10-Q 1 d92290e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ---------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2001 Commission file number 001-15837 -------------------------------- WORLD WIRELESS COMMUNICATIONS, INC. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Nevada 87-0549700 ----------------------------------- ------------------------------------- (State of other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 5670 Greenwood Plaza Boulevard Penthouse Greenwood Village, Colorado 80111 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number (303) 221-1944 -------------- Indicate by check mark whether registrant (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- As of October 31, 2001 there were 31,387,087 shares of the Registrant's Common Stock, par value $0.001, issued and outstanding. TABLE OF CONTENTS PART I. Financial Information Item 1. Financial Statements: Statement Regarding Forward-Looking Disclosure.............................1 Condensed Consolidated Balance Sheets (Unaudited) - as of September 30, 2001 and December 31, 2000 (Unaudited).......................3 Condensed Consolidated Statements of Operations - (Unaudited) for the Three Months Ended September 30, 2001 and September 30, 2000 And for the Nine Months Ended September 30, 2001 and September 30, 2000....5 Condensed Consolidated Statements of Cash Flow (Unaudited) - for the Nine Months Ended September 30, 2001 and September 30, 2000........6 Notes to Condensed Consolidated Financial Statements (Unaudited)...........8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation..................................................14 PART II. Other Information Item 1. Legal Proceedings.........................................................20 Item 2. Changes in Securities and Use of Proceeds.................................20 Item 6. Exhibits and Reports on Form 8-K..........................................25 Signatures................................................................26
PART I - FINANCIAL INFORMATION STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the expectations or beliefs of World Wireless Communications, Inc. and our subsidiaries (collectively the "Company", "we" or "us") concerning future events that involve risks and uncertainties, including and without limitation, (i) those associated with the ability of the Company to obtain financing for our current and future operations, to manufacture (or arrange for the manufacturing of) our products, to market and sell our products, and our ability to establish and maintain our sales of X-traWeb(TM) products, (ii) general economic conditions and (iii) technological developments by us, our competitors and others. All statements other than statements of historical facts included in this Report including, without limitation, the statements under "Management's Discussion and Analysis of Results of Operations and Financial Condition" and elsewhere herein, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot assure you that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") are disclosed in this Report, including, without limitation, in connection with the forward-looking statements included in this report. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. -1- Restatement and Status of Independent Auditor's Review On November 19, 2001, the Company filed a Form 8-K concerning the restatement of the Company's consolidated financial statements for the years ended December 31, 2000, 1999, and 1998, to correct among other things, the accounting for stock options issued under the 1998 Employee Incentive Stock Option Plan. The stock options had originally been accounted for under fixed plan accounting, whereby compensation expense was recognized at the time of the grant, if the exercise price was lower than the then market price of the stock, but was thereafter not effected by changes in the price of the stock. In the restated financial statements, the stock options have been accounted for under variable plan accounting, whereby compensation cost is recognized at each report date based on changes in the stock price. The balance sheet as of December 31, 2000 and the statement of operations for the three and nine-month periods ended September 30, 2000 presented herein reflects the restatement, as follows:
As previously Reported As restated Balance sheet: Additional paid-in capital $ 48,901,546 $ 47,689,366 Accumulated deficit (44,844,164) (43,648,056) Statements of operations: Three months ended September 30, 2000: Selling, general and administrative expenses 1,285,258 1,354,295 Net loss $ (1,578,807) $ (1,647,844) Loss per share $ (0.05) $ (0.05) Nine months ended September 30, 2000: Selling, general and administrative expenses 3,807,824 4,147,612 Net loss $ (2,763,220) $ (3,030,384) Loss per share $ (0.10) $ (0.11)
