CELLGATE TECHNOLOGIES LLC
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
TABLE OF CONTENTS
INDEPENDENT ACCOUNTANTS' REPORT
FINANCIAL STATEMENTS
BALANCE SHEETS 1
STATEMENTS OF OPERATIONS 2
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL (DEFICIT) 3
STATEMENTS OF CASH FLOWS 4
NOTES TO FINANCIAL STATEMENTS 5 - 13
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
CellGate Technologies LLC
Boca Raton, Florida
We have audited the accompanying balance sheets of CellGate Technologies LLC as
of December 31, 1999 and 1998, and the related statements of operations, changes
in members' capital (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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CellGate Technologies LLC as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
As discussed in Note 8 to the financial statements, on November 16, 2000, the
Company executed an agreement to sell substantially all of its assets and assign
certain of its liabilities.
/s/ SCHMIDT, RAINES, TRIESTE,
DICKENSON & ADAMS, P.L.
December 11, 2000
Boca Raton, Florida
CELLGATE TECHNOLOGIES LLC
BALANCE SHEETS
December 31 December 31, September 30,
1999 1998 2000
---------------- ----------------- ----------------
(Unaudited)
ASSETS
------
Current assets:
Cash $ 748,298 $ 569,992 $ 151,516
Accounts receivable 27,311 467 9,200
Deposits 303,146 - 14,234
Investments - 2,002,567 -
Inventory 63,225 - -
---------------- ----------------- ----------------
1,141,980 2,573,026 174,950
---------------- ----------------- ----------------
Furniture, fixtures and leasehold improvements, net 8,384 - 15,886
---------------- ----------------- ----------------
$ 1,150,364 $ 2,573,026 $ 190,836
================ ================= ================
LIABILITIES AND MEMBERS' CAPITAL (DEFICIT)
------------------------------------------
Current liabilities:
Accounts payable $ 1,359 $ - $ 567,121
Accrued expenses 349,159 194,766 298,841
Notes payable - - 350,000
---------------- ----------------- ----------------
350,518 194,766 1,215,962
---------------- ----------------- ----------------
Members' capital (deficit) 968,992 2,378,260 (1,005,126)
Notes receivable from members (169,146) - (20,000)
---------------- ----------------- ----------------
799,846 2,378,260 (1,025,126)
---------------- ----------------- ----------------
$ 1,150,364 $ 2,573,026 $ 190,836
================ ================= ================
The accompanying notes are an integral part of these financial statements.
- 1 -
CELLGATE TECHNOLOGIES LLC
STATEMENTS OF OPERATIONS
For the years ended For the nine months ended
December 31, September 30,
-------------------------------- --------------------------------
1999 1998 2000 1999
--------------- --------------- --------------- ---------------
(Unaudited)
Sales revenue $ 31,709 $ - $ 42,696 $ -
Cost of sales 47,447 - 480,638 -
--------------- --------------- --------------- ---------------
Gross margin (15,738) - (437,942) -
--------------- --------------- --------------- ---------------
General and administrative expenses:
Product development 373,112 180,000 - 361,355
Service development 857,461 332,427 391,283 650,485
Salaries and employee benefits 538,365 21,837 945,933 366,761
Consulting 172,348 2,709 110,118 141,849
Sales and support services 124,138 - 19,250 91,639
Communications links and software 99,166 - 171,650 42,040
Legal and accounting 26,043 72,179 42,296 12,275
Travel and entertainment 59,280 2,958 110,978 45,428
Marketing 26,343 - 90,959 21,091
Repairs and maintenance 24,370 - 13,307 -
Office rent 34,541 - 39,726 26,237
Other expenses 115,866 11,112 169,675 95,882
--------------- --------------- --------------- ---------------
2,451,033 623,222 2,105,175 1,855,042
--------------- --------------- --------------- ---------------
Operating loss (2,466,771) (623,222) (2,543,117) (1,855,042)
Other income (expenses):
Interest income 60,194 2,715 12,026 52,197
Interest expense - (2,111) (12,226) -
Depreciation (3,941) - (8,461) (2,652)
--------------- --------------- --------------- ---------------
56,253 604 (8,661) 49,545
--------------- --------------- --------------- ---------------
Net loss $ (2,410,518) $ (622,618) $ (2,551,778) $ (1,805,497)
=============== =============== =============== ===============
The accompanying notes are an integral part of these financial statements.
