectus Supplement"). The names of any
participating brokers or dealers, any applicable commissions or discounts and
the net proceeds to the Selling Stockholders from such sale will be set forth in
the applicable Prospectus Supplement as required.
In connection with sales of Shares pursuant to the Registration Statement
of which this Prospectus is a part, a Selling Shareholder offering such Shares
and brokers and dealers who participate in the offer and sale of the Shares may
be deemed "underwriters" as such term is defined in the Securities Act. In
addition, persons using this Prospectus in the offer and sale of the Shares will
be deemed to be engaged in a "distribution" of the Shares as such term is
defined in Regulation M under the Exchange Act, and will be required to comply
with Regulation M with respect to contemporaneous market activity and other
provisions of such Regulation.
32
MARKET INFORMATION
"Bid" and "asked" prices for the Company's Common Stock have been quoted on
the Nasdaq OTC Electronic Bulletin Board since October 4, 1996, prior to which
there was no public market for the Common Stock. Since October 4, 1996, actual
trading of the Common Stock has been limited and, based upon sales figures
furnished to the NASD by broker dealers who have quoted prices for the Company's
Common Stock, the total trading volume between October 4, 1996, and October 15,
1997, was 843,100 shares. The table below sets forth for the periods indicated
the high and low bid quotations as furnished by the NASD. These quotations
reflect inter-dealer prices, without retail mark-up, markdown, or commission and
may not necessarily represent transactions. The bid and asked prices for the
Common Stock on October 17, 1997, were $11.25 and $12.00, respectively.
High Low
-------- ---------
1996
----
Fourth quarter ......... $ 2.00 $ 2.00
(beginning 10/4/96)
1997
----
First quarter ......... $11.00 $ 2.00
Second quarter ......... $11.00 $ 9.00
Third quarter ......... $12.25 $ 8.125
Fourth quarter ......... $12.00 $11.00
(through October 17, 1997)
At October 15, 1997, the Company had 194 holders of record of its Common
Stock.
Outstanding Options
The Company has outstanding options to purchase a total of 598,969 shares
of Common Stock at prices ranging from $0.18 to $ 2.00 per share, and expiring
between June 30, 1998, and December 20, 2001. See "Description of Securities --
Other Outstanding Options".
Shares Saleable Under Rule 144
At October 15, 1997, the Company had outstanding 7,489,758 shares that were
"restricted securities" as defined in Rule 144, promulgated by the Securities
and Exchange Commission. Of these shares, 1,022,140 shares currently are
saleable, and the balance will become saleable prior to August 8, 1998, under
Rule 144, upon the seller's compliance with the manner of sale and other
conditions and limitations of that Rule. Rule 144 also requires that specified
information concerning the Company must be available at the time any such sale
is made. Following this offering, the Company will be subject to reporting
requirements of the Securities Exchange Act of 1934, compliance with which also
will satisfy Rule 144 "public information" requirements. Shares registered for
sale by Selling stockholders are restricted securities which are not currently
saleable under Rule 144, but which would become saleable under that Rule by the
holders of such securities in 1998.
ORGANIZATIONAL AND OTHER TRANSACTIONS
Organization, Initial Capitalization and Purchase of Assets of Micro Security,
Inc.
The Company was formed in November 1995 to acquire certain assets that had
been used in the business of Micro Security, Inc. ("Micro"). Contemporaneously
with its organization, the Company entered into an agreement to acquire the
Micro assets from Chocolate Leasing LLC ("Chocolate"), a limited liability
company that had previously acquired those assets. The individuals principally
responsible for organizing the Company were Abraham Salaman and Lynn Dixon, and
the organizers of Chocolate were Gary Christensen, Gary Peterson, Dan Maxwell
and Brian Pettersen. Messrs. Christensen, Peterson, Maxwell, Pettersen, Salaman
and Dixon all may be considered "founders" or "promoters" of the Company.
33
In connection with the purchase and sale of Micro assets, Mr. Christensen
received $269,000 in redemption of his interest, and Messrs. Maxwell, Peterson
and Pettersen received shares of the Company's Common Stock (450,000, 105,000
and 105,000 shares, respectively) in consideration for their interests, through
Chocolate, in the Micro assets, which assets had been acquired by them at a net
cash cost of $122,000 during 1995.
Also in connection with the Company's organization and initial
capitalization, and the purchase of Micro assets, the Company issued 132,140
shares of Common Stock to Robsal, Inc. and Elvena, Inc., corporations controlled
by or otherwise associated with Messrs. Salaman and Dixon, for cash (107,140
shares) and for services (25,000 shares) at a price of $.047 per share. The
Company also issued 320,000 shares of Common Stock to Jonathan D. Rahn, who also
may be considered a founder or promoter of the Company, for services at a price
of $.047 per share, and borrowed $275,000 from Robsal, Inc., Elvena, Inc., three
other corporations controlled by Messrs. Salaman and Dixon and/or their adult
children (Cherry Hill, Inc., BRRD, Inc. and Stamatt, Inc.), Mr. Salaman's nephew
and three other investors. These short term borrowings and accrued interest
thereon were converted into 1,892,860 shares of Common Stock (an effective price
of approximately $.15 per share) in March 1996.
Mr. Dixon served as the initial President and sole director of the Company
until Mr. Peterson became a director, President and Chief Executive Officer,
and Mr. Rahn became Secretary/Treasurer and a director, of the Company on
November 16, 1995. Mr. Peterson remained President and a director of the
Company until October 28, 1996. Mr. Maxwell presently is employed by the
Company in a supervisory engineering and manufacturing position. Mr. Pettersen
serves as Executive Vice President of the Company and is a Director. Mr. Rahn
serves as Secretary of the Company and is a Director. None of the Company's
other founders/ promoters is or has been employed by the Company.
Employment of David Singer
In October 1996, the Company entered into an agreement with David Singer in
connection with which Mr. Singer assumed the duties of Chief Executive Officer
of the Company, and the Company agreed to acquire a corporation which had been
organized by Mr. Singer and a business associate of his to engage in the
contract manufacturing and assembly in exchange for 500,000 shares of Common
Stock. Since the corporation formed by Mr. Singer did not have assets or
operations at the time of the agreement, the shares acquired by Mr. Singer in
this transaction (475,000 shares) were treated, for accounting purposes, as
being issued for services, and were valued at approximately $.33 per share.
Principal Capital Transactions
In October 1996 through January 1997, the Company sold 2,357,857 shares of
Common Stock to a total of 33 investors for cash (1,800,000 shares at $.33 per
share, and 557,857 shares at $.35 per share), 11,000 shares in payment of
accrued interest on a note at a price of $.45, and 5,629 shares in conversion of
a note at $.35 per share. Purchasers included Lynn Dixon and Elvena, Inc.
(245,629 shares); Trinity American Corp., a corporation owned and controlled by
Mr. Salaman (113,250 shares), J.R. Consultants, Inc., a corporation owned and
controlled by Mr. Rahn (75,500 shares), a number of other entities and
individuals related to Messrs. Salaman and Dixon and other investors.
During 1997, the Company issued a total of 2,000,000 shares of Common Stock
raising a total of $4,000,000 (average cost of $2.00 per share) in direct
private placements of Common Stock or units of securities consisting of Common
Stock and Warrants, all of which were subsequently exercised. Michael Lauer,
certain of his associates, and a number of institutional investors for which Mr.
Lauer is the investment manager and/or general partner, were the purchasers of
these securities. Mr. Lauer also purchased 400,000 shares of Common Stock in the
financing transactions described in the preceding paragraph.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.001 par value, of which 10,035,518 shares were outstanding as of
October 15, 1997, and 1,000,000 shares of Preferred Stock, $.001 par value, of
which no shares are outstanding.
34
Common Stock
Holders of Common Stock are entitled to one vote for each share of Common
Stock owned of record on all matters to be voted on by stockholders, including
the election of directors. Holders of Common Stock do not have cumulative voting
rights and, accordingly, the holders of more than 50% of the outstanding shares
can elect the entire Board of Directors. The holders of Common Stock are
entitled, upon liquidation or dissolution of the Company, to receive pro rata
all assets remaining available for distribution to stockholders. The Common
Stock has no preemptive or other subscription rights, and there are no
conversion rights or redemption provisions. All outstanding shares of Common
Stock are validly issued, fully paid, and nonassessable.
Preferred Stock
The Company's Board of Directors has the authority by resolution to issue
up to 1,000,000 shares of preferred stock in one or more series and fix the
number of shares constituting any such series, the voting powers, designations,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, including the dividend
rights, dividend rate, terms of redemption (including sinking fund provisions),
redemption price or prices, conversion rights and liquidation preferences of the
shares constituting any series, without any further vote or action by the
stockholders. For example, the Board of Directors is authorized to issue a
series of preferred stock that would have the right to vote, separately or with
any other series of preferred stock, on any proposed amendment to the Company's
Articles of Incorporation or on any other proposed corporate action, including
business combinations and other transactions.
1997 Stock Option Plan
On October 1, 1997, the Company's Board of Directors approved the 1997
Stock Option Plan (the "Plan"), subject to shareholder approval of the Plan, and
reserved 1,500,000 shares of Common Stock for issuance upon options granted
under the Plan. As of the date of this Prospectus, no options had been granted
under the 1997 Plan.
The purposes of the Plan are to provide incentives and rewards to those
employees who are in a position to contribute to the long-term growth and
profitability of the Company; to assist the Company to attract, retain and
motivate personnel with experience and ability; and to make the Company's
compensation program more competitive with those of other employers. The Company
anticipates it will benefit from the added interest which such personnel will
have in the success of the Company as a result of their proprietary interest.
The Plan presently is administered by the Board of Directors, but the Board
may establish a Stock Option Committee (the "Committee"), which consists of at
least three directors, to administer the Plan. References to the "Committee"
herein include the Board of Directors so long as it continues to administer the
Plan directly.
The Committee is authorized to select from among eligible employees,
directors, advisors and consultants those individuals to whom options are to be
granted and to determine the number of shares to be subject to, and the terms
and conditions of, the options. The Committee also is authorized to prescribe,
amend and rescind terms relating to options granted under the Plan and the
interpretation of options. Generally, the interpretation and construction of any
provision of the Plan or any options granted thereunder is within the discretion
of the Committee.
The Plan provides that options may or may not be Incentive Stock Options
within the meaning of Section 422 of the Internal Revenue Code ("ISOs"). Only
employees of the Company are eligible to receive ISOs, while employees and
non-employee directors, advisors and consultants are eligible to receive
options which are not ISOs, i.e. "Non-Qualified Options."
The acquisition of shares upon exercise of an ISO will not result in
recognition of income at the time. However, the excess of the fair market value
of the shares acquired over the exercise price will constitute an item of tax
preference, to be included in the optionee's computation of his "alternative
minimum tax" for federal income tax purposes. If the optionee does not dispose
of the shares issued to him upon the exercise of an ISO within one years of such
issuance or within two years from the date of the grant of the ISO, whichever is
later, any gain or loss realized by the optionee on a later sale or exchange of
such shares generally will be a
35
long-term capital gain or long-term capital loss. If the optionee sells the
shares during such period, the optionee will recognize ordinary income for the
year in which disposition occurs equal to the amount, if any, by which the
lesser of the fair market value of such shares on the date of exercise of such
ISO or the amount realized from such sale exceeded the amount paid for such
shares.
In the case of Non-Qualified Options, the optionee generally will recognize
ordinary income upon exercise of the Non-Qualified Option in an amount equal to
the difference between the option price, assuming that the option price equaled
the fair market value of the Company's Common Stock at the time of grant, and
the fair market value of the shares on the date of exercise. When the shares are
sold, the grantee will generally recognize capital gain or loss equal to the
difference between (i) the selling price of the shares, and (ii) the sum of the
option price and the amount included in his income when the option is exercised.
The terms of options granted under the Plan are determined by the Committee
at the time the option is granted. Each option is evidenced by a written option
document, which, together with the provisions of the Plan itself determines such
terms as: when options under the Plan become exercisable; the exercise price of
options granted under the Plan, which may not be less than 100% of the fair
market value of the Common Stock on the date of the grant in the case of ISOs
(110% in the case of optionees who own 10% or more of the Company's Common Stock
on the date of grant); the term of the option; vesting provisions; and special
termination provisions.
An option is not transferrable by the optionee, other than by will or the
laws of descent and distribution, and is exercisable only by the optionee during
his lifetime or, in the event of his death, by a person who acquires the right
to exercise the option by bequest or inheritance or by reason of the optionee's
death.
Other Options
The Company has outstanding options to purchase 190,969 shares of Common
Stock at prices ranging from $0.18 per share to $2.00 per share (average
exercise price of $2.00 per share) issued in connection with the DRCC
acquisition in order to convert DRCC options granted prior to the Company's
acquisition of DRCC. The DRCC "conversion options" are subject to the terms and
conditions of DRCC's Omnibus Stock Option Plan (the "DRCC Plan") pursuant to
which the options originally were granted. The terms of the DRCC Plan are
substantially the same as the Company's 1997 Stock Option Plan.