The impact of the restatement on the three- and nine-month periods ended September 30, 2000 increased expenses and net loss because of the stock option compensation recognized as a result of increases in the trading price of the Company's common stock over the prior reporting periods. The statement of operations for the nine-month period ended September 30, 2001 includes the reversal of $69,311 of stock options compensation, which had previously been included in the statements of operations for the six-month period ended June 30, 2001, as reported in the Company's second quarter Form 10-Q. As discussed in the Form 8-K filed on November 19, 2001, the Company's independent auditors have not completed their auditing procedures on the 2000, 1999 and 1998 financial statements. Until the Company's independent auditors complete such auditing procedures, they will not be able to complete their review of the Company's interim financial statements as presented herein. Thus, the interim financial statements included in this Form 10-Q have not been reviewed by the Company's independent auditors, nor any other independent accountants, using professional standards and procedures for conducting such reviews, as established by generally accepted auditing standards. Accordingly, the Company's independent auditors have not expressed any opinion or any other form of assurance on such financial statements, assume no responsibility for, and disclaim any association with, such financial statements. -2- ITEM 1. FINANCIAL STATEMENTS WORLD WIRELESS COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ CURRENT ASSETS Cash and cash equivalents $ 83,456 $ 3,097,624 Investment in securities available-for-sale 1,063 19,109 Trade receivables, net of allowance for doubtful accounts 112,960 347,218 Other receivables 116,459 57,345 Inventory 565,011 558,076 Prepaid expenses 260,245 71,891 ------------ ------------ TOTAL CURRENT ASSETS 1,139,194 4,151,263 ------------ ------------ EQUIPMENT, NET OF ACCUMULATED DEPRECIATION AND IMPAIRMENTS 543,860 575,475 ------------ ------------ GOODWILL, NET OF ACCUMULATED AMORTIZATION 85,712 214,286 ------------ ------------ OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION 23,864 28,863 ------------ ------------ TOTAL ASSETS $ 1,792,630 $ 4,969,887 ============ ============
(CONTINUED) The accompanying notes are an integral part of these condensed consolidated financial statements. -3- WORLD WIRELESS COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ CURRENT LIABILITIES Trade accounts payable $ 927,402 $ 540,899 Accrued liabilities 231,675 371,149 Accrued interest 72,477 -- Other liabilities 90,901 13,077 Note payable 15,057 -- Note payable, net of discount - related party 1,664,843 -- Obligation under capital leases - current portion 6,453 19,374 ------------ ------------ TOTAL CURRENT LIABILITIES 3,008,808 944,499 ------------ ------------ LONG-TERM OBLIGATION UNDER CAPITAL LEASES 7,509 9,633 ------------ ------------ DEFERRED REVENUE 30,000 -- STOCKHOLDERS' EQUITY Preferred stock - 1,000 shares of 8% cumulative Convertible senior series authorized; 0 issued and outstanding Common stock - $0.001 par value; 50,000,000 shares authorized; issued and outstanding: 31,387,080 shares at September 30, 2001 and 31,208,847 shares at December 31, 2000 31,386 31,209 Additional paid-in capital 48,086,323 47,689,366 Accumulated other comprehensive loss (40,010) (56,764) Accumulated deficit (49,331,386) (43,648,056) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY (1,253,686) 4,015,755 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,792,630 $ 4,969,887 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. -4- WORLD WIRELESS COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ SALES $ 262,455 $ 376,885 $ 863,315 $ 1,343,124 COST OF SALES 391,121 259,110 684,225 962,022 ------------ ------------ ------------ ------------ GROSS PROFIT (128,666) 117,775 179,090 381,102 ------------ ------------ ------------ ------------ EXPENSES Research and development 131,978 455,456 406,155 1,060,760 Selling, general and administrative 1,440,582 1,354,295 4,949,948 4,147,612 Manufacturing activity exit costs -- -- -- (1,677,668) Amortization of goodwill 42,858 42,858 128,574 128,574 ------------ ------------ ------------ ------------ TOTAL EXPENSES 1,615,418 1,852,609 5,484,677 3,659,278 ------------ ------------ ------------ ------------ LOSS FROM OPERATIONS (1,744,084) (1,734,834) (5,305,587) (3,278,176) OTHER INCOME/(EXPENSE): Interest expense (255,786) (4,388) (375,513) (117,119) Interest and other income 437 91,378 29,990 364,911 ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ (1,999,433) $ (1,647,844) $ (5,651,110) $ (3,030,384) ============ ============ ============ ============ Basic and Diluted Loss Per Common Share $ (0.06) $ (0.05) $ (0.18) $ (0.11) ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED IN PER SHARE CALCULATION 31,383,635 31,208,847 31,273,990 28,856,083 ============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. -5- WORLD WIRELESS COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 2001 2000 ------------ ------------ CASH FLOW FROM OPERATING ACTIVITIES Net Loss $ (5,651,110) $ (3,030,384) Adjustments to reconcile net loss to net cash used by operating activities: Amortization of goodwill 128,574 128,574 Depreciation 97,220 101,794 Amortization of debt discount 264,269 -- Consulting services paid with stock 12,000 -- Change in compensation from stock options (53,240) 291,330 Loss on sale of securities 26,762 -- Valuation allowance on inventory 172,741 (72,624) Provision for doubtful accounts receivable 11,545 93,304 Changes in operating assets and liabilities: Accounts receivable 163,599 79,738 Inventory (179,677) (15,077) Prepaid expenses/other assets (183,355) 38,986 Deferred revenue 30,000 -- Accounts payable 386,503 (419,280) Accrued interest 72,477 -- Accrued liabilities (61,649) (1,639,243) ------------ ------------ NET CASH AND CASH EQUIVALENTS USED BY OPERATING ACTIVITIES (4,763,341) (4,442,882) ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES Payments for the purchase of property and equipment (65,605) (235,218) Proceeds from sale of property and equipment -- 18,913 Proceeds from sale of securities 31,083 -- NET CASH AND CASH EQUIVALENTS USED BY INVESTING ACTIVITIES (34,522) (216,305) ------------ ------------
(CONTINUED) The accompanying notes are an integral part of these condensed consolidated financial statements. -6- WORLD WIRELESS COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 2001 2000 ------------ ------------ CASH FLOW FROM FINANCING ACTIVITIES Net proceeds from issuance of common stock $ -- $ 12,133,217 Proceeds from exercise of options 17,467 -- Proceeds from exercise of warrants 39,261 1,348,423 Redemption of preferred stock -- (950,000) Proceeds from borrowings and issue of warrants 1,815,600 -- Principal payments on notes payable (50,543) (3,362,411) Principal payments on obligation under capital lease (15,045) (67,196) Payment of preferred dividends -- (57,378) ------------ ------------ NET CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES 1,806,740 9,044,655 ------------ ------------ EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS (23,045) -- ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,014,168) 4,385,468 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,097,624 893,849 ------------ ------------ CASH AND CASH EQUIVALENTS - END OF PERIOD $ 83,456 $ 5,279,317 ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION - CASH PAID FOR INTEREST WAS $7,318 AND $193,719 IN 2001 AND 2000 RESPECTIVELY. NON-CASH INVESTING AND FINANCING ACTIVITIES - NOTES 3 AND 5 The accompanying notes are an integral part of these condensed consolidated financial statements. -7- NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - The accompanying condensed consolidated financial statements are unaudited. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made to present fairly the financial position, results of operations and cash flows for the periods presented. Certain information and note disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the December 31, 2000 annual report on Form 10-K. The results of operations for the nine month period ended September 30, 2001 are not necessarily indicative of the operating results to be expected for the full year. MAJOR CUSTOMERS -Sales to major customers are defined as sales to any one customer which exceeded 10% of total sales in any of the two reporting periods. Sales to the major customers during each of the three months ended September 30, 2001 and 2000 are as follows: Customer "A" represented 0.0% and 0.09% of sales, respectively; Customer "B" represented 12.6% and 25.8% of sales respectively; Customer "C" represented 0.0% and 12.5% respectively and Customer "D" represented 13.2% and 0.07% respectively. For the nine months ended September 30, 2001 and 2000 sales to major customers were: Customer "A" represented 0% and 33.3%; Customer "B" represented 15.7% and 0.09%; and Customer "D" represented 9.0% and 0.03% respectively. INVENTORY - Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. As of September 30, 2001 and December 31, 2000 inventory consisted of the following:
September 30, December 31 2001 2000 ------------- ------------ Materials $ 404,697 $ 297,147 Work in process 56,683 -- Finished goods 103,631 260,929 ------------ ------------ Total $ 565,011 $ 558,076 ============ ============
LOSS PER SHARE - Basic loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflects potential dilution which could occur if all potentially issuable common shares from stock purchase warrants and options or convertible notes payable and preferred stock resulted in the issuance of common stock. In the present position, diluted loss per share is the same as basic loss per share because the inclusion of potentially issuable common shares at September 30, 2001 and 2000, respectively, would have decreased the loss per share and have been excluded from the calculation. -8- COMPREHENSIVE INCOME/(LOSS) - Comprehensive income/(loss) provides a measure of overall Company performance that includes all changes in equity resulting from transactions and events other than capital transactions. The Company's comprehensive income and loss for the reporting periods ended September 30, 2001 and 2000 are as follows:
For the Three Months For the Nine Months Ended September 30, Ended September 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net Loss $ (1,999,433) $ (1,647,844) $ (5,651,110) $ (3,030,384) Unrealized Gain (loss) on Marketable Equity Securities 7,671 (29,722) 13,037 (36,312) Effect of foreign currency translation 5,439 -- (23,045) -- Comprehensive Loss for the Period $ (1,986,323) $ 1,677,566 $ (5,661,118) $ (3,066,696) ============ ============ ============ ============
NOTE 2 -- EXIT FROM MANUFACTURING ACTIVITIES During the fourth quarter of 1999, the Company executed a plan to focus its efforts primarily on enhancing and marketing its X-traWeb(TM) products whereby all contract manufacturing was discontinued, all in-house production was outsourced and the Company moved its executive offices to the Denver, Colorado area. The plan also involved liquidating the Company's raw materials and work in process inventory and selling all equipment used in production and contract manufacturing. The Company was able to effect the inventory liquidation under terms more favorable than previously estimated, resulting in a recovery of $72,624 of inventory impairment previously charged to cost of sales. The recovery was recognized as other income during the first quarter of 2000. The Company recognized as exit costs the related non-cancelable obligation under a lease agreement for the office and manufacturing facilities in Salt Lake City, Utah through 2005. Future minimum lease payments of $1,756,924 under the lease were charged to operations during the year ended December 31, 1999. The Company completed its relocation to the Denver, Colorado area in the first quarter of 2000. Pursuant to a Lease Termination Agreement dated May 1, 2000, the Company paid a $75,000 settlement payment and transferred its security deposit in the amount of $27,742 to the benefit of a new tenant in the Salt Lake City Utah office and manufacturing facilities, and the lease was terminated as of that date. Incident to the lease termination, the settlement funds described above were charged to the outstanding lease liability on the Company's balance sheet resulting in a remaining liability balance of $1,598,342, which was recorded to manufacturing exit recoveries income during the second quarter. -9- NOTE 3 - STOCKHOLDERS' EQUITY During the first quarter of 2000, the Company issued 4,548,557 common shares for gross cash proceeds of $13,646,000 received from 45 accredited investors in a private placement offering, at $3.00 per share. These securities are exempt from registration under the Act. In connection with the offering, a total of $1,512,782 was incurred as placement costs. During March 2000, the Company issued a total 5,393,690 common shares related to the exercise of warrants to purchase common stock at $.25 per share. The Company received $401,220 in cash and recorded $947,203 related to the cashless exercise of warrants as a deemed payment of the principal of the 1999 Notes, as described in Note 5 - Notes Payable. Pursuant to the authority vested in the Board of Directors, the Board on June 8, 2001 resolved to issue up to 1,000 shares of a series of 8% cumulative, convertible senior preferred stock. The shares, if and when issued, will be convertible into shares of our common stock at a rate of 16,667 shares of common stock for each share of preferred stock. The Company has not issued any of such shares as of the date hereof. NOTE 4 - MANDATORILY REDEEMABLE PREFERRED STOCK