- 2 -
CELLGATE TECHNOLOGIES LLC
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Balance at January 1, 1998 $ -
Capital contributions 3,000,878
Net loss (622,618)
-------------------
Balance at December 31, 1998 2,378,260
Capital contributions 1,001,250
Notes receivable from members (169,146)
Net loss -
-------------------
Balance at December 31, 1999 3,210,364
Capital contributions (unaudited) 746,806
Note receivable from members (unaudited) (20,000)
Net loss (unaudited) (2,551,778)
-------------------
Balance at September 30, 2000 (unaudited) $ 1,385,392
===================
The accompanying notes are an integral part of these financial statements.
- 3 -
CELLGATE TECHNOLOGIES LLC
STATEMENTS OF CASH FLOWS
For the years ended For the nine months ended
December 31, September 30,
--------------------------------- -----------------------------------
1999 1998 2000 1999
--------------- --------------- --------------- -----------------
(Unaudited)
OPERATING ACTIVITIES
- --------------------
Net loss $ (2,410,518) $ (622,618) $ (2,551,778) $ (1,805,497)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 3,941 - 8,461 2,652
(Increase) decrease in:
Accounts receivable (26,844) (467) 18,111 (1,701)
Inventory (63,225) - 63,225 (323,846)
Increase (decrease) in:
Accounts payable 1,359 - 565,762 4,059
Accrued expenses 154,393 194,766 (50,318) 111,632
--------------- --------------- --------------- -----------------
Net cash used in operating activities (2,340,894) (428,319) (1,946,537) (2,012,701)
--------------- --------------- --------------- -----------------
INVESTING ACTIVITIES
- --------------------
Purchase of equipment (12,325) - (15,963) (12,325)
Proceeds from sale of investments 2,002,567 - - 1,703,372
Purchase of investments - (2,002,567) - -
Deposits on equipment purchases (303,146) - 288,912 (411)
--------------- --------------- --------------- -----------------
Net cash provided by (used in)
investing activities 1,687,096 (2,002,567) 272,949 1,690,636
--------------- --------------- --------------- -----------------
FINANCING ACTIVITIES
- --------------------
Capital contributions 832,104 3,000,878 726,806 -
Proceeds from issuance of notes payable - - 350,000 -
--------------- --------------- --------------- -----------------
Net cash provided by financing activities 832,104 3,000,878 1,076,806 -
--------------- --------------- --------------- -----------------
Net increase (decrease) in cash 178,306 569,992 (596,782) (322,065)
Cash, begining of period 569,992 - 748,298 569,992
--------------- --------------- --------------- -----------------
Cash, end of period $ 748,298 $ 569,992 $ 151,516 $ 247,927
=============== =============== =============== =================
The accompanying notes are an integral part of these financial statements.
- 4 -
CELLGATE TECHNOLOGIES LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------
Nature of Business
------------------
CellGate Technologies LLC (the Company), a Delaware limited liability
company, was formed on September 18, 1997. The Company is engaged in
providing wireless internet protocol ("IP") services for transaction
processing in the financial services industry through a proprietary
wireless IP adapter.
Since commencement of operations through November 1999, the Company had
been engaged in product development and market testing of its services.
Sales began in December 1999. Therefore, the accompanying statement of
operations for the year ended December 31, 1999 reflects only one month
of sales revenue.
On November 16, 2000, the Company sold substantially all of its assets
and assigned certain of its liabilities to U.S. Wireless Data, Inc.