The Company also has outstanding options to purchase 258,000 shares at a
price of $.33 per share, and 150,000 shares at a price of $.35 per share, which
were granted to the former President and CEO (Gary Peterson) and other members
of management of the Company (Brian Pettersen and Dan Maxwell) in late 1996 and
early 1997 in recognition of their prior service.
The options described above are fully vested, or will vest prior to
December 20, 1997, and expire between February 1, 1999 and December 20, 2001 in
the case of the DRCC conversion options, and on June 30, 1998, in the case of
the 408,000 options granted in December 1996 and January 1997.
"Anti-Takeover" Provisions
Although the Board of Directors is not presently aware of any takeover
attempt or interest involving the Company, the Articles of Incorporation and
Bylaws of the Company and the Nevada General Corporation Law (the "NGCL")
contain certain provisions which may be deemed to be "anti-takeover" in nature
in that such provisions may deter, discourage or make more difficult the
assumption of control of the Company by another corporation or person through a
tender offer, merger, proxy contest or similar transaction or series of
transactions.
Authorized but Unissued Shares: The authorized capital stock of the Company
is 50,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock.
These shares of capital stock were authorized for the purpose of providing the
Board of Directors of the Company with as much flexibility as possible to issue
additional shares for proper corporate purposes, including equity financing,
acquisitions, stock dividends, stock splits, employee stock option plans, and
other similar purposes which could include public offerings or private
placements. Other than with respect to shares of Common Stock reserved for
issuance upon the exercise of options, as described above, the Company has no
agreements, commitments or immediate plans for the sale or issuance
36
of the additional shares of Common Stock or Preferred Stock at this time.
However, shares of Preferred Stock could be issued quickly with terms calculated
to delay or prevent a change in control of the Company without any further
action by the stockholders. Stockholders of the Company do not have preemptive
rights with respect to the purchase of these shares. Therefore, such issuance
could result in a dilution of voting rights and book value per share of the
Common Stock of the Company. No shares of Preferred Stock have been issued, and
the Company has no present plan to issue any such shares.
No Cumulative Voting: Neither the Company's Articles of Incorporation nor
its Bylaws contain provisions for cumulative voting. Cumulative voting entitles
each stockholder to as many votes as equal the number of shares owned by him
multiplied by the number of directors to be elected. A stockholder may cast all
these votes for one candidate or distribute them among any two or more
candidates. Thus, cumulative voting for the election of directors allows a
stockholder or group of stockholders who hold less than 50% of the outstanding
shares voting to elect one or more members of a board of directors. Without
cumulative voting for the election of directors, the vote of holders of a
plurality of the shares voting is required to elect any member of a board of
directors and present stockholders would be able to elect all of the members of
the board of directors. The Company's founders did not provide for cumulative
voting in the Articles of Incorporation of the Company because of a belief that
each director should represent and act in the interest of all stockholders and
not any special group of stockholders.
Control Share Acquisitions: Sections 78.378 et seq. of the NGCL provide for
notice to shareholders of a "control share acquisition", which is defined as the
acquisition of 20% of the voting power of a Nevada corporation, or of voting
power exceeding one-third of such total voting power by a person who owns 20% or
more of such voting power prior to the acquisition, or a majority or more of
such voting power by a person who already owns one-third or more of the voting
power. Shareholders have the right to demand "fair value" for their shares if a
control share acquisition occurs. The "control share" provisions limit the
voting power of the acquiror in a control share acquisition, and permit a
corporation to recover profits resulting from the sale of control shares in
certain situations. The control share acquisition provisions of the NGCL apply
only to Nevada corporations with a minimum of 100 shareholders of record who
reside in Nevada and, for that reason, do not now apply to the Company.
General Effect of Anti-Takeover Provisions: The overall effect of these
provisions may be to deter a future tender offer or other takeover attempt that
some stockholders might view to be in their best interests at that time. In
addition, these provisions may have the effect of assisting the Company's
current management in retaining its position and place it in a better position
to resist changes which some stockholders may want to make if dissatisfied with
the conduct of the Company's business.
Provisions Relating to Officers and Directors
The Company's Articles of Incorporation contain a provision permitted by
Nevada law which eliminates the personal liability of the Company's directors
for monetary damages for breach or alleged breach of their fiduciary duty of
care which arises under state law. Although this does not change the directors'
duty of care, it limits legal remedies which are available for breach of that
duty to equitable remedies, such as an injunction or rescission. This provision
of the Company's Articles of Incorporation has no effect on directors' liability
for: (1) breach of the directors' duty of loyalty; (2) acts or omissions not in
good faith or involving intentional misconduct or known violations of law; and
(3) approval of any transactions from which the directors derive an improper
personal benefit.
The Company's Articles of Incorporation also contain a provision providing
for the indemnification of directors and officers to the fullest extent
permitted under the NGCL.
Dividend Policy
The Company has never paid and does not presently anticipate paying
dividends on its Common Stock.
Transfer Agent
Interwest Transfer Co., Inc., Suite 100, 1901 E. 4000 South, Salt Lake
City, UT 84117, is the transfer agent and registrar for the Company's Common
Stock.
37
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Section 78.751 of the NGCL, as amended, authorizes the Company to indemnify
any director or officer under certain prescribed circumstances and subject to
certain limitations against certain costs and expenses, including attorneys'
fees actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
such person is a party by reason of being a director of officer of the Company
if it is determined that such person acted in accordance with the applicable
standard of conduct set forth in such statutory provisions. The Company may also
purchase and maintain insurance for the benefit of any director or officer which
may cover claims for which the Company could not indemnify such person. Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore unenforceable.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Connolly Epstein Chicco Foxman Engelmyer
& Ewing.
EXPERTS
The consolidated financial statements of World Wireless Communications,
Inc. and subsidiaries as of December 31, 1996 and 1995, and for the years ended
December 31, 1996 and 1995, included in this Prospectus have been so included in
reliance on the report of Hansen, Barnett & Maxwell, independent accountants,
given on the authority of said firm as experts in auditing and accounting. The
consolidated financial statements of Digital Radio Communications Corporation
and subsidiaries as of December 31, 1996 and 1995, and for the years ended
December 31, 1996 and 1995, included in this Prospectus have been so included in
reliance upon the report of Hansen, Barnett & Maxwell, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company has filed a registration statement on Form SB-2 (including all
amendments and supplements thereto, the "Registration Statement") with the
Commission under the Securities Act with respect to the Shares offered hereby.
This Prospectus, which forms a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
Exhibits filed therewith, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. Statements contained herein
concerning the provisions of such documents are not necessarily complete and, in
each instance, reference is made to the Registration Statement or to the copy of
such document filed as an Exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference. Copies of the Registration Statement and Exhibits thereto can be
obtained upon payment of a fee prescribed by the Commission or may be inspected
free of charge at the public reference facilities and regional offices referred
to below. Additional information with respect to this offering may be provided
in the future by means of supplements or "stickers" to the Prospectus.
Prior to the date of this Prospectus, the Company has not been subject to
the informational and reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Following the date of this Prospectus,
the Company will be subject to Exchange Act reporting requirements and, in
accordance therewith, will file reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed with the Commission by the Company
may be inspected and copied at the public reference facilities maintained by the
Commission at its principal offices at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and 7
38
World Trade Center, Suite 1300, New York, New York 10048. Such reports, proxy
statements and other information may also be obtained from the web site that the
Commission maintains at http://www.sec.gov. Copies of these materials can also
be obtained at prescribed rates from the Public Reference Section of the
Commission at its principal offices in Washington, D.C., set forth above.
39
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
-----
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF WORLD WIRELESS
COMMUNICATIONS, INC. AND DIGITAL RADIO COMMUNICATIONS CORPORATION
Pro Forma Condensed Consolidated Statements of Operations for the Six Months Ended June
30, 1997 ....................................................................................... F-2
Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December
31, 1996 ........................................................................................ F-2
WORLD WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants ............................................. F-3
Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (Unaudited), and December 31, 1996 and 1995 .... F-4
Consolidated Statements of Operations for the Six Months Ended June 30, 1997 and 1996
(Unaudited), for the Year Ended December 31, 1996, for the Period from April 10, 1995
(Date of Inception) through December 31, 1995, for the Cumulative Period From April
10, 1995 through June 30, 1997 (Unaudited), and for the Cumulative Period from April 10, 1995
through December 31, 1996 .................................................................... F-6
Consolidated Statements of Stockholders' Equity for the Period from April 10, 1995
(Date of Inception) through December 31, 1995, for the Year Ended December 31, 1996, and for
the Six Months Ended June 30, 1997 (Unaudited) ............................................. F-7
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996
(Unaudited), for the Year Ended December 31, 1996, for the Period from April 10, 1995
(Date of Inception) through December 31, 1995, for the Cumulative Period From April
10, 1995 through June 30, 1997 (Unaudited), and for the Cumulative Period from April 10, 1995
through December 31, 1996 .................................................................... F-9
Notes to Consolidated Financial Statements ...................................................... F-10
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Report of Independent Certified Public Accountants ............................................. F-19
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995 ................................. F-20
Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1995............ F-21
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December
31, 1995 and 1996 .......................................................................... F-22
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995............ F-23
Notes to Consolidated Financial Statements ................................................... F-24
F-1
WORLD WIRELESS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
The unaudited pro forma consolidated financial statements present the
acquisition of DRCC by the Company using the purchase method of accounting as if
the acquisition had been consummated at January 1, 1996. Such information is
derived from, and should be read in conjunction with, the separate historical
consolidated financial statements of the Company and DRCC and notes thereto and
other financial information appearing elsewhere herein. The unaudited pro forma
consolidated statements of operations have been included for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have been obtained if the acquisition had been consummated
at January 1, 1996 or the results of operations which may be obtained in the
future. In addition, future results may vary significantly from the results
reflected in these pro forma statements of operations due to normal market and
industry activities.
FOR THE SIX MONTHS ENDED JUNE 30, 1997
World Digital Pro Forma Pro Forma
Wireless Radio Adjustments Results
---------------- ----------------- ------------- ----------------
Sales ....................................... $ 1,875,494 $ 134,585 $ 2,010,079
Cost of sales .............................. 1,070,097 88,205 1,158,302
------------ ------------- ------------
Gross profit .............................. 805,397 46,380 851,777
------------ ------------- ------------
Research and development expense ............ 588,938 93,267 682,205
General and administrative expense ......... 1,476,596 91,973 1,568,569
Amortization of Goodwill .................. 279,963 --(A) $ 88,780 368,743
Interest expense ........................... 22,597 -- 22,597
------------ ------------- ---------- ------------
Total expenses .............................. 2,368,094 185,240 88,780 2,642,114
------------ ------------- ---------- ------------
Net loss .................................... $ (1,562,697) $ (138,860) $ (88,780) $ (1,790,337)
============ ============= ========== ============
Net loss per common share .................. $ (0.19) $ (0.21)
============ ============
Weighted average number of common
shares used in per share calculation ...... 8,421,370 8,330,116
============ ============
FOR THE YEAR ENDED DECEMBER 31, 1996
Sales ....................................... $ 618,505 $ 1,386,478 $ 2,004,983
Cost of sales .............................. 662,184 1,006,366 1,668,550
------------ ------------- ------------
Gross profit .............................. (43,679) 380,112 336,433
------------ ------------- ------------
Research and development expense ............ 92,932 440,125 533,057
General and administrative expense ......... 732,636 1,089,821 1,822,457
Amortization of Goodwill .................. -- --(A) $ 753,598 753,598
Interest expense ........................... 30,677 36,397 67,074
------------ ------------- ---------- ------------
Total expenses .............................. 856,245 1,566,343 753,598 3,176,186
------------ ------------- ---------- ------------
Loss from operations ........................ (899,924) (1,186,231) (753,598) (2,839,753)
Benefit from income tax ..................... -- (13,718) -- (13,718)
------------ ------------- ---------- ------------
Net loss .................................... $ (899,924) $ (1,172,513) $ (753,598) $ (2,826,035)
============ ============= ========== ============
Net loss per common share .................. $ (0.25) $ (0.52)
============ ============
Weighted average number of common
shares used in per share calculation ...... 3,601,750 5,399,850
============ ============
- ------------
(A) To record the pro forma goodwill amortization adjustment to reflect the
Company's amortization expense as if the acquisition had occurred on January
1, 1996. Goodwill is amortized over five years by the straight-line method.
F-2
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East Broadway, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
World Wireless Communications, Inc.