On May 14, 1999 the Company authorized 950 shares of senior liquidating mandatorily redeemable 10% preferred stock with a liquidation preference of $1,000 per share and detachable five-year warrants to purchase 4,750,000 common shares at $0.25 per share, and issued such 950 shares of preferred stock and the related warrants between May 15, 1999 and October 5, 1999. By their terms, the preferred shares had to be redeemed within one year at their par value plus accrued dividends. The preferred stock cash dividend requirement was $95,000 annually. The preferred stock was issued for proceeds of $950,000 consisting of $700,000 cash and the deemed payment of $250,000 principal amount of 1998 bridge loan notes. On February 25, 2000, the Company redeemed the mandatorily redeemable preferred stock for cash of $950,000 for the principal balance and $57,378 for the accrued preferred dividends accrued to date. NOTE 5 - NOTES PAYABLE On May 14, 1999 the Company issued $2,600,000 of senior secured 16% notes payable ("the 1999 Notes") which were to mature in one year and bore interest at the rate of 16% annually and payable quarterly. The notes were issued for $2,600,000 consisting of $1,600,000 in cash and the deemed payment of $1,000,000 principal amount of the 1998 bridge loan notes. The 1999 Notes were secured by substantially all the Company's assets. In March 2000, the Company paid off the 1999 Notes outstanding with cash in the amount of $2,377,623 and with the deemed proceeds from the exercise of warrants to purchase 3,788,813 common shares at $.25 per share. The portion of the 1999 Notes paid by the exercise of warrants was $947,203. The warrants exercised are included in the total warrants issued during the three months ended March 31, 2000 as discussed in Note 3. -10- On May 17, 2001 the Company issued $1,125,000 of 15% senior secured convertible notes payable to an affiliate of the Company's largest shareholder, Lancer Offshore, Inc. (the "2001 Notes"). The 2001 Notes, when issued, were mandatorily convertible into 2,250,000 shares of Common Stock of the Company at the rate of $0.50 of debt for each share (see Note 8) upon (i) approval by the Company's shareholders to such conversion at a meeting and (ii) the Company's receipt of $2,000,000 in equity on or before December 31, 2001 from sources other than Michael Lauer and his affiliates. The Company also issued detachable five-year warrants to purchase 562,500 shares of the Company's common stock at $.50 per share (see Note 8). The 2001 Notes originally were to mature on September 15, 2001 unless they have been mandatorily converted into shares of Common Stock prior to such date. Such financing agreement also allows for such loan to be increased to a total of $5,000,000 provided that both parties agree to do so. The 2001 Notes are secured by a first security interest in substantially all the assets of the Company. $258,949 of the net proceeds from the 2001 Notes was deemed to result from the issuance of the detachable warrant. This amount was recorded as discount on the 2001 Notes, and is being amortized over the term of the loan. Any event of default under the 2001 Notes will require the issuance of 1,000,000 shares of our Common Stock commencing with the month in which such default first occurs and thereafter in each such month in which such default is not cured, up to a maximum amount of 10,000,000 shares. On August 7, 2001 the 2001 Notes were amended to provide for an additional $875,000 in debt financing over a three month period by Lancer Partners L.P., an affiliate of our largest stockholder. Pursuant thereto we received $350,000 on August 7, 2001, with $275,000 and $250,000 to be provided on or about September 15, 2001 and October 15, 2001, respectively, with the September and October payments conditioned upon the receipt of $1,500,000 in additional equity financing to be provided by sources other than Michael Lauer and his affiliates on or before September 15, 2001. We also issued detachable five-year warrants to purchase 225,000 shares of our Common Stock as the result of the $350,000 August 7 loan. The Company recorded the August 7, 2001 debt net of a discount equal to $64,136, attributable to the related warrants. While the Company did not meet the requirements for the conditional funding of $275,000 originally to have been provided on or about September 15, 2001, $100,000 of the $275,000 was provided on September 6, 2001 and the balance of $175,000 was provided on September 18, 2001 without the issuance of any additional special consideration for the making of such modification. In addition, the holders of the 2001 Notes acknowledged that there was no