("U.S. Wireless"), a publicly traded entity. The total purchase price
included $1,000,000 in cash and 562,500 shares of the common stock of
U.S. Wireless (see Note 8). As a result of this transaction, the
Company now operates as an investment company and consulting firm.
Significant Accounting Policies
-------------------------------
Estimates
---------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ
from those estimates.
Cash
----
Cash includes amounts held in escrow relating to certain lease
agreements. At September 30, 2000, total cash held in escrow
totaled $143,667 (unaudited).
Accounts receivable
-------------------
No allowance for doubtful accounts is provided, as all receivables
are considered collectible.
Investments
-----------
The Company invests in short-term commercial paper with maturities
ranging from six to twelve months.
Inventory
---------
Inventory is stated at the lower of cost (first-in, first-out
method) or market.
-5-
CELLGATE TECHNOLOGIES LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------------------------------------------
Furniture, fixtures and leasehold improvements
----------------------------------------------
Furniture, fixtures and leasehold improvements are recorded at
cost. Depreciation is provided by the straight-line method over
the estimated useful lives of the assets. Leasehold improvements
are amortized on a straight-line basis over the useful life of the
improvements or the term of the lease, whichever is less.
Revenue Recognition
-------------------
Revenue is recognized when earned. For service and transaction
fees, customers are billed under specific contract provisions and
revenue is recognized in accordance with such provisions. Revenue
from sales of products is generally recognized upon shipment of
the units.
Income Taxes
------------
The Company, with the consent of its members, has elected under
the Internal Revenue Code to be treated as a partnership. In lieu
of corporation income taxes, the members of a limited liability
company (partnership election) are taxed on their pro rata share
of the Company's income, expenses, gains, and losses on their
individual income tax returns. Therefore, no provision or
liability for Federal or state income taxes has been included in
the accompanying financial statements.
Advertising Costs
-----------------
Advertising costs are charged to operations when incurred.
Advertising expense for the years ended December 31, 1999 and 1998
amounted to $9,038, and $0, respectively. Advertising expense for
the nine months ended September 30, 2000 totaled $32,050
(unaudited).
NOTE 2- FURNITURE, FIXTURES AND LEASEHOLD IMPROVEMENTS
- ------------------------------------------------------
The following is a summary of the Company's furniture, fixtures and
leasehold improvements:
September 30, Useful Life/
December 31 December 31 2000 Lease Term
1999 1998 (unaudited) (in years)
---------------- ---------------- ------------------ --------------
Furniture and fixtures $ 8,400 - 22,005 3
Leasehold improvements 3,925 - 6,283 2
---------------- ---------------- ------------------
12,325 - 28,288
Less: accumulated depreciation (3,941) - (12,402)
---------------- ---------------- ------------------
$ 8,384 - 15,886
================ ================ ==================
-6-
CELLGATE TECHNOLOGIES LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)
NOTE 3- AGREEMENTS
- ------------------
The Company has an exclusive contract with Tellus Technology Inc.
("Tellus") for the development and manufacture of wireless IP modem
adapters. The agreement calls for the Company to pay Tellus non-recurring
development fees, software development fees and to reimburse Tellus for
certain development personnel expenses incurred. The agreement also
describes pricing terms and conditions for the sale of the wireless IP
modem adapters to the Company. Pricing is dependent upon quantities
purchased and delivery periods as described in Note 5. The term of the
contract is through February 2002, unless terminated earlier in accordance
with the provisions of Article 10 of the agreement.
The Company has contracted with Williams Technology Solutions ("Williams")
to develop and manage the Company's network and server systems. The Company
owns all equipment and software and contracts directly with the various
communication carriers for communication links. Williams provides the
personnel to develop server software and to operate the Company's systems
on a 24 hours a day, 7-days per week basis. The Company's servers reside in
the Williams facility in Earth City, Missouri. This facility is a
communications center with full diversity for all communications
connections and generator back up for power. The term of this contract is
three years with a 30-day cancellation option. The Company has the option
to hire the Williams staff if the Company desires to assume operational
responsibility for the network and servers.