We have audited the accompanying consolidated balance sheets of World Wireless
Communications, Inc. and subsidiaries (a development stage enterprise) as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
1996, for the period from April 10, 1995 (date of inception) through December
31, 1995, and for the cumulative period from April 10, 1995 through December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of World Wireless
Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the year ended December 31,
1996, for the period from April 10, 1995 (date of inception) through December
31, 1995, and for the cumulative period from April 10, 1995 through December 31,
1996, in conformity with generally accepted accounting principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 7, 1997
F-3
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
June 30, ----------------------------
1997 1996 1995
------------- ------------- ------------
(Unaudited)
Current Assets
Cash ....................................... $ 707,120 $ 37,278 $ 29,682
Trade accounts receivables .................. 704,247 130,509 30,621
Other receivables (net of allowance) ...... 120,389 -- --
Inventory ................................. 422,206 159,881 60,656
Other assets .............................. -- 883 --
----------- ---------- ---------
Total Current Assets ..................... 1,953,962 328,551 120,959
----------- ---------- ---------
Equipment .................................... 1,279,625 448,237 339,693
Less accumulated depreciation ............ (212,556) (121,215) (38,853)
----------- ---------- ---------
Net Equipment .............................. 1,067,069 327,022 300,840
----------- ---------- ---------
Other Assets
Goodwill -- net ........................... 3,488,028 -- --
Non-compete agreement -- net ............... 72,112 -- --
Security deposit and other ............... 20,194 7,469 4,141
Organization costs, net ..................... 3,328 -- --
Investment in joint venture ............... 13,520 -- --
Investment in securities .................. 36,500 -- --
----------- ---------- ---------
Total Other Assets ........................ 3,633,682 7,469 4,141
----------- ---------- ---------
Total Assets ................................. $ 6,654,713 $ 663,042 $ 425,940
=========== ========== =========
(continued)
The accompanying notes are an integral part of these financial statements.
F-4
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
June 30, ---------------------------
1997 1996 1995
--------------- ------------ ------------
(Unaudited)
Current Liabilities
Trade accounts payable ................................. $ 355,899 $ 61,997 $ 31,256
Accrued liabilities .................................... 146,925 55,788 827
Notes payable and capital lease obligation -- current
portion ............................................. 137,952 85,566 284,000
Non-compete obligation ................................. 102,604 -- --
Accrued settlement obligation ........................... 160,000 -- --
------------ ---------- ---------
Total Current Liabilities .............................. 903,380 203,351 316,083
Long-Term Liabilities
Notes payable and capital lease obligation ............ 54,084 44,808 44,500
Deferred income taxes ................................. 546,465 -- --
------------ ---------- ---------
Total Liabilities .................................... 1,503,929 248,159 360,583
------------ ---------- ---------
Stockholders' Equity
Preferred stock -- $0.001 par value; 1,000,000 shares
authorized; no shares issued or outstanding ......... -- -- --
Common stock -- $0.001 par value; 50,000,000 shares
authorized; 9,524,587, 5,663,000 and 1,132,140
shares issued and outstanding, respectively ......... 9,525 5,663 1,132
Additional paid-in capital ........................... 7,692,548 1,397,812 152,893
Deficit accumulated during the development stage ...... (2,551,289) (988,592) (88,668)
------------ ---------- ---------
Total Stockholders' Equity ........................... 5,150,784 414,883 65,357
------------ ---------- ---------
Total Liabilities and Stockholders' Equity ............... $ 6,654,713 $ 663,042 $ 425,940
============ ========== =========
The accompanying notes are an integral part of these financial statements.
F-5
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months For the
Ended June 30, Year Ended
------------------------------- December 31,
1997 1996 1996
---------------- ------------- --------------
(Unaudited) (Unaudited)
Sales ................................. $ 1,875,494 $ 339,283 $ 618,505
Cost of Sales ........................ 1,070,097 319,104 662,184
------------ ---------- -----------
Gross Profit ........................... 805,397 20,179 (43,679)
------------ ---------- -----------
Expenses
Research and development expense ...... 588,938 -- 92,932
General and administrative expense ... 1,476,596 294,992 732,636
Amortization of goodwill ............ 279,963 -- --
Interest expense ..................... 22,597 13,236 30,677
------------ ---------- -----------
Total Expenses ..................... 2,368,094 308,228 856,245
------------ ---------- -----------
Net Loss .............................. $ (1,562,697) $ (288,049) $ (899,924)
============ ========== ===========
Net Loss Per Common Share ............ $ (0.19) $ (0.09) $ (0.25)
============ ========== ===========
Weighted Average Number of Common Shares
Used in Per Share Calculation ......... 8,421,370 3,049,484 3,601,750
============ ========== ===========
For the Period For the
From April 10, Cumulative Periods
1995 (Date of From April 10, 1995
Inception) (Date of Inception) Through
Through -------------------------------
December 31, June 30, December 31,
1995 1997 1996
---------------- ---------------- -------------
(Unaudited)
Sales ................................. $ 426,825 $ 2,920,824 $1,045,330
Cost of Sales ........................ 237,356 1,969,637 899,540
---------- ------------ -----------
Gross Profit ........................... 189,469 951,187 145,790
---------- ------------ -----------
Expenses
Research and development expense ...... -- 681,870 92,932
General and administrative expense ... 278,137 2,487,369 1,010,773
Amortization of goodwill ............ -- 279,963 --
Interest expense ..................... -- 53,274 30,677
---------- ------------ -----------
Total Expenses ..................... 278,137 3,502,476 1,134,382
---------- ------------ -----------
Net Loss .............................. $ (88,668) $ (2,551,289) $ (988,592)
========== ============ ===========
Net Loss Per Common Share ............ $ (0.10) $ (0.30) $ (0.31)
========== ============ ===========
Weighted Average Number of Common Shares
Used in Per Share Calculation ......... 854,640 8,421,370 3,209,306
========== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-6
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Accumulated
Common Stock Additional During the Total
------------------------ Paid-in Development Stockholders'
Shares Amount Capital Stage Equity
------------ --------- ------------ ------------- --------------
BALANCE -- APRIL 10, 1995 (Date
of Inception) ........................... -- $ -- $ -- $ -- $ --
Shares issued for cash, April 10, 1995,
$0.18 per share ........................... 1,020,000 1,020 338,980 -- 340,000
Shares issued for cash, June through
November 1995, $0.05 to $0.23 per
share .................................... 306,395 306 55,694 -- 56,000
Redemption of shares for $60,000 cash
and a $209,000 promissory note, May
through November 1995, $0.18 per
share .................................... (600,000) (600) (268,400) -- (269,000)
Shares issued for services, November
1995, $0.05 to $0.24 per share ............ 405,745 406 26,619 -- 27,025
Net Loss ................................. -- -- -- (88,668) (88,668)
--------- ------- ---------- ----------- ----------
BALANCE -- DECEMBER 31, 1995................ 1,132,140 1,132 152,893 (88,668) 65,357
Shares issued upon conversion of notes
payable, January 1996, $0.15 per share 1,892,860 1,893 273,107 -- 275,000
Shares issued for cash, less $12,000 in
offering costs, March 1996, $0.70 per
share .................................... 300,000 300 197,700 -- 198,000
Shares issued for services, March 1996,
$0.70 per share ........................... 7,000 7 4,893 -- 4,900
Shares issued for cash, less $5,000 in
offering costs, October to December
1996, $0.33 per share ..................... 1,800,000 1,800 593,200 -- 595,000
Shares issued for services October
through November $0.33 per share ......... 520,000 520 171,080 -- 171,600
Shares issued for interest due on convert-
ible debentures, December 1996, $0.45
per share ................................. 11,000 11 4,939 -- 4,950
Net loss ................................. -- -- -- (899,924) (899,924)
--------- ------- ---------- ----------- ----------
BALANCE -- DECEMBER 31, 1996 ............... 5,663,000 $5,663 $1,397,812 $ (988,592) $ 414,883
========= ======= ========== =========== ==========
(Continued)
The accompanying notes are an integral part of these financial statements.
F-7
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
Deficit
Accumulated
Common Stock Additional During the Total
---------------------- Paid-in Development Stockholders'
Shares Amount Capital Stage Equity
----------- --------- ------------ ---------------- --------------
BALANCE -- DECEMBER 31, 1996 ........................ 5,663,000 $ 5,663 $1,397,812 $ (988,592) $ 414,883
Shares issued for cash, January 15, 1997, $0.35 per
share (unaudited) ................................. 557,857 558 194,692 -- 195,250
Shares issued upon conversion of note payable,
January 15, 1997, $0.35 per share (unaudited) ...... 5,629 6 1,964 -- 1,970
Shares and 500,000 warrants (exercisable at $2.00
per share) issued for cash, February 12, 1997,
$1.69 per share and $0.31 per warrant
(unaudited) ....................................... 500,000 500 999,500 -- 1,000,000
Shares issued and 201,900 stock options granted in
acquisition of Digital Radio Communications
Corporation, February 12, 1997, $1.69 per share
and $0.31 per option (unaudited) .................. 1,798,100 1,798 3,099,580 -- 3,101,378
Shares issued for cash upon exercise of warrants,
March 6, 1997, $2.00 per share (unaudited) ......... 500,000 500 999,500 -- 1,000,000
Shares issued for cash, April 23, 1997, $2.00 per
share (unaudited) ................................. 500,000 500 999,500 -- 1,000,000
Net loss (unaudited) .............................. -- -- -- (1,562,697) (1,562,697)
---------- -------- ----------- ------------ ------------
BALANCE -- JUNE 30, 1997 (Unaudited) ............... 9,524,587 $ 9,525 $7,692,548 $ (2,551,289) $ 5,150,784
========== ======== =========== ============ ============
The accompanying notes are an integral part of these financial statements.
F-8
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months For the
Ended June 30, Year Ended
------------------------------- December 31,
1997 1996 1996
---------------- ------------- --------------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities
Net loss ................................. $ (1,562,697) $ (288,050) $ (899,924)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization ......... 371,304 40,155 83,094
Allowance provided on other
receivables ........................... 35,000 -- --
Provision for settlement liability ...... 160,000 -- --
Stock issued for services ............... -- 4,900 176,500
Stock issued for interest ............ -- -- 4,950
Changes in operating assets and
liabilities, net of effects of
businesses acquired:
Accounts receivable .................. (262,110) (34,521) (99,888)
Other receivable ..................... (152,898) -- --
Other assets ........................... 2,896 (16,776) (883)
Inventory .............................. (5,840) (12,617) (99,225)
Accounts payable ..................... (80,016) 18,959 30,741
Accrued liabilities .................. (405,117) 39,390 54,965
------------ ---------- -----------
Net Cash Used By Operating
Activities .............................. (1,899,478) (248,560) (749,670)
------------ ---------- -----------
Cash Flows From Investing Activities
Payment for acquisition of subsidiaries
net of cash received -- net ............ (131,157) -- --
Payments for the purchase of property
and equipment ........................ (404,382) (77,327) (90,544)
Payment for other assets ............... -- -- (4,060)
------------ ---------- -----------
Net Cash Used By Investing Activities .... (535,539) (77,327) (94,604)
------------ ---------- -----------
Cash Flows From Financing Activities
Redemption of common stock ............... -- -- --
Proceeds from issuance of common
stock ................................. 3,195,250 116,500 171,500
Offering costs paid ..................... -- (12,000) (17,000)
Proceeds from borrowings ............... 50,000 320,500 805,470
Proceeds from sale and lease back of
equipment .............................. -- 80,500 80,500
Principal payments of debt ............... (120,752) (202,163) (188,600)
Principal payments on capital lease
obligations ........................... (19,639) -- --
------------ ---------- -----------
Net Cash Provided By Financing
Activities .............................. 3,104,859 303,337 851,870
------------ ---------- -----------
Net Increase In Cash ..................... 669,842 (22,550) 7,596
Cash -- Beginning of Period ............ 37,278 29,682 29,682
------------ ---------- -----------
Cash -- End of Period ..................... $ 707,120 $ 7,132 $ 37,278
============ ========== ===========
For the Period
From April 10, For the
1995 (Date of Cumulative Period
Inception) From April 10, 1995
Through Date of Inception) Through
December 31, June 30, December 31,
1995 1997 1996
---------------- ---------------- -------------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities
Net loss ................................. $ (88,668) $ (2,551,289) $ (988,592)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization ......... 38,853 493,251 121,947
Allowance provided on other
receivables ........................... -- 35,000 --
Provision for settlement liability ...... -- 160,000 --
Stock issued for services ............... 27,025 203,525 203,525
Stock issued for interest ............ -- 4,950 4,950
Changes in operating assets and
liabilities, net of effects of
businesses acquired:
Accounts receivable .................. (30,621) (392,619) (130,509)
Other receivable ..................... -- (152,898) --
Other assets ........................... -- 2,013 (883)
Inventory .............................. (14,799) (119,864) (114,024)
Accounts payable ..................... 31,256 (18,019) 61,997
Accrued liabilities .................. 827 (349,325) 55,792
---------- ------------ -----------
Net Cash Used By Operating
Activities .............................. (36,127) (2,685,275) (785,797)
---------- ------------ -----------
Cash Flows From Investing Activities
Payment for acquisition of subsidiaries
net of cash received -- net ............ (340,000) (471,157) (340,000)
Payments for the purchase of property
and equipment ........................ (49,691) (544,617) (140,235)
Payment for other assets ............... -- (4,060) (4,060)
---------- ------------ -----------
Net Cash Used By Investing Activities..... (389,691) (1,019,834) (484,295)
---------- ------------ -----------
Cash Flows From Financing Activities
Redemption of common stock ............... (60,000) (60,000) (60,000)
Proceeds from issuance of common
stock ................................. 396,000 3,762,750 567,500
Offering costs paid ..................... -- (17,000) (17,000)
Proceeds from borrowings ............... 125,000 980,470 930,470
Proceeds from sale and lease back of
equipment .............................. 44,500 125,000 125,000
Principal payments of debt ............... (50,000) (359,352) (238,600)
Principal payments on capital lease
obligations ........................... -- (19,639) --
---------- ------------ -----------
Net Cash Provided By Financing
Activities .............................. 455,500 4,412,229 1,307,370
---------- ------------ -----------
Net Increase In Cash ..................... 29,682 707,120 37,278
Cash -- Beginning of Period ............ -- -- --
---------- ------------ -----------
Cash -- End of Period ..................... $ 29,682 $ 707,120 $ 37,278
========== ============ ===========
Supplemental cash flow information and noncash investing and financing
activities -- Note 6
The accompanying notes are an integral part of these financial statements.