default of any kind thereunder as of September 14, 2001. Detachable warrant to purchase 64,285 and 112,500 shares of stock were issued in connection with the September loans, and discount equal to $13,655 and $12,686 respectively was recorded. As a condition of this additional financing, among other changes, the $1,125,000 principal amount of the 2001 Notes funded on May 17, 2001 then became convertible into shares of the Company's Common Stock at the rate of $0.20 of debt per share, and the exercise price of the 562,500 warrants issued on May 17, 2001 was reduced to $0.30 per share. The maximum amount of shares of our common stock issuable in the event of continuing monthly defaults was increased to 12,500,000 from 10,000,000. -11- By an agreement dated September 14, 2001 (signed on September 18, 2001), the 2001 Notes were amended (a) to extend the maturity dates of the first two tranches of the 2001 Notes totaling $1,475,000 in principal amount from September 15, 2001 until October 15, 2001 and (b) to extend the time for the Company to raise $1,500,000 until October 15, 2001 as a condition to the issuance of the $250,000 loan on or about October 15, 2001. Although the first two tranches of the 2001 Notes totaling $1,475,000 in principal amount were originally to be due on October 15, 2001, Lancer Offshore, Inc. and Lancer Partners L.P. agreed to extend the maturity date thereof until February 28, 2002. Although the third and fourth tranches of the 2001 Notes totaling $275,000 in principal amount were originally to be due on December 15, 2001, Lancer Offshore, Inc. and Lancer Partners L.P. agreed to extend the maturity date thereof until February 28, 2002. These points are reflected under Note 8. The Company does not currently have the ability to pay those portions of the 2001 Notes and may default on this debt on February 28, 2002. NOTE 6 - BUSINESS SEGMENT INFORMATION As of September 30, 2001 the Company's operations are classified into two reportable business segments: X-traWeb products and radio products. Corporate includes income, expenses, and assets that are not allocable to a specific business segment, or relate to activities no longer being pursued. The revenues, expenses, and assets associated with our former manufacturing activities have been reclassified to Corporate to provide a better comparison of our ongoing business model. Segment operating income is total segment revenue reduced by operating expenses identifiable with or allocable to that business segment. The Company evaluates performance of its segments based on revenues and operating income. The Company's Italian subsidiary, X-traWeb Europe, S.p.A., held assets of under $50,000 as of September 30, 2001, and contributed only $700 in revenue for the three months ended September 30,2001 and year-to-date. These amounts have been included in the X-traWeb segment.
For the Three Months Ended For the Nine Months Ended September 30 September 30 ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenues: X-traWeb(TM) $ 41,074 $ 114,578 $ 233,012 $ 272,946 Radio products 220,281 177,111 612,763 496,619 Corporate 1,100 85,196 17,540 573,559 ------------ ------------ ------------ ------------ Total sales $ 262,455 $ 376,885 $ 863,315 $ 1,343,124 ============ ============ ============ ============ Operating loss: X-traWebTM $ 860,336 $ 869,488 $ 2,908,400 $ 2,324,647 Radio products 884,848 819,265 2,414,727 2,300,683 Corporate (1,100) 46,081 (17,540) (1,347,155) ------------ ------------ ------------ ------------ Total operating loss $ 1,744,084 $ 1,734,834 $ 5,305,587 $ 3,278,175 ============ ============ ============ ============
-12-
As of September 30, December 31, 2001 2000 ------------- ------------ Assets: X-traWeb(TM) $ 1,050,866 $ 1,324,821 Radio products 114,563 642,595 Corporate 627,201 3,002,471 ------------ ------------ Total assets $ 1,792,630 $ 4,969,887 ============ ============
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 has a significant impact on its financial statements. Effective January 2002, we are subject to Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Instead, goodwill is assessed for impairment on an annual basis (or more frequently if circumstances indicate a possible impairment) by means of a fair-value-based test. SFAS No. 142 requires that existing goodwill as of June 30, 2001 continue to be amortized through the end of the current calendar year, after which no further amortization of goodwill will be permitted. As of September 30, 2001, we had approximately $85,712 of unamortized goodwill. We believe the implementation of SFAS No. 142 will not have a material adverse effect on our future results of operations. NOTE 