The Company has three agreements with AT&T Wireless Data, Inc. ("AT&T
Wireless"). The Intellectual Property License Agreement grants the Company
a non-exclusive license to the proprietary technology of AT&T Wireless.
Subject to the terms of this agreement, the Company will own the rights to
any developed or enhanced technology that takes place during the four-year
term of the contract. In addition, AT&T Wireless cannot license the patents
to a third party for four years from commercial launch of the wireless IP
modem adapters. The contract calls for the Company to maintain a
comprehensive general liability insurance policy of at least $2 million
during the term of the contract. The CDPD Value Added Reseller Agreement
sets forth the pricing of AT&T Wireless services to the Company such as
line access fees, usage charges, and volume discounts. The term of this
agreement is through 2001 and is renewable thereafter on a month-to-month
basis. The Data Marketing Agreement designates the Company as a reseller of
AT&T Wireless Data services.
Refer to Note 8 for discussion on the assignment by the Company and
assumption of the above-mentioned contracts by U.S. Wireless in connection
with its purchase of the Company's business.
NOTE 4- ALLOCATION OF PROFITS AND LOSSES
- ----------------------------------------
In accordance with section 6.01(a) of the Amended and Restated Limited
Liability Company Agreement (the Agreement), profits and losses shall be
allocated each fiscal year according to the number of membership units
owned as reflected in the books and records of the Company; provided,
however, that no loss will be allocated to any member for any fiscal year
to the extent that such a loss would create or increase a deficit in such
member's "adjusted capital account" (as this term is defined in the
Agreement), and such loss will instead be allocated to other members
according to the number of
-7-
CELLGATE TECHNOLOGIES LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)
NOTE 4- ALLOCATION OF PROFITS AND LOSSES (CONTINUED)
- ----------------------------------------------------
membership units owned by such other members to the extent that such
allocation will not create or increase a deficit in such other members'
adjusted capital accounts. There are other provisions under section 6.01
applicable to profit and loss allocations as more fully described in the
Agreement and the amendments thereto.
In accordance with section 14.02 of the Agreement, in the event of
dissolution or discontinuance of the core business of the Company, the
assets and funds of the Company available for distribution to members after
payment of/provision for all debts and liabilities of the Company and the
allocation of all gains and losses on the disposition of assets or the
settlement of liabilities, including debts and liabilities to members,
will, to the extent that the same are sufficient therefor, be paid and
applied in payment of the respective capital accounts of the members,
without preference as to class, pro rata as to such capital accounts if the
funds available are not sufficient to discharge the capital accounts of all
members. No member may receive any portion of the capital account of
another member.
In accordance with section 6.03 of the Agreement, interim distributions, if
made, will be allocated according to the number of membership units owned,
as reflected in the books and records of the Company.
NOTE 5- NOTES PAYABLE (UNAUDITED)
- ---------------------------------
The following is a summary of notes payable (unaudited) as of
September 30, 2000:
Unsecured note payable to a member of the Company, due on
demand. The applicable rate of interest is 12% per annum. $250,000
Note payable to a member of the Company, with principal and
interest payments due on the earlier of October 1, 2000 or the
date upon which the Company secures additional funding. Interest
is payable at 12% per annum. The note is collateralized by the
Company's accounts receivable. 100,000
----------
$350,000
==========
Total interest accrued on the above notes as of September 30, 2000 was
$12,226 (unaudited). The Company repaid these borrowings in October 2000
and November 2000.
NOTE 6- COMMITMENTS
- -------------------
The Company leases its office space in Boca Raton, Florida under a
non-cancelable sublease agreement, which expires on January 28, 2001. The
agreement calls for a minimum monthly rental payment of $2,192 including
sales taxes. Rental expense for the year ended December 31, 1999 and the
nine months ended September 30, 2000 amounted to $29,898 and $33,144
(unaudited), respectively.