F-9
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information With Respect to June 30, 1997 and For the Six Months ended
June 30, 1997 and 1996 is Unaudited)
NOTE 1 -- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization -- On April 10, 1995 a group of investors contributed $340,000
in cash to form a joint venture (the Joint Venture). On the same day, the Joint
Venture acquired substantially all of the assets and operations of Micro
Security Systems, Inc. (Micro), a bankrupt company, at a sheriff's auction for
$340,000 cash. The acquisition was accounted for by the purchase method of
accounting. The purchase price was allocated to the assets acquired based upon
their fair value: $45,857 to current assets and $294,143 to equipment and other
long-term assets. The operations of the acquired business are included in the
accompanying financial statements from the date of acquisition. Due to
circumstances beyond the control of the Joint Venture, Micro continued to
operate under the direction of the court-appointed trustee, using the Joint
Venture's assets, until approximately November 1995. These operations, as far as
they could be identified, have been included in the accompanying financial
statements.
Data Security Corporation (Data Security) was formed on November 15, 1995
under the laws of the State of Nevada. The Joint Venture was reorganized into
Data Security in November 1995 by Data Security issuing 470,000 shares of common
stock and agreeing to pay $269,000 to the owners of the Joint Venture. The
transfer of the net assets and operations to Data Security was a transfer
between enterprises under common control and has been accounted for at
historical cost in a manner similar to that in pooling-of-interests accounting.
The accompanying financial statements have been restated to reflect the common
stock equivalents that would have been issued and redeemed from the dates of the
original transactions with the owners of the Joint Venture based upon the shares
that were exchanged in the transfer.
Principles of Consolidation -- The consolidated financial statements
include the accounts of World Wireless Communication, Inc. and its wholly owned
subsidiaries, ECA Electronic Contract Assembly, Inc. (ECA), and Digital Radio
Communications Corporation, which has subsidiaries, from the date of its
acquisition. Intercompany accounts and transactions have been eliminated in
consolidation. The consolidated entities are collectively referred to herein as
"the Company".
Nature of Business -- The Company and its subsidiaries design, develop and
manufacture wired and wireless communications technology, systems and products,
and provide contract manufacturing services to the electronics and wireless
communications industry.
Prior to the acquisition of Digital Radio the primary operations of the
Company were centered around the design and manufacture of computer security
products, which constituted most of the Company's sales for 1996 and 1995. Sales
of these products were insignificant during 1997 and are not expected to be
significant in the future.
Name Change -- By shareholder action on January 15, 1997, the Company's
name was changed from Data Security Corporation to World Wireless
Communications, Inc.
Business Condition -- The Company is in the development stage with its
primary efforts being spent raising capital and developing markets. It has not
had sales sufficient to meet its operating expenses and to generate income. It
has sustained operating losses in the six months ended June 30, 1997, and for
the years ended December 31, 1996 and 1995, and may require additional capital
to continue operations. Management intends to obtain additional capital through
issuance of common stock and has done so subsequent to both December 31, 1996
and June 30, 1997. During February 1997 the Company acquired Digital Radio.
Management expects the acquisition will enhance the Company's profitability from
operations. However, there is no assurance that profitable operations can be
obtained or sustained.
F-10
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 -- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Long-Lived Assets -- Effective January 1, 1996, the company adopted
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
(SFAS 121). SFAS 121 requires that impairment losses be recorded when indicators
of impairment are present and undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. The adoption of this
standard in 1996 did not have a material impact on the Company's operating
results, cash flows or financial position.
Segment Information and Concentration of Risk -- Prior to 1997, the Company
operated solely in the electronics industry primarily in the Western United
States. Accordingly, segment information relating to operations in different
industries or geographic areas is not presented in these financial statements.
Beginning in 1997 the Company expanded its operations to include significant
sales nationally and internationally. The concentration of business in one
industry and one geographic area subjects the Company to a concentration of
credit risk relating to trade accounts receivable. The Company generally does
not require collateral from its customers with respect to the Company's trade
receivables.
Accounts Receivable and Major Customers -- A significant portion of the
1996 net sales were concentrated in a few significant customers. Thirty- four
percent of sales in 1996, or $218,269, were to four customers. For the six
months ended June 30, 1997, seventy and six tenths percent of sales, or
$1,419,327 were to two customers under contracts which submit the Company to the
risk that the Company may not be able to continue the current level of revenue
due to loss of contracts. Due to the actual write off of accounts that were
uncollectible at December 31, 1996 and 1995 and at June 30, 1997, an allowance
for doubtful accounts was not required. Management estimates that the remaining
balance of accounts receivable at December 31, 1996 and at June 30, 1997 will be
collected.
Inventory -- Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Research and Development Expense -- Current operations are charged with all
research, engineering and product development expenses.
Equipment -- Equipment is stated at cost. Depreciation, including
amortization of leased assets, is computed using the straight-line method over
the estimated useful lives of the equipment, which are five to seven years.
Depreciation expense was $82,362 and $38,853 for the year ended December 31,
1996 and for the period from April 10, 1995 through December 31, 1995,
respectively. Depreciation expense for the six months ended June 30, 1997 was
$91,340. Maintenance and repairs of equipment are charged to operations, and
major improvements are capitalized. Upon retirement, sale, or other disposition
of equipment, the cost and accumulated depreciation are eliminated from the
accounts, and gain or loss is included in operations.
Sales Recognition -- Sales are recognized upon delivery of products or
services and acceptance by the customer. As a result of design and technology
contracts the Comapny has a right to receive royalties which will be recognized
upon the related sales by customers.
Net Loss Per Common Share -- Net loss per common share is computed using
the weighted average number of common shares outstanding. Stock options
were-antidilutive at December 31, 1996 and at June 30, 1997, and were not
included in the calculation of net loss per common share.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in these financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-11
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 -- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Stock Based Compensation -- During 1996, the Company adopted Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation. Under the provisions of SFAS 123, the Company can elect to account
for stock-based compensation plans and options using a fair-value-based method,
or it can continue to measure compensation costs for those plans using the
intrinsic method prescribed by Accounting Principles Board Opinion No. 25 (APB
No. 25), Accounting for Stock Issued to Employees. The Company has elected to
continue to account for such plans under the provisions of APB No. 25.
Interim Condensed Financial Statements -- The accompanying consolidated
financial statements at June 30, 1997 and for the periods ended June 30, 1997
and 1996 are unaudited. In the opinion of management, all necessary adjustments
(which include only normal recurring adjustments) have been made to present
fairly the financial position, results of operations and cash flows for the
periods presented. The results of operations for the six month period ended June
30, 1997 are not necessarily indicative of the operating results to be expected
for the full year.
NOTE 2 -- BUSINESS COMBINATION AND ACQUISITION
ECA was incorporated on October 24, 1996 under the laws of the State of
Nevada. ECA had no operations or assets and had made efforts toward the
development of business relating to the assembly of printed circuit boards and
wire/cable harnesses. Effective October 28, 1996, the Company acquired all of
ECA's outstanding common stock and employed two ECA officers, by issuing 500,000
shares of common stock. This business combination was accounted for using the
purchase method of accounting. However, the Company received no assets from the
ECA acquisition. Accordingly, the shares issued were deemed to represent
compensation to the two new officers in the amount of $165,000, or $0.33 per
share, based on prices for which shares of common stock were issued for cash
during the same time period. ECA did not have any operations prior to the
acquisition. Its operations have been included in the accompanying financial
statements from the date of acquisition.
On February 12, 1997, a majority of the shareholders of Digital Radio
Communications Corporation (Digital Radio) accepted an offer from the Company
(World Wireless) to merge Digital Radio into a newly-formed subsidiary of World
Wireless. The Digital Radio shareholders agreed to exchange each of their common
shares for 0.5577349 common shares of World Wireless, which resulted in World
Wireless issuing 1,798,000 shares of common stock. In addition, holders of
Digital Radio stock options exchanged each of their options for 0.5577349 of
World Wireless stock options, which resulted in World Wireless issuing options
to purchase 201,900 shares of common stock exercisable at $2.00 per share.
The merger has been accounted for using the purchase method of accounting.
The purchase price, based upon the fair value of the common shares and stock
options issued, was $3,101,378. Goodwill in the amount of $3,766,175 was
recognized from the acquisition and is being amortized over five years by the
straight-line method.
F-12
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 2 -- BUSINESS COMBINATION AND ACQUISITION -- (Continued)
Although the merger agreement was not executed until May 21, 1997, the
acquisition was effective for financial reporting purposes on February 12, 1997,
which was the date of approval by the World Wireless Board of Directors and by a
majority of the Digital Radio shareholders. The accompanying condensed
consolidated financial statements include the accounts and operations of Digital
Radio from February 12, 1997, and includes the shares to be issued at the
closing of the acquisition as though such shares had been issued on that date.
Pro forma results of operations, had the acquisition occurred January 1, 1996,
are as follows:
For the
Six Months For the
Ended Year Ended
June 30, December 31,
1997 1996
-------------- --------------
(Unaudited) (Unaudited)
Sales ........................... $ 2,010,079 $ 2,016,805
Net Loss ........................ (1,790,337) (2,832,443)
Net Loss per Common Share ...... (0.21) (0.52)
NOTE 3 -- INVENTORY
Inventory consists of the following:
December 31,
June 30, -----------------------
1997 1996 1995
----------- ----------- ---------
Materials ............ $ 180,716 $ 20,935 $ --
Work in process ...... 241,940 138,946 60,656
---------- ---------- ---------
Total ............... $ 422,206 $ 159,881 $ 60,656
========== ========== =========
NOTE 4 -- EQUIPMENT
Equipment consists of the following:
December 31,
June 30, ----------------------
1997 1996 1995
------------ ----------- --------
Computer equipment .......$ 174,123 $ 68,440 $ 55,216
Telephone equipment .... 91,786 31,273 22,873
Office equipment ....... 54,364 29,995 26,042
Manufacturing equipment . 852,436 308,458 225,491
Furniture and fixtures . 16,906 10,071 10,071
Software ................ 90,010 -- --
----------- ---------- ---------
Total ...................$1,279,625 $ 448,237 $339,693
=========== ========== =========
NOTE 5 -- OBLIGATION UNDER NON-COMPETE AGREEMENT
In connection with Digital Radio's acquisition of a subsidiary,
Dem-Tronics, in 1995, Digital Radio entered into a non-compete agreement with
the seller. The agreement originally called for a series of yearly minimum
payments to be increased by a contingent amount based on Dem-Tronics' sales
volume. The payment plan was accelerated through a renegotiated agreement in
September 1997 whereby the contingent payments were eliminated and the minimum
payments increased in both amount and frequency of payment. The new agreement is
for $110,000 to be paid in four monthly payments beginning September 15, 1997 of
$27,500 each. Interest on the minimum obligation has been imputed at 10 percent,
resulting in a total present value at June 30, 1997 of $102,604.
F-13
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 6 -- ACCRUED SETTLEMENT OBLIGATION
Subsequent to June 30, 1997 the Company reached an informal settlement with
an otherwise unrelated joint venture partner over a suit filed by the partner
against the Digital Radio and its major customers. The suit asserted claims that
the joint venture had an interest in the technology which Digital Radio used in
products sold to those customers. Digital Radio strongly disputed the partners
interest in the technology at issue. The settlement offer was made in an effort
to minimize the time and expense of protracted litigation, as well as to
maintain its good customer relations. The Company has recorded a current
liability of $160,000 as a preliminary estimate for the costs associated with
the proposed settlement. The proposed settlement would release all claims
against the Company and allow the Company unlimited use of the technology.