8 - SUBSEQUENT EVENTS Although the Company did not meet the requirements for additional funding by October 15, 2001, Lancer Partners L.P. loaned an additional $25,000 on October 3, 2001 and Lancer Offshore Inc. loaned an additional $85,000 on October 3, 2001, $175,000 on October 9, 2001 and $175,000 on October 29, 2001 without the issuance of any additional special consideration for the making of such modification. Also, although the maturity date for the May 17, 2001 Note for $1,125,000 in principal amount and the August 7, 2001 Note for $350,000 in principal amount was originally fixed at October 15, 2001, the Company and such creditors orally agreed to extend such October 15, 2001 maturity date until December 15, 2001, which was agreed to in writing after October 15, 2001. -13- On November 14, 2001, Lancer Offshore Inc. loaned the Company an additional $1,000,000 and among other things, the Company and such creditors agreed to change the conversion rate of each note comprising the 2001 Notes to one share for each $0.05 of debt and to extend the date of the entire $3,210,000 principal amount of the loans to February 28, 2002. All such terms of the August 7, 2001 amendment, and any amendment resulting from the additional loans in October and November 2001, are conditioned upon the final execution of the loan documents. ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION When used in this discussion, the words "expect(s)", "feel(s)", "believe(s)", "will", "may", "anticipate(s)" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, and are urged to carefully review and consider the various disclosures elsewhere in this Report which discuss factors which affect our business. The following discussion should be read in conjunction with our Consolidated Financial Statements and respective notes thereto. RESULTS OF OPERATIONS Three Months Ended September 30, 2001 and Three Months Ended September 30, 2000 We incurred a net loss of $1,999,433 for the three-month period ended September 30, 2001, or a $0.06 loss per share, compared to net loss of $1,647,844 or a $0.05 loss per share, for the three months ended September 30, 2000. Our loss from operations for the third quarter of 2001 increased by approximately $9,250 over the loss from operations for the third quarter of 2000. Such increased loss was attributable to the $114,430 reduction in revenue in the third quarter of 2001, and a $198,000 write-down of inventory to its fair value, offset by a reduction of approximately $240,000 in compensation expense related to reductions in the workforce, reduced travel expenses, and lower equipment leasing expenses resulting from the expiration of the lease period on a number of operating leases. Sales for the three-month period ended September 30, 2001 totaled $262,455 compared to $376,885 during the three months ended September 30, 2000, or a decrease of $114,430 or 30.4%. During the comparative third quarters of 2001 and 2000, we derived our revenue as follows:
For the Three Months Ended September 30, Summary of Revenue by Segment 2001 2000 ------------ ------------ X-traWeb(TM) $ 41,074 $ 114,578 Branded products 220,281 177,111 Corporate 1,100 85,196 ------------ ------------ Total Revenue $ 262,455 $ 376,885 ============ ============
-14- During the third quarter of 2001, we continued to implement our strategic plan to focus our efforts on the X-traWeb(TM) product line. Of the $41,074 in revenue derived from the X-traWeb(TM) product line, $23,275 resulted from engineering design services related to proof-of-concept and similar development activities contracted by customers interested in custom applications of our internet communications products and services. Our business strategy continues to include revenue from the production of radio products, which totaled $220,281 for the three-month period ended September 30, 2001, compared to $177,111 for the three months ended September 30, 2000, an increase of $43,170 or 24.4%. Finally, royalties contributed $1,100 in corporate revenues during the three-month period ended September 30, 2001, compared to $45,172 for the three months ended September 30, 2000, a decrease of $44,072 or 97.6%. Since the license agreement with our primary customer expired by its terms in September 2000, we received greatly reduced royalty income during the third quarter of 2001. In addition, we derived only $700 in revenues from our Italian subsidiary, X-traWeb Europe, S.p.A. and received no revenues from our subsidiaries, X-traWeb Europe S.p.A., and received two additional operating subsidiaries, X-traWeb Services Corp. and X-traWeb Financial Corp., which are designed to offer various services of