-8-
CELLGATE TECHNOLOGIES LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)
NOTE 6-COMMITMENTS (CONTINUED)
- ------------------------------
Minimum future lease payments under this sublease for each of the next two
years and in the aggregate are as follows:
For the year ending December 31,
--------------------------------
2000 $ 44,658
2001 3,904
------------------
$ 48,562
==================
On July 29, 1999, the Company entered into a Master Purchase and Lease
Agreement with Tellus Technology Inc. (Tellus) and Varilease Corporation
(Varilease) in which Tellus agrees to sell to Varilease and Varilease
agrees to lease to the Company wireless IP modem adapters (the Equipment
Units). In connection therewith, the Company entered into a separate Master
Lease Agreement with Varilease to lease Equipment Units. On December 7,
1999, the Company leased 849 Equipment Units from Varilease at a total cost
of $191,025. The terms of the lease agreement call for monthly lease rental
payments of $6,269 for a period of 30 months. At the end of the period, and
under the terms specified in the agreement, the Company may either purchase
the Equipment Units (at prices to be determined by the parties), extend the
lease for an additional twelve months (at specified rates), or return the
Equipment Units. While in its possession, the Company bears the risk of
loss for any damaged Equipment Units.
The Company leases equipment under various other non-cancelable operating
leases with terms that expire through December 2002. The leases call for
minimum monthly rent payments plus sales and use taxes. The leased
equipment includes personal computers, computer servers, telephone systems,
and photocopiers. Total rental expense, in the aggregate, for the year
ended December 31, 1999 and for the nine months ended September 30, 2000
amounted to $23,497 and $40,474 (unaudited), respectively. Minimum future
lease payments at December 31, 1999 under these leases for each of the next
three years and in the aggregate are as follows:
For the year ending December 31,
--------------------------------
2000 $ 118,582
2001 110,701
2002 52,782
------------------
$ 282,065
==================
-9-
CELLGATE TECHNOLOGIES LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)
NOTE 6-COMMITMENTS (CONTINUED)
- ------------------------------
In connection with the agreement with Tellus described in Note 3, the
Company has, through the issuance and acceptance of purchase orders
committed to purchase 19,000 wireless IP modem adapters at $195 per modem.
These modems are deliverable within eighteen months of successful
completion of the "critical design review", as that term is defined in the
Tellus agreement. This commitment is backed by an irrevocable standby
letter of credit for $3,700,000, which the Company obtained in February
2000. As of the nine months ended September 30, 2000, the Company had
leased from Varilease 9,800 of the 19,000 Equipment Units at a total cost
of $2,115,000 (unaudited). The terms of the lease call for monthly lease
rental payments of $73,053 (unaudited) for a period of 30 months. The
Company is committed to lease the remaining 9,200 Equipment Units before
December 31, 2000. The $3,700,000 letter of credit expired on September 30,
2000. In the event the Company does not take delivery of at least 100,001
modems within the initial thirty-six months, pricing of the modems will be
adjusted up to a maximum of $225 per modem and an appropriate adjustment
charge for the actual number of modems delivered will be charged to the
Company.
Refer to Note 8 for discussion on the assignment by the Company and
assumption of the above commitments by U.S. Wireless in connection with its
purchase of the Company's business.
NOTE 7- CONTINGENCIES
- ---------------------
In connection with the Company's Data Marketing Agreement with AT&T
Wireless, the Company is required to pay a marketing and support services
fee in the amount of $500,000 on the last day of the 36th month following
"commercial launch", as defined in the CDPD Value Added Reseller Agreement
("VAR Agreement"), in the event that the Company has not achieved at least
40,000 active "end users", as defined in the VAR Agreement, as of such
date. Moreover, the Company, within one year of the date of the VAR
Agreement, shall maintain a minimum of 500 active numbers. Within eighteen
months of the date of the VAR Agreement, the Company shall maintain a
minimum of 10,000 active numbers. Within two years of the date of the VAR
Agreement, the Company shall maintain a minimum of 20,000 active numbers.