NOTE 7 -- NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
December 31,
June 30, ----------------------------
1997 1996 1995
------------- ------------ -------------
Payable to stockholders for working capital; no
stated interest; amount was converted to stock in
1996 ................................................ $ -- $ -- $ 125,000
Promissory note incurred in connection with stock
redemption; paid in 1996; interest at 10% per
annum ............................................. -- -- 159,000
Notes payable for equipment; interest at 10%;
collateralized by equipment; paid during 1997 ...... -- 3,404 --
Payable due to shareholder for working capital; no
stated interest; the note was converted to stock in
January 1997 ....................................... -- 1,970 --
Capital lease obligations for equipment purchases,
with various interests rates ranging from 7 to 21
percent. Minimum monthly payments are $4,560 ......... 105,639 -- --
Note payable to a shareholder for equipment;
interest at 15%; due in payments of $7,798
through September 1998; secured by equipment
and personally guaranteed by two stockholders ...... 86,397 125,000 44,500
---------- --------- ----------
Total Notes Payable and Capital Lease
Obligations .......................................... 192,036 130,374 328,500
Less: Current Portion .............................. (137,952) (85,566) (284,000)
---------- --------- ----------
Long-Term Notes Payable and Capital Lease
Obligations ....................................... $ 54,084 $ 44,808 $ 44,500
========== ========= ==========
F-14
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 7 -- NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS -- (Continued)
The annual maturities of the notes payable at June 30, 1997 and December
31, 1996 were as follows:
June 30, December 31,
1997 1996
---------- -------------
Year Ending:
1997 ...... $ 41,589 $ 85,566
1998 ...... 44,808 44,808
The following is a schedule by years of the future minimum payments
required under capital leases together with the present value of the net minimum
lease payments. There were no future minimum lease payments as of December 31,
1996, future minimum lease payments as of June 30, 1995 were:
Years Ending December 31:
1997 .......................................... $ 27,357
1998 .......................................... 54,714
1999 .......................................... 45,830
2000 .......................................... 9,021
2001 .......................................... 696
---------
Total minimum lease payments ..................... 137,618
Less: Amount representing interest ............... (31,979)
---------
Present value of net minimum lease payments ...... $ 105,639
=========
NOTE 8 -- INCOME TAXES
There was no provision for or benefit from income tax for any period. The
components of the deferred tax asset are shown below:
December 31,
---------------------------
1996 1995
------------ ------------
Operating Loss Carryforwards ...... $ 302,167 $ 22,372
Compensated absences ............... 3,807 --
---------- ---------
Total Deferred Tax Assets ......... 305,974 22,372
Valuation Allowance ............... (305,974) (22,372)
---------- ---------
Net Deferred Tax Asset ............ $ -- $ --
========== =========
The Company had operating loss carry forwards at December 31, 1996 of
$965,725 which expire in 2010 through 2011, if unused.
F-15
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 9 -- SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH INVESTING AND
FINANCING ACTIVITIES
For the Year Ended
For the Six December 31,
Months Ended ------------------
June 30, 1997 1996 1995
--------------- --------- -----
Taxes Paid ......... $ -- $ -- $ --
Interest Paid ...... $ 8,186 $ 30,677 $ --
Supplemental Disclosure of Noncash Investing and Financing Activities --
For the period from April 10, 1995, through December 31, 1995, 1,494,444 shares
of common stock were redeemed for $60,000 in cash and a $209,000 note payable.
Also, 405,575 shares of common stock valued at $27,025 were issued for services.
For the year ended December 31, 1996, $143,000 of debt was issued, of which
$125,000 was to a stockholder, to acquire equipment. Notes payable in the amount
of $275,000 were converted to stock. Stock valued at $176,500 was issued for
services and stock valued at $4,950 was issued for interest due on debentures.
During January, 1997 the Company converted $1,907 in long-term debt into
5,629 shares of common stock at $0.35 per share.
During February 1997, the Company issued 1,798,100 shares of common stock
and 201,900 stock options in exchange for all of the issued and outstanding
common stock of Digital Radio Communications Corporation and Subsidiaries. In
conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired .................. $ 5,719,387
Common stock issued and acquisition costs incurred (3,101,378)
------------
Liabilities Assumed ........................... $ 2,618,009
============
During June 1997, the Company accrued a $160,000 obligation to a joint
venture partner in connection with the settlement of a dispute. In exchange the
Company would receive a release of certain claims asserted by the joint venture
partner against the Company.
NOTE 10 -- STOCKHOLDERS' EQUITY
On February 12, 1997 the Company issued 500,000 units at $2.00 per unit in
a private placement offering with each unit consisting of one share of common
stock and one warrant. Each warrant entitled the holder to purchase one share of
common stock at $2.00 per share. The 500,000 warrants were exercised on March 6,
1997 and resulted in proceeds of $1,000,000.
NOTE 11 -- STOCK OPTIONS
In December 1996, the Company granted options to an employee, a former
member of the Board of Directors and a consultant to purchase 258,000 shares of
restricted common stock at $0.33 per share. In January 1997, the consultant was
granted an additional option to purchase 150,000 shares at $0.35 per share. The
options may be exercised until June 30, 1998. The exercise price approximated
the market value of the stock at the date of grant.
In connection with the acquisition of Digital Radio, the Company assumed
Digital Radio's stock option plans and granted options to the former
shareholders and employees of Digital Radio to purchase 201,900 shares of common
stock at a weighted average price of $1.90 per share through December 20, 2001.
F-16
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 11 -- STOCK OPTIONS -- (Continued)
The Board of Directors have approved the 1997 Stock Option Plan, subject
to shareholder approval, which authorizes the issuance of 1,500,000 options. No
options have been issued under the plan.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: dividend yield of
0.0 percent for both periods; expected volatility of 121.1 and 173.1 percent;
risk-free interest rates of 5.2 and 5.0 percent; and expected lives of 2.4 and
1.5 years. A summary of the status of the Company's stock options as of June 30,
1997 and December 31, 1996, and changes during the periods then ended is
presented below:
June 30, 1997 December 31, 1996
------------------------------ ------------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
--------- ------------------ ---------- -----------------
Outstanding at beginning of period ............... 258,000 $ 0.33 --
Granted .......................................... 351,900 1.30 258,000 $ 0.33
-------- ---------
Outstanding at end of period ..................... 609,900 0.89 258,000 0.33
======== =========
Options exercisable at period-end ............... 550,650 $ 0.91 258,000 $ 0.33
======== =========
Weighted-average fair value of options granted dur-
ing the period $ 0.28 $ 0.24
======== =========
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its options and plans.
Accordingly, no compensation cost has been recognized from the stock options
granted. Had compensation costs for the Company's options been determined based
on the fair value at the grant dates consistent with the method of SFAS 123, net
loss and loss per share would have increased to the pro forma amounts indicated
below:
Year Ended
Six Months December 31,
Ended June ------------------------------
30, 1997 1996 1995
---------------- -------------- -------------
Net loss:
As reported ...... $ (1,562,697) $ (899,924) $ (88,668)
Pro forma ......... (1,661,229) (961,354) (88,668)
Loss per share:
As reported ...... $ (0.19) $ (0.25) $ (0.10)
Pro forma ......... (0.20) (0.26) (0.10)
NOTE 12 -- SUBSEQUENT EVENTS
On August 8, 1997, 500,000 shares of common stock were issued for
$1,000,000, or $2.00 per share.
The Board of Directors approved a stock option plan in October 1997.
Options to purchase 1,500,000 shares of common stock are authorized under the
plan, subject to shareholders' approval. No options have yet been granted under
the plan, but such is anticipated prior to December 31, 1997.
Subsequent to June 30, 1997, option holders exercised options to purchase
10,931 shares of common stock at a weighted average exercise price of $0.14 per
share.
F-17
WORLD WIRELESS COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
The Company leases office and production facilities in Salt Lake City and
American Fork, Utah. The leases are accounted for as operating leases. Lease
expense under these agreements for 1996 and 1995 were $123,779 and $59,096,
respectively. These lease terms end in May and June 1998. The Company also
assumed lease commitments in the merger with Digital Radio for three vehicles
under operating lease agreements. Future minimum rental payment commitments
under facility and vehicle leases by years as of December 31, 1996 are as
follows:
Facilities Vehicles
------------ ---------
Year Ending December 31:
1997 ........................... $ 253,380 $ 19,238
1998 ........................... 115,424 9,096
---------- ---------
Total Minimum Payments Required ...... $ 368,804 $ 28,334
========== =========
Although action has not been initiated, the Company's former Chief
Financial Officer has threatened litigation against the Company following his
resignation from that office and as a director of the Company in October 1997.
The resignation was the result of a dispute over compensation involving, among
other things, a claim by the former officer and director that the Company had
agreed to grant him options to purchase 275,000 shares of the Company's Common
Stock at a price of $2.00 per share in connection with his employment, and had
later disaffirmed such obligation. Because of the number of shares involved in
this unasserted claim, and the difference between the current market price for
the Company's Common Stock and the exercise price of the options claimed, the
expense to the Company for financial reporting purposes would be material if the
former officer should initiate and prevail in litigation over these claims. The
Company intends to vigorously defend any such action.
F-18
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East Broadway, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Digital Radio Communications Corporation
We have audited the accompanying consolidated balance sheets of Digital Radio
Communications Corporation and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Digital Radio
Communications Corporation and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has a working capital deficiency and a net
capital deficiency at December 31, 1996, and has incurred a loss from operations
and negative cash flows from operating activities during the year ended December
31, 1996. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans and subsequent events
regarding those matters are described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 4, 1997, except for the second paragraph of Note 2,
as to which the dateis September 15, 1997
F-19
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
------------------------------
1996 1995
-------------- -------------
Current assets
Cash ..................................................................... $ 1,854 $ 4,981
Trade accounts receivables ............................................. 258,016 290,460
Other accounts receivable ................................................ 82,340 160,000
Inventory ............................................................... 308,496 175,043
Prepaid expenses ......................................................... 15,328 11,748
Deferred income taxes ................................................... 69,738 41,316
------------ ----------
Total current assets ................................................ 735,772 683,548
------------ ----------
Property and equipment ................................................... 611,422 485,642
Less accumulated depreciation .......................................... (192,964) (76,297)
------------ ----------
Net property and equipment .......................................... 418,458 409,345
------------ ----------
Other assets
Capitalized financing costs ............................................. 18,000 --
Purchased technology, net of accumulated amortization .................. -- 9,230
Investment in joint venture, which principally owns a patent, net of
amortization ......................................................... 13,520 16,900
Investment in securities ................................................ 36,500 30,000
Goodwill, net of amortization .......................................... 72,112 33,985
------------ ----------
Total other assets ................................................... 140,132 90,115
------------ ----------
Total Assets ............................................................ $ 1,294,362 $1,183,008
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Checks written in excess of cash in bank ................................. $ 2,921 $ 12,992
Trade accounts payable ................................................... 447,612 207,195
Accrued liabilities ...................................................... 430,824 229,921
Accrued income taxes ................................................... 722 16,967
Notes payable ............................................................ 3,405 66,624
Notes payable to related parties ....................................... 162,540 119,503
Obligation under capital leases -- current portion ..................... 73,902 72,753
Obligation under non-compete agreement ................................. 101,475 71,571
------------ ----------
Total current liabilities ............................................. 1,223,401 797,526
------------ ----------
Long-term liabilities
Obligation under capital leases .......................................... 73,562 75,306
Deferred income taxes ................................................... 43,801 39,731
Convertible debentures ................................................... 100,000 --
------------ ----------
Total long-term liabilities .......................................... 217,363 115,037
------------ ----------
Stockholders' equity (deficit)
Preferred stock -- $0.01 par value; 2,000,000 shares authorized; no shares
issued ............................................................... -- --
Common stock -- $0.01 par value; 10,000,000 shares authorized;
3,049,814 shares and 2,550,000 shares issued and outstanding ......... 30,498 25,500
Additional paid-in capital ............................................. 1,028,500 505,672
Receivable from shareholders ............................................. -- (151,000)
Deferred offering costs ................................................ -- (76,840)
Accumulated deficit ...................................................... (1,205,400) (32,887)
------------ ----------
Total stockholders' equity (deficit) ................................. (146,402) 270,445
------------ ----------
Total Liabilities and Stockholders' Equity (Deficit) ..................... $ 1,294,362 $1,183,008
============ ==========
The accompanying notes are an integral part of these financial statements.