X-traWeb products and to provide financing capability of sales of X-traWeb products or services, respectively. Our cost of sales for the three-month period ended September 30, 2001 increased to $391,121 from a total of $259,110 for the three months ended September 30, 2000, or an increase of $132,011 or 50.9%. The resulting gross margin was a loss of $128,666, or 49.0% of sales, for the three-month period ended September 30, 2001 compared to a profit of $117,775, or 31.2%, for the three months ended September 30, 2000. The gross profit for the three months ended September 30, 2001 was $69,334, or 26.4% of sales before the write-down of inventory items to their fair value. Our research and development expenses decreased to $131,978 from $455,456, or by a decrease of $323,478, or 71.0%, for the comparable three month periods ended September 30, 2001 versus September 30, 2000. This decrease reflects the increasing maturity of our X-traWeb product line, and the shift in resources from research and development to applications engineering. These costs continue to relate to the ongoing development of the X-traWeb(TM) proprietary technology in 2001. Our total selling, general, and administrative expenses amounted to $1,440,582 for the three-month period ended September 30, 2001 compared to $1,354,295 for the three months ended September 30, 2000, representing an increase of $86,287, or 6.4%. Selling and marketing expenses decreased by $144,552 or 35.5%, during the three-month period ended September 30, 2001 over the three months ended September 30, 2000, which primarily represents an decrease in staffing levels for our full-time permanent sales force and a reduced investment in media consulting. Total general and administrative expenses for the comparable September 30, 2001 and September 30, 2000 period increased by $230,839, or 24.4%, and resulted primarily from (1) an increase in expenses of $136,000 for the general operating requirements of the X-traWeb Europe offices, and (2) expenses related to applications engineering that had previously been allocated to research and development. -15- Our interest income for the three-month period ended September 30, 2001 was $437 compared to $90,553 for the three months ended September 30, 2000, with the decrease of $90,116 directly attributable to decreased available funds in overnight interest bearing accounts initially provided by the $13.6 million private placement of shares of our Common Stock we sold in the first quarter of 2000. Interest expense increased to $255,786 during the three-month period ended September 30, 2001 compared to $4,388 for the three months ended September 30, 2000, and represents an increase of $251,398. This expense increase is directly related to our issuance of units of secured notes and warrants during the second and third quarters of 2001, and represents the amortization of discount and accrued interest thereon. NINE MONTHS ENDED SEPTEMBER 30, 2001 AND NINE MONTHS ENDED SEPTEMBER 30, 2000 Results of Operations We incurred a net loss of $5,651,110 for the nine months ended September 30, 2001, or $0.18 loss per share, compared to a net loss of $3,030,384, or $0.11 loss per share, for the nine months ended September 30, 2000. This represents an increase in 2001 of $2,620,726, or 86.5%, over the 2000 year-to- date financial results. However, the increase of the loss in 2001 would be $943,058 if the non-recurring reversal of manufacturing exit costs of approximately $1,677,668 were excluded from the 2000 result. Sales for the nine month period ended September 30, 2001 totaled $863,315 compared to $1,343,125 during the nine month period ended September 30, 2000, a decrease of $479,809 or 35.7%. During the comparative three quarters of 2001 and 2000, the Company derived its revenue as follows:
For the Nine Months Ended September 30, Summary of Revenue by Product 2001 2000 ------------ ------------ X-traWeb(TM) $ 233,012 $ 272,947 Branded Products 612,763 496,619 Corporate 17,540 573,559 ------------ ------------ Total Revenue $ 863,315 $ 1,343,125 ============ ============
During the first three quarters of 2001, we continued to implement our strategic plan to focus our efforts on the X-traWeb(TM) product line and proprietary radio products. Our sales of branded products, including radio and antenna sales, increased by $116,144, or 23.4%, during the first three quarters of 2001. We recognized total revenues from the X-traWeb(TM) product line of $233,012 during the first nine months of 2001, of which $104,493 was attributable to engineering design services contracted by customers for the custom development of such products. -16- Finally, royalties contributed $