If such minimums are not met, the Company will not be eligible for the
Customer Rate Plan and will receive service on the Standard VAR Rate Plan,
as defined in the VAR Agreement. If the Company fails to meet a minimum
number requirement on a date as set forth in the VAR Agreement, but does
meet a subsequent minimum number requirement, the Company will become
eligible for the Customer Rate Plan following its satisfaction of the
subsequent minimum number requirement. In addition, failure to meet minimum
number requirements shall give rise to AT&T Wireless' right to terminate
under section 7.2 of the VAR Agreement.
The Company and Heartland Card Services LLC ("Heartland") are parties to a
Member Service Agreement ("MS Agreement") in which the Company provides to
Heartland wireless modem adapters, access to the AT&T Wireless technology,
and access to other merchant wireless data services through intercarrier
agreements. In connection with this agreement, Heartland is required to
maintain active a certain number of wireless modem adapters during certain
periods after commercial launch. If Heartland does not meet those minimums,
the Company may, at its option, each month charge Heartland an amount equal
to the difference in number in such month between actual active wireless
-10-
CELLGATE TECHNOLOGIES LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)
NOTE 7- CONTINGENCIES (CONTINUED)
- ---------------------------------
modem adapters and the required minimum, times an amount equal to the
Company's cost of acquiring or leasing such wireless modem adapters.
Refer to Note 8 for discussion on the assignment by the Company and
assumption of the above contingencies by U.S. Wireless in connection with
its purchase of the Company's business.
NOTE 8 - SUBSEQUENT EVENT--SALE OF COMPANY'S BUSINESS (UNAUDITED)
- -----------------------------------------------------------------
On November 16, 2000, the Company sold substantially all of its assets and
assigned certain of its liabilities to U.S. Wireless Data, Inc. ("U.S.
Wireless"), a publicly-traded entity primarily engaged in providing
wireless payment processing solutions to businesses. The total purchase
price included $1,000,000 in cash and 562,500 shares of the common stock of
U.S. Wireless. The sale generally included all the assets and substantially
all liabilities of the Company as of September 30, 2000. The liabilities
retained by the Company include a certain promissory note for $250,000 to a
member (see Note 5), and any other loans or payables to affiliates of the
Company or their related parties, other than those pursuant to the AT&T
license agreements and that certain promissory note for $100,000 to a
member (see Note 5). With respect to those liabilities that remain with
U.S. Wireless, all contracts, commitments, and contingencies associated
with such liabilities have been assumed by and proper consents granted to
U.S. Wireless, except for the Heartland MS Agreement described in Note 7.
U.S. Wireless has assumed the MS Agreement but consent has not been
granted. The Company has been relieved of this contract liability as part
of the asset purchase agreement. U.S. Wireless assumed employment
obligations of the Company's employees for a period of ten business days
following the closing date of the asset purchase agreement. After such
period, individuals to whom U.S. Wireless has not extended employment
offers will be considered terminated, and U.S. Wireless will have ten
business days to pay to the Company any amounts required to satisfy all
severance obligations listed under section 6.03 of the asset purchase
agreement.
The total purchase price of $1,000,000 and 562,500 shares of U.S. Wireless
common stock is subject to a "price adjustment", defined as follows: if the
average closing price of the common stock for the 20 consecutive trading
days ending with the trading day immediately preceding the date one year
from the closing date is less than $16 per share as adjusted for any stock
splits, stock dividends or similar events, then U.S. Wireless will pay an
additional amount equal to the number of "remaining shares" (as this term
is defined in the asset purchase agreement) multiplied by the amount, if
any, not to exceed $10.00, by which such average closing price is less than
$16.00. No less than 50 percent of the adjustment amount shall be paid in
cash, and the balance shall be paid either in cash or in shares of U.S.