F-20
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---------------- ------------
Sales ................................................... $ 1,386,478 $ 1,638,559
Cost of sales .......................................... 1,006,366 1,120,293
------------ ------------
Gross profit ............................................. 380,112 518,266
------------ ------------
Expenses
Research and development expense ........................ 440,125 117,081
General and administrative expenses ..................... 1,089,821 341,427
Interest expense ....................................... 36,397 20,301
------------ ------------
Total expenses ....................................... 1,566,343 478,809
------------ ------------
Income (loss) before income taxes ........................ (1,186,231) 39,457
Provision for (benefit from) income taxes ............... (13,718) 8,669
------------ ------------
Net Income (Loss) ....................................... $ (1,172,513) $ 30,788
============ ============
Net Income (Loss) Per Common Share ..................... $ (0.42) $ 0.01
============ ============
Weighted average number of common shares used in per share
calculation ............................................. 2,818,250 2,212,884
============ ============
The accompanying notes are an integral part of these financial statements.
F-21
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Total
Common Stock Additional Stockholders'
----------------------- Paid-In Accumulated Equity
Shares Amount Capital Deficit Other (Deficit)
----------- ---------- ------------- ---------------- ------------- --------------
Balance -- December 31, 1994 ......... 2,200,000 $ 22,000 $ (19,010) $ (63,675) $ -- $ (60,685)
Issuance to acquire EMA Inc.,
$3.12 per share, April 1, 1995 ...... 11,000 110 17,072 -- -- 17,182
Issuance of shares, at $4.00 per
share, December 29, 1995 ............ 5,000 50 9,950 -- -- 10,000
Issuance of shares, at $3.00 per
share, December 30, 1995 and
subscription receivable ............ 334,000 3,340 497,660 -- (151,000) 350,000
Deferred offering costs incurred ... -- -- -- -- (76,840) (76,840)
Net income for year ending
December 31, 1995 .................. -- -- -- 30,788 -- 30,788
---------- --------- ----------- ------------ ---------- ------------
Balance -- December 31, 1995 ......... 2,550,000 25,500 505,672 (32,887) (227,840) 270,445
Issuance for cash, $1.53 per share,
January through April 1996 ......... 71,666 717 109,283 -- -- 110,000
Collection of subscription
receivable ........................ -- -- -- -- 151,000 151,000
Issuance upon exercise of options .... 191,000 1,910 7,335 -- -- 9,245
Issuance for services ............... 20,000 200 27,400 -- -- 27,600
Issuance of shares upon conversion
of debentures ..................... 21,748 217 49,783 -- -- 50,000
Issuance of shares for cash in
private placement offering, net
of $147,519 offering costs ......... 195,400 1,954 329,027 -- 76,840 407,821
Net loss for the year ended
December 31, 1996 .................. -- -- -- (1,172,513) -- (1,172,513)
---------- --------- ----------- ------------ ---------- ------------
Balance -- December 31, 1996 ......... 3,049,814 $ 30,498 $ 1,028,500 $ (1,205,400) $ -- $ (146,402)
========== ========= =========== ============ ========== ============
The accompanying notes are an integral part of these financial statements.
F-22
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 1996 1995
1996 1995
---------------- ------------
Cash Flows From Operating Activities
Net income (loss) ................................................ $ (1,172,513) $ 30,788
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization ................................. 144,697 67,135
Compensation paid with common shares ........................... 27,600 --
Compensation paid with notes payable ........................... 43,037 --
Trade receivable collected with investment securities ............ (6,500) (30,000)
Changes in operating assets and liabilities, net of effects of
businesses acquired:
Accounts receivable .......................................... 32,444 (211,568)
Other accounts receivable .................................... (82,340) --
Inventory ................................................... (133,453) (110,501)
Accounts payable ............................................. 240,417 98,186
Accrued liabilities .......................................... 174,966 129,789
Accrued income taxes .......................................... (16,245) 10,100
Other ......................................................... 1,385 2,096
------------ ----------
Net cash used by operating activities ........................... (746,505) (13,975)
------------ ----------
Cash flows from investing activities
Payments for the purchase of property and equipment ............... (62,980) (53,846)
Increase in deposits ............................................. -- (4,090)
Investment in patent ............................................. -- (16,900)
Cash received in acquisitions .................................... -- 60,417
------------ ----------
Net cash used by investing activities .............................. (62,980) (14,419)
------------ ----------
Cash flows from financing activities
Proceeds from issuance of common stock ........................... 527,066 200,000
Collection of receivables from shareholders for common stock ...... 311,000 --
Proceeds from issuance of convertible debentures, net of $18,000 in
financing costs paid ............................................. 132,000 --
Net payment on short-term obligations ........................... (10,071) (26,787)
Principal payments on notes payable .............................. (71,160) (33,150)
Principal payments on obligation under capital lease ............... (55,454) (40,615)
Payments on non-compete obligation ................................. (27,023) (28,800)
Payment of deferred offering costs ................................. -- (76,840)
------------ ----------
Net cash provided by (used in) financing activities ............... 806,358 (6,192)
------------ ----------
Net decrease in cash ................................................ (3,127) (34,586)
Cash -- beginning of year .......................................... 4,981 39,567
------------ ----------
Cash -- end of year ................................................ $ 1,854 $ 4,981
============ ==========
Supplemental cash flow information and noncash investing and financing
activities -- Note 11
The accompanying notes are an integral part of these financial statements.
F-23
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Digital Radio Communications Corporation and subsidiaries (the Company),
began business in 1992. On March 15, 1996, its name was changed from Electronic
Technology Corp. It designs and manufactures electronic products, including
radio frequency and infrared systems, embedded control, low power FM
transceivers and antenna technologies. It provides research and design services
on a contract basis for others and it is also engaged in contract manufacture of
electronic components.
Principles of Consolidation
The consolidated financial statements include the accounts of Digital Radio
Communications Corporation and its wholly owned subsidiaries, EMA Inc. and
Dem-Tronics, Inc., since the date of their respective acquisitions, after
elimination of intercompany accounts and transactions. Investments in
unconsolidated joint ventures, which relate primarily to research and
development ventures, are accounted for using the equity method. The Company's
share of losses from its equity investments are included in "Research and
development expense" in the consolidated statements of operations.
Business Condition
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company sustained a substantial
operating loss during the year ended December 31, 1996. Further, at December 31,
1996 current liabilities exceeded current assets by $494,037 and total
liabilities exceeded total assets by $152,810. These matters raise substantial
doubt about the Company's ability to continue as a going concern; however the
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. To mitigate these factors, in 1997, the Company
obtained $1,380,000 of short-term debt financing under a bridge loan from World
Wireless Communications, Inc. and obtained additional capital financing by
merging with World Wireless Communications, Inc. Also in the first four months
of 1997, approximately $2,000,000 of revenue was earned or was committed under
short-term contracts with customers. However, there is no assurance that this
additional capital and future revenues can meet the Company's obligations and
its production and operating expenses as they become due.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates.
Segment Information and Concentration of Risk
Through 1996, the Company operated solely in the electronics industry
primarily in the Western United States. Accordingly, segment information
relating to operations in different industries or geographic areas is not
presented in these financial statements. The concentration of business in one
industry and one geographic area subjects the Company to a concentration of
credit risk relating to trade accounts receivable. The Company generally does
not require collateral from its customers with respect to the Company's trade
receivables. Beginning in 1997, the Company has expanded its operations to
include significant sales nationally and internationally.
F-24
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Major Customers
Sales to two customers were each in excess of 10% of total sales during
1996 and 1995. Sales to the first customer were $249,123 and $121,635 in 1996
and 1995, respectively, and were $591,000 and $324,000, respectively, to the
second customer. In 1997, contracts with several additional significant
customers have been signed.
Accounts Receivable
Due to the actual write off of accounts that were uncollectible at December
31, 1996 and 1995, an allowance for doubtful accounts was not required.
Management believes that the remaining accounts receivable are fully
collectible. Trade accounts receivable included $95,000 at December 31, 1996,
which was subsequently collected by receiving shares of customers' common stock,
as prescribed in the related performance contracts.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Long-Lived Assets
Beginning in 1996, the Company adopted Statement of Financial Accounting
Standard 121 (SFAS 121) which requires Management to review long-lived assets
and the related intangible assets for impairment whenever events or changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. Recoverability is determined by an analysis of undiscounted future
cash flows from operations related to those assets. If the related operations
are determined to be unable to recover the carrying amount of its assets, then
the assets are written down to fair value. Fair value is determined based on
discounted cash flows or appraised values, depending upon the nature of the
assets. The adoption of SFAS 121 did not result in an adjustment to the carrying
amount of assets during 1996.
Equipment
Property and equipment are stated at cost. Depreciation, including
amortization of leased assets, is computed using the straight-line method over
the estimated useful lives of the equipment, which is five years. Maintenance
and repairs of equipment are charged to operations, and major improvements are
capitalized. Upon retirement, sale, or other disposition of equipment, the cost
and accumulated depreciation are eliminated from the accounts, and gain or loss
is included in operations.
Investments
Investments in equity securities for which the Company cannot sell those
securities for a period in excess of one year, due to restrictions from
securities regulation, are carried at historical cost and are classified as
non-current assets.
Sales Recognition
Sales are recognized upon delivery of products or services and acceptance
by the customer.
Research and Development Expense
Current operations are charged with all research, engineering and product
development expenses.
F-25
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Net Income (Loss) Per Common Share
Net income (loss) per share is computed using the weighted average number
of common shares outstanding during each period.
NOTE 2 -- ACQUISITIONS
On April 1, 1995, the outstanding common stock of EMA Inc. (EMA), an
electronic component assembler, was purchased for $30,430. The Company paid
$13,258 in cash (including acquisition costs) and issued 5,500 shares of common
stock valued at $17,172. The owner of EMA did not own a controlling interest in
the Company; accordingly, the acquisition has been accounted for using the
purchase method of accounting. Assets were recorded at fair value. The results
of operations of EMA are included in the consolidated financial statements from
the date of acquisition.
On August 1, 1995 the Company acquired the net assets of Dem-Tronics, Inc.,
an electronic component assembler, for $175,328. The Company executed a
non-interest bearing promissory note to the seller for $62,724 payable in
January 1996. Additionally, the Company executed a non-compete agreement which
initially required a series of yearly minimum payments, to be increased by a
contingent amount based on Dem-Tronics sales volume. The payment plan was
accelerated through a subsequently re-negotiated agreement whereby the
contingent payments were replaced with higher minimum payments due in entirety
by December 15, 1997. The new payments total $137,023. With imputed interest at
10%, the resulting present value of the obligation was $128,498 at the date of
acquisition. Since the owners of Dem-Tronics did not receive a controlling
interest in the Company, the acquisition was accounted for using the purchase
method of accounting. The results of operations of Dem-Tronics are included in
the consolidated financial statements from the date of acquisition.
The fair value of the net assets acquired was $72,724 which is net of
liabilities incurred and assumed of $101,743. The excess of the purchase price
over the fair value of the identifiable assets was $94,001 and was allocated to
goodwill. Goodwill is being amortized over five years on a straight-line basis.
Goodwill amortization expense was $18,800 and $3,089 for the years ended
December 31, 1996 and 1995, respectively.
Pro forma results of operations for the year ended December 31, 1995, as if
the acquisitions were effective January 1, 1995, are as follows (unaudited):
Revenue ..................... $1,998,021
Net Income .................. 39,888
Income Per Common Share ...... 0.02
NOTE 3 -- OTHER RECEIVABLES AND RECEIVABLE FROM SHAREHOLDER
In 1996, other receivables included loans to employees of $7,768 for
payroll advances and a receivable from a partner in a joint venture for
engineering services under the joint venture agreement.
These amounts were received subsequent to year end. Other receivables also
included a receivable from a customer which retained $35,000 for a project that
is pending completion, once a third party provides necessary software.
Other receivables at December 31, 1995 consist of subscriptions for the
Company's common shares subscribed for during 1995. Total subscriptions at
December 31, 1995 were $311,000, of which $160,000 was received by April 8,
1996, and was recorded as a current asset. The balance of $151,000 was recorded
as an offset against additional paid-in capital on the balance sheet and was
collected in 1996.
F-26
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 4 -- INVENTORY
Inventory consists of the following at December 31:
1996 1995
----------- ---------
Materials .................... $ 131,983 $ 84,403
Work in process .............. 176,513 90,640
---------- ---------
Total ....................... $ 308,496 $175,043
========== =========
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1996 1995
----------- ---------
Computer equipment ............ $ 32,102 $ 26,526
Electronic equipment ......... 131,977 125,117
Office equipment ............... 7,955 6,313
Manufacturing equipment ...... 373,832 295,447
Furniture and fixtures ......... 13,738 13,738
Software ..................... 51,818 18,501
---------- ---------
Total ........................ $ 611,422 $485,642
========== =========
Depreciation expense, which includes amortization of assets under capital
lease, was $116,667 and $42,900 for the years ended December 31, 1996 and 1995,
respectively.
NOTE 6 -- RELATED PARTIES TRANSACTIONS
Notes payable to related parties consisted of the following:
1996 1995
----------- ----------
Payable to officers for deferred compensation, no terms for
repayment, unsecured ............................................. $ 124,962 $ 61,370
Notes payable to shareholders, no terms for repayment, no stated
interest rate at December 31, 1996 ................................. 8,828 10,863
Loan payable to an officer, no terms for repayment, unsecured ...... 28,750 27,000
Loans payable to employees, unsecured, paid during 1996 ............ -- 20,270
---------- ----------
Total ............................................................... $ 162,540 $ 119,503
========== ==========
The Company has entered into a line of credit agreement with AAH
Development Company, Inc. The maximum amount available under the line of credit
was $200,000 with $5,000 borrowed at December 31, 1995, and included above in
notes payable to shareholders. The note had a 10% annual interest rate. The note
was repaid January 1996.
F-27
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 7 -- NOTES PAYABLE
Notes payable consisted of the following:
1996 1995
----------- ---------
Note payable to an individual, secured by Dem-Tronics common
stock, paid in 1996 ....................................... $ -- $ 62,724
Other notes payable, various terms ........................ 3,405 3,900
Convertible debentures payable, interest at 12%, due September
1998, unsecured ............................................. 100,000 --
---------- ---------
Total notes payable .......................................... 103,405 66,624
Less current portion ....................................... 3,405 66,624
---------- ---------
Convertible Debentures - Long-Term ........................... $ 100,000 $ --
========== =========
During 1996, the Company issued notes payable in the amount of $150,000;
these notes were convertible into common stock at a ratio of 289.96 shares per
$1,000 principal amount of notes. On December 6, 1996, $50,000 of these notes
were converted to common stock for 14,498 shares, leaving a remaining balance of
$100,000 of notes payable. Interest is due at 12%, and the notes are due
September 1998. Subsequent to year end, the Company issued additional
convertible notes payable for $75,000. All of the outstanding debentures were
converted to common stock, although the Company amended the terms of its notes
to increase the conversion ratio to 434.94 shares per $1,000 of principal
amount. In 1997, the Company converted $175,000 of debt into 83,369 shares of
common stock (including 7,249 shares for notes converted prior to the 1997
amendment).
NOTE 8 -- OBLIGATION UNDER NON-COMPETE AGREEMENT
In connection with the acquisition of Dem-Tronics (see Note 2) the Company
entered into a non-compete agreement with the seller. The remaining liability on
the agreement is $110,000, imputed interest at 10 percent is $7,936 for a
carrying amount of $102,604, payable in four monthly payments beginning
September 15, 1997 of $27,500 each.
NOTE 9 -- LEASE COMMITMENTS
Capital Leases
The Company has leased equipment under capital lease agreements, and has
capitalized lease equipment of $268,847 and $214,151 as of December 31, 1996 and
1995, respectively. During 1996, the Company leased additional equipment with a
capitalized value of $54,696. During 1995, the Company received capital lease
equipment capitalized in the amount of $55,562 in connection with the
acquisitions described in Note 2, and leased additional equipment with a
capitalized value of $126,669. Accumulated amortization on all leased equipment
was $55,935 and $18,400 at December 31, 1996 and 1995, respectively.
Amortization of leased equipment is included with depreciation expense.
F-28
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 9 -- LEASE COMMITMENTS -- (Continued)
The following is a schedule by years of the future minimum lease payments
required under capital leases together with the present value of the net minimum
lease payments as of December 31, 1996:
Years Ending December 31:
- -------------------------
1997 .......................................... $ 102,038
1998 .......................................... 49,870
1999 .......................................... 41,985
2000 .......................................... 9,021
2001 .......................................... 695
---------
Total Minimum Lease Payments ..................... 203,609
Less amount representing interest .................. (56,145)
---------
Present Value of Net Minimum Lease Payments ...... 147,464
Less Current Portion .............................. (73,902)
---------
Capital lease - Long-Term ........................ $ 73,562
=========
Operating Leases
The Company leases office space under operating lease agreements. Lease
expense for the year ended December 31, 1996 was $117,518. The future
obligations under these operating leases are $95,456 and $53,109 for the years
ending December 31, 1997 and 1998, respectively.
During 1996, the Company began leasing three automobiles under operating
lease agreements. Lease expense was $14,258 for the year ended December 31, 1996
for these auto leases. The future obligations for the leases are $19,238 and
$9,096 for the years ending December 31, 1997 and 1998, respectively.
NOTE 10 -- INCOME TAXES
Digital Radio Communications Corporation files a consolidated tax return
with it's two wholly-owned subsidiaries, EMA Inc., and Dem-Tronics, Inc. The
components of the provision for income taxes were as follows at December 31:
1996 1995
------------- ------------
Current: Federal ......................... $ (10,550) $ 13,147
State .............................. (4,753) 3,820
Deferred: Federal ........................ 1,309 (6,855)
State .............................. 276 (1,443)
--------- --------
Provision for (benefit from) income taxes.. $ (13,718) $ 8,669
========= ========
The net deferred tax assets consisted of the following at December 31:
1996 1995
----------- ------------
Deferred Tax Assets:
Compensated absences ............ $ 12,933 $ 10,895
Deferred compensation ............ 30,421 30,421
Net Operating Loss Tax Benefit ...... 447 --
--------- ---------
43,801 41,316
--------- ---------
Deferred Tax Liability:
Depreciation ..................... (32,804) (29,494)
Amortization of Goodwill ......... (10,997) (10,237)
--------- ---------
(43,801) (39,731)
--------- ---------
Net deferred tax asset ............... $ -- $ 1,585
========= =========
F-29
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 10 -- INCOME TAXES -- (Continued)
The following is a reconciliation of the amount of tax (benefit) that would
result from applying the federal statutory rate to pretax income (loss) with the
provision for income taxes at December 31:
1996 1995
-------------- ------------
Tax at statutory rate (34%) ........................ $ (403,319) $ 13,416
Non-deductible expenses ........................... 8,357 2,750
Benefit of operating loss not recognized ............ 362,032 --
State tax benefit, net of Federal tax effect ...... (2,955) 2,377
Effect of lower tax rates ........................... 22,167 (9,874)
---------- --------
Provision for (benefit from) income taxes ......... $ (13,718) $ 8,669
========== ========
For tax reporting purposes, the Company has a net operating loss carry
forward in the amount of $1,214,514 that will expire in the year 2011.
NOTE 11 -- SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH INVESTING AND
FINANCING ACTIVITIES
Supplemental Cash Flow Information
1996 1995
--------- --------
Taxes Paid ....................... $ 7,479 $ 100
Interest Paid .................... 32,634 22,154
Supplemental Information of Noncash Investing and Financing Activities
During 1996, equipment was leased under a capital lease obligation in the
amount of $54,859. Equipment was purchased by a note payable in the amount of
$7,941. Additional goodwill was recognized in connection with the renegotiation
of, and the increase in, the non-compete obligation related to the acquisition
of Dem-Tronics in the amount of $56,927. Also, $50,000 of convertible debentures
were converted into common stock.
During 1995, equipment was leased under a capital lease obligation in the
amount of $126,669. Equipment was purchased for $31,334 for which liabilities
were assumed in the same amount. The Company contributed a patent with a cost of
$16,900 to a joint venture and recorded an investment in the joint venture of
$16,900. Common stock was issued to investors for notes receivable of $311,000.
In 1995, the Company purchased the common stock of EMA Inc. for $30,430.
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired ........................... $ 131,727
Common stock issued and acquisition costs incurred ...... (30,430)
---------
Liabilities assumed ....................................... $ 101,297
=========
In 1995, the Company purchased the common stock of Dem-Tronics, Inc. by
assuming and incurring liabilities in the amount of $231,395.
NOTE 12 -- STOCKHOLDERS' EQUITY
On December 11, 1995, the shareholders of the Company agreed to a 5.5-for-1
stock split of the Company's common stock. On March 15, 1996, the shareholders
approved an increase of the authorized common stock
F-30
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 12 -- STOCKHOLDERS' EQUITY -- (Continued)
from 500,000 shares to 5,000,000 shares. On August 31,1996, the shareholders
approved a 2-for-1 stock split and also approved increasing the authorized
common stock to 10,000,000 shares. The accompanying financial statements have
been restated for the effects of the changes in capital structure and for the
stock splits for all periods presented.
On March 15, 1996, the shareholders authorized 2,000,000 shares of
nonvoting preferred stock, $0.01 par value. The preferred stock has been
designated for issuance in connection with purchases of other companies. The
Board of Directors is authorized to designate classes of preferred stock with
various rights and preferences as to dividends and liquidation. No preferred
stock has been issued.
NOTE 13 -- STOCK OPTIONS
On October 1, 1995, the Company adopted the Omnibus Stock Option Plan,
which authorized incentive and non-qualified stock options to be granted.
291,000 shares of common stock have been reserved for issuance under the Plan.
On May 17, 1996, the Company adopted the 1996 Stock Option Plan and authorized
200,000 options for granting to employees and consultants. Incentive stock
options must be granted with an exercise price at least equal to the market
value of the common stock on the date of grant, as determined by the Company's
Board of Directors. The options generally become exercisable upon being granted
and are exercisable for a period of five years. In the event of a dissolution or
liquidation of the Company, any options outstanding under the Plan will
terminate. Options were granted under the Plans with exercise prices equal to
the market value of the common stock on the dates granted.
During 1995, the company granted options to investors to purchase 94,000
shares of common stock at $0.01 to $0.02 per share. Those options were exercised
during 1996. In addition, during 1996, options for 96,000 shares of common stock
were granted to an investor. The investor paid the Company $4,800 of the
exercise price during 1996 with services and exercised the options in February
1997 with a payment of $100 in cash.
The Company has elected to continue to account for stock-based
compensation under the provisions of APB Opinion No. 25 rather than Statement
of Financial Accounting Standards (SFAS) No. 123. However, net loss and net
loss per share would not have changed had SFAS No. 123 been adopted.
The following table presents the status of stock options:
Weighted
Average
Options Exercise Price
------------- ---------------
Outstanding, December 31, 1994 ......... -- --
Granted .............................. 209,850 $ 0.02
---------
Outstanding, December 31, 1995 ......... 209,850 0.02
Granted .............................. 241,150 1.34
Exercised ........................... (191,000) 0.02
Canceled ........................... (400) 2.50
---------
Outstanding, December 31, 1996 ......... 259,600 1.25
=========
Exercisable, December 31, 1996 ...... 200,350 1.05
=========
Options at December 31, 1996 had exercise prices ranging from $0.02 to
$2.50.
NOTE 14 -- SUBSEQUENT EVENTS
In February 1997, the Company borrowed $97,093 under the terms of an 8%
promissory note payable to a customer to finance the purchase of certain radio
receivers from the customer. Payments are due monthly and will begin upon
signing an additional contract with the customer and are only payable out of the
revenue from the potential contract. The note is secured by the investment in
common stock of the customer held by the Company.
F-31
DIGITAL RADIO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 14 -- SUBSEQUENT EVENTS -- (Continued)
An investor exercised options for 96,000 shares of common stock for $100 on
February 22, 1997.
The Company granted options to purchase 200,000 shares of common stock on
February 12, 1997 to employees and consultants under the 1996 Stock Option Plan.
The options are exercisable at $1.84 per share.
On February 12, 1997, the Board of Directors and a majority of the
shareholders approved a merger of the Company into a wholly-owned subsidiary of
World Wireless Communications, Inc. (WWCI), subject to approval of a definitive
agreement. The terms of the agreement presently provide that each outstanding
share of common stock will be exchanged for 0.5577349 shares of WWCI common
stock. All outstanding options will be converted at the same ratio into WWCI
options exercisable at $2.00 per share.
The Board also authorized borrowing up to $1,000,000 under a promissory
note payable to WWCI for monies advanced to the Company. The note is due
February 1998, with interest payable semi-annually commencing on August 12,
1997. Through May 15, 1997, the Company has borrowed approximately $1,380,000
under this note and additional notes (unaudited).
F-32
================================================================================
The Selling Shareholders and any broker/dealers or agents that
participate with the Selling Shareholders in the distribution of the Shares may
be deemed to be "underwriters" within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), and any commissions received by them and any
profit on the resale of the Shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. Persons who are
deemed to be underwriters may be subject to statutory liabilities if the
registration statement of which this Prospectus is a part contains a material
misstatement or omits to disclose any information necessary to make statements
which are made not misleading. The Company has not agreed to indemnify any of
the Selling Stockholders regarding such potential liabilities. See "Plan of
Distribution".
No dealer, salesperson or other person has been authorized by the Company or
the selling shareholders to give any information or to make any representations
other than those contained in this prospectus in connection with the offering
made hereby, and, if given or made, such information or representations must not
be relied upon as having been authorized. The delivery of this Prospectus shall
not, under any circumstances, create any implication that information herein is
correct as of any time subsequent to the date of the Prospectus. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy the
shares to any person or by anyone in any jurisdiction in which such offer or
solicitation may not lawfully be made.