Wireless common stock having a value, based on such average closing price
(provided that such average closing price for such purposes shall not be
less than $6 per share), equal to the amount of such balance not paid in
cash.
U.S. Wireless has the option, exercisable at any time and from time to time
by two business days prior written notice, to purchase all or a portion of
the remaining shares at a price of $32 per share (subject to adjustment for
stock splits, stock dividends, and similar events), payable in cash.
-11-
CELLGATE TECHNOLOGIES LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)
NOTE 8 - SUBSEQUENT EVENT--SALE OF COMPANY'S BUSINESS (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------
Article III of the asset purchase agreement between the Company and U.S.
Wireless details all representations and warranties of the Company in
connection with the sale transaction. Provisions under Article III include
a statement that there are no actions or proceedings pending or threatened
against, relating to or affecting the Company with respect to its business
or any of its assets and properties. Article V of the asset purchase
agreement addresses certain covenants of the Company. Provisions under
Article V include statements whereby the Company (a) for a period of at
least thirteen months from and after the closing date, shall not wind up,
liquidate or dissolve; and (b) shall change its name to one that does not
include the name "Cellgate" or any similar name.
Refer to Articles III and V of the asset purchase agreement for a complete
description of all representations, warranties, and covenants of the
Company.
NOTE 9- RELATED PARTY TRANSACTIONS
- ----------------------------------
The Company has contracted with Noblett & Associates, Inc. ("Noblett"), a
member of the Company, for consulting services involving sales support,
product development, contract negotiation, and other services. For the year
ended December 31, 1999 and the nine months ended September 30, 2000, total
consulting fees paid to Noblett were $196,908 and $103,148 (unaudited),
respectively. The consulting services contract with Noblett expired on
December 4, 2000.
In connection with the various agreements with AT&T Wireless, a member of
the Company, payments to AT&T Wireless for license, marketing, and
technology access fees for the year ended December 31, 1999 and the nine
months ended September 30, 2000 amounted to $2,937 and $40,801 (unaudited),
respectively.
NOTE 10- NOTES RECEIVABLE FROM MEMBERS
- --------------------------------------
At December 31, 1999, the Company held six promissory notes with balances
totaling $169,146 from members of the Company. Of these six members, five
are also employees of the Company. The notes, which were a result of the
capital notice that raised $1,001,250, do not bear interest and are payable
in installments all of which are due through February 2000. At September
30, 2000, the Company held one promissory note for $20,000 (unaudited) from
a member of the Company.
NOTE 11- MEMBERS' CAPITAL
- -------------------------
At December 31, 1999 and September 30, 2000, total units authorized and
issued totaled 111,350 and 121,113 (unaudited), respectively. At December
31, 1999, total units authorized but not issued amounted to 9,033. For the
nine months ended September 30, 2000, 2,866 options (unaudited) to purchase
Company units at $100 per unit were exercised by a member of the Company;
4,000 units with no value (unaudited) were granted to new employees; 2,897
units (unaudited) at $100 per unit were issued as a result of a capital
notice; and 5,000 options (unaudited) to purchase Company units at
-12-
CELLGATE TECHNOLOGIES LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)
NOTE 11- MEMBERS' CAPITAL (CONTINUED)
- -------------------------------------
$100 per unit were issued to a third party in exchange for a service
guarantee. These options expire in September 2001. Units authorized but not
issued in connection with the Company's Membership Unit Incentive Plan
totaling 1,667 at December 31, 1999 will be retired.
NOTE 12- CONCENTRATIONS
- -----------------------
The Company is indirectly reliant on one supplier, Tellus Technology, Inc.
that develops and manufactures the wireless modem adapters. As provided for
in the Company's agreement with Tellus, Tellus shall use its best efforts
to secure an agreement with Universal Scientific Industry, Ltd. that should
provide the Company a continuing source of wireless IP modem adapters in
the event that Tellus is unable to meet its obligations under the
agreement.
-13-