--------------------------
TABLE OF CONTENTS
Page
-----
PROSPECTUS SUMMARY ..................... 3
RISK FACTORS ........................... 5
DILUTION .............................. 10
USE OF PROCEEDS ........................ 10
SELECTED CONSOLIDATED HISTORICAL AND PRO
FORMA FINANCIAL DATA ............... 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ........................... 13
BUSINESS .............................. 14
MANAGEMENT ........................... 21
PRINCIPAL AND SELLING
SHAREHOLDERS ........................ 25
PLAN OF DISTRIBUTION .................. 30
MARKET INFORMATION ..................... 31
ORGANIZATIONAL AND OTHER TRANSACTIONS . 31
DESCRIPTION OF CAPITAL STOCK ............ 32
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES ........................ 36
LEGAL MATTERS ........................ 36
EXPERTS .............................. 36
AVAILABLE INFORMATION .................. 36
Until ________, 1997, all dealers effecting transactions in the Common
Stock, whether or not participating in this distribution, may be required to
deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
================================================================================
================================================================================
WORLD WIRELESS
COMMUNICATIONS,
INC.
4,000,000 Shares
Common Stock, $.001 Par Value
---------------
PROSPECTUS
---------------
______________ , 1997.
================================================================================
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officer.
The Bylaws of the Registrant provide for indemnification of directors and
officers of the Registrant in accordance with the indemnification of the Nevada
General Corporation Law. The Nevada statute permits indemnification of directors
and employees of a corporation under certain conditions and subject to certain
limitations.
The Registrant's Articles of Incorporation provide that, subject to certain
limitations, no director shall be personally liable to the Registrant or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated amount of various expenses in
connection with the sale and distribution of the securities being registered:
SEC registration fee ........................... $ 13,533
Printing and engraving expenses ............... 20,000
Legal fees an expense
(including blue sky fees and expenses) ...... 60,000
Accounting fees and expenses .................. 50,000
Miscellaneous ................................. 6,467
----------
Total ....................................... $ 150,000
==========
Item 26. Recent Sales of Unregistered Securities.
Since its inception, the Company has sold Common Stock and other securities
in reliance upon exemptions from the registration requirements of the Securities
Act of 1933 (the "Securities Act") in the following transactions:
a. Upon incorporation of the Company in November 1995, the Company issued
107,140 shares of Common Stock to Elvena, Inc. (53,570 shares), a corporation
controlled by Lynn Dixon, and to Robsal, Inc. (53,570 shares). Abraham J.
Salaman holds the power to vote the shares of the Company owned by Robsal, Inc.
These shares were issued for cash at a price of $.047 per share in reliance upon
Section 4(2) of the Securities Act of 1933 (the "Act") and are restricted as to
resales. Also in connection with the Company's organization, the Company issued
320,000 shares to J.R. Consultants, Inc., a corporation controlled by Jonathan
D. Rahn, and 25,000 shares to Robsal, Inc., for services valued at $16,215
($.047 per share) in reliance on Rule 504, Regulation D.
b. In connection with the acquisition of assets with which the Company
commenced business operations, the Company issued 680,000 shares of Common Stock
to equity owners (Roslyn Maxwell, Gary B. Peterson, Betty A. Peterson, Brian
Pettersen and Ann Marie Pettersen) of Chocolate Leasing LLC, a limited liability
company which then owned the assets, and to Data Growth, Inc., an unaffiliated
corporation which then held an option to acquire the assets from Chocolate
Leasing. Based upon their net equity contributions to Chocolate Leasing, the
cash cost of these shares to the former Chocolate Leasing equity holders was
approximately $122,000. A portion of the Shares were issued for services valued
at $10,810. These shares were issued in reliance upon Section 4(2) of the
Securities Act and restricted as to resales.
c. In connection with the Company's acquisition of assets from Chocolate
Leasing and its commencement of operations, the Company raised a total of
$275,000 in short term debt financing. The debt financing was placed with nine
investors (Elvena, Inc., Cherry Hill, Inc., Robsal, Inc., Research Net Services,
Consolidated Capital, Cow Bell, Inc., BRRD, Inc., Mitchell Salaman and Stamatt,
Inc.). This indebtedness and interest accrued thereon was converted into
1,892,860 shares of Common Stock at a price of approximately $.15 per share in
connection with the Regulation D, Rule 504 offering described in the following
paragraph.
II-1
d. In March 1996, the Company sold 300,000 shares of Common Stock at a
price of $.70 per share ($210,000) to a total of 64 investors in reliance upon
Rule 504, Regulation D. In connection with this offering, the Company solicited
and obtained the conversion of debt referred to in the preceding paragraph, also
in reliance upon Rule 504, Regulation D.
e. In March 1996, the Company issued 7,000 shares, restricted as to
resales, to an employee, Paul K. Jensen, for services valued at $4,900 in
reliance upon Section 4(2) of the Act.
f. In the period October 1996 through January 1997, the Company sold
2,357,857 shares to a total of 33 investors for cash (1,800,000 shares at a
price of $.33 per share and 557,857 shares at a price of $.35 per share), 5,629
shares in conversion of a note at $.35 per share, and 11,000 shares in payment
of accrued interest on a note at $.45 per share. The investors in such offering,
and the number of shares purchased by each, were as follows:
Investor No. of Shares
-------- -------------
Capco Nominees Limited Partnership 654,000
Michael Lauer 400,000
Lynn Dixon/Elvena, Inc. 245,629
Melissa D. Epperson 181,200
T. Kent Rainey 180,600
Trinity American Corp. 113,250
Turan M. Itil 85,000
J.R. Consultants, Inc. 75,500
SRS Partners, Ltd. 60,400
BRRD, Inc. 60,400
Thornhill, Ltd. 60,400
Heather Hanby 50,000
Philip C. Bohm 42,858
Michael Williamson 21,750
Jeffrey G. Shields 20,200
Cartwright Holdings, Inc. 20,000
Rona Dixon 20,000
Alan Dabrow 15,000
Alan Robbins and Judie Robbins 15,000
Brenda Hubrich 10,000
Alisa Pace, individually and as Custodian under UT UGMA 8,000
Joni Dixon 5,000
Lynda Whitehead 5,000
Allen Dixon 5,000
Norene Dixon 5,000
Charlie Schwab and Dorothy Hanby 5,000
Laina Egan 5,000
Peter Gordon 3,300
Justin Moeller, custodian under UGMA 1,000
Lori Gunter, custodian under UGMA 1,000
-------------
Total 2,374,487
These shares were issued in reliance upon Section 4(2) of the Act, and Rule
506, Regulation D, promulgated thereunder, and restricted as to resales.
g. In November 1996, the Company issued 520,000 shares of Common Stock to
Hyrum Taylor (25,000 shares), David D. Singer (475,000 shares) and Raymond
Scharp (20,000 shares) in connection with their employment by the Company. The
shares were valued, for tax and accounting purposes, at $.33 per share, and were
issued in reliance upon Section 4(2) of the Act, and restricted as to resales.
II-2
h. In the period March 1997 and through August 1997, the Company sold a
total of 2,000,000 shares of Common Stock at a price of $2.00 per share
(including the allocable cost of warrants to purchase Common Stock exercised by
these purchasers, as described below) to investment funds under the control of
Michael Lauer, and certain business associates of Mr. Lauer, in reliance upon
Section 4(2) of the Act and/or Rule 506 thereunder, and restricted as to
resales, as follows:
Investor No. of Shares
-------- -------------
Lancer Partners, LP 1,043,750
Lancer Offshore, Inc. 773,750
Lancer Voyager 150,000
Martin H. Garvey 30,000
Russel J. Redgate 2,500
-------------
2,000,000
A portion of these shares were issued upon the exercise of warrants which
were issued in units with shares of Common Stock. All such warrants were
exercisable at a price of $2.00 per share, and all have now been exercised.
i. In July 1997, the Company issued a total of 1,798,100 shares of Common
Stock, and options to purchase 201,900 shares of Common Stock, to former
shareholders and employees (a total of 98 persons, of whom 80 were "accredited"
investors) of Digital Radio Communications Corporation ("DRCC") in exchange for
shares and options of DRCC. These shares and options were issued in reliance
upon Rule 506, Regulation D, and restricted as to resales.
j. In September and October 1997, the Company issued a total of 10,931
shares of Common Stock to former employees and directors of DRCC, David Politis,
Stephen Cowser and Jack Berg, at prices of $0.09 (10,513 shares), $0.18 (139
shares) and $2.00 (239 shares), respectively. The shares were issued in reliance
upon Section 4(2) of the Act, and restricted as to resales.
Item 27. Exhibits
(a) Exhibits
Exhibit
No.
- --------
3.1 Articles of Incorporation of the Company and all amendments thereto
3.2 Bylaws of the Company
4.1 Form of Common Stock Certificate*
5 Opinion of Connolly Epstein Chicco Foxman Engelmyer & Ewing regarding
the legality of securities being registered*
10.1 1997 Stock Option Plan
10.2 DRCC Omnibus Stock Option Plan
10.3 Development and License Agreement dated April 4, 1997, between DRCC
and Kyushu Matsushita Electric Co., Ltd.
10.4 Technical Development and Marketing Alliance Agreement dated
September 15, 1997, between the Company and Williams Telemetry
Services, Inc.
10.5 Lease Agreement dated May 17, 1995, between DRCC and Pracvest
Partnership relating to the Company's American Fork City offices and
facility
10.6 Lease Agreement dated February 12, 1996, between the Company the
Green/Praver, et al., relating to the Company's Salt Lake City
offices
II-3
10.7 Shareholders Agreement dated May 21, 1997 between the Company, DRCC,
Philip A. Bunker and William E. Chipman, Sr.
21 Subsidiaries of the Company
23.1 Consent of Hansen, Barnett & Maxwell, independent certified public
accountants
23.2 Consent of Connolly Epstein Chicco Foxman Engelmyer & Ewing (included
in Exhibit 5)
27 Financial Data Schedules
- ------------
* To be filed by amendment.
Item 27. Undertakings.
The undersigned Registrant hereby undertakes to:
1. File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the Prospectus any facts or events which, individually or
in the aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) Include any additional or changed material information on the Plan
of Distribution described in the Registration Statement.
2. For the purpose of determining any liability under the Securities Act,
treat each post-effective amendment as a new registration of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering thereof.
3. To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned small business issuer hereby undertakes that:
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time the Commission declared it effective.
For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in this Registration
Statement, and the offering of the securities at that time, shall be deemed to
be the initial bona fide offering of those securities.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in Salt Lake City,
Utah, on the 23rd day of October, 1997.
WORLD WIRELESS COMMUNICATIONS, INC.
By: /s/ David D. Singer
----------------------------------------------
David D. Singer, President and Chief Executive
Officer
By: /s/ William E. Chipman, Sr.
----------------------------------------------
William E. Chipman, Sr., Chief Financial
Officer
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
Signatures Title Date
---------- ----- ----
/s/ Brian W. Pettersen
- ------------------------- Director Oct. 23, 1997
Brian W. Pettersen
/s/ Jonathan D. Rahn
- ------------------------- Director Oct. 23, 1997
Jonathan D. Rahn
/s/ Philip A. Bunker
- ------------------------- Director Oct. 23, 1997
Philip A. Bunker
II-5
EXHIBIT INDEX
No. Description Page
- ------ ----------- -----
3.1 Articles of Incorporation of the Company and all amendments thereto
3.2 Bylaws of the Company
4.1 Form of Common Stock Certificate*
5 Opinion of Connolly Epstein Chicco Foxman Engelmyer & Ewing regarding the legality
of securities being registered*
10.1 1997 Stock Option Plan
10.2 DRCC Omnibus Stock Option Plan
10.3 Development and License Agreement dated April 4, 1997, between DRCC and Kyushu
Matsushita Electric Co., Ltd.
10.4 Technical Development and Marketing Alliance Agreement dated September 15, 1997,
between the Company and Williams Telemetry Services, Inc.
10.5 Lease Agreement dated May 17, 1995 between DRCC and Pracvest Partnership relating
to the Company's American Fork City offices and facility
10.6 Lease Agreement dated February 12, 1996, between the Company the Green/Praver, et al.,
relating to the Company's Salt Lake City offices
10.7 Shareholders Agreement dated May 21, 1997 between the Company, DRCC, Philip A. Bunker
and William E. Chipman, Sr.
21 Subsidiaries of the Company
23.1 Consent of Hansen, Barnett & Maxwell, independent certified public accountants
23.2 Consent of Connolly Epstein Chicco Foxman Engelmyer & Ewing (included in Exhibit 5)
27 Financial Data Schedule
- ------------
* To be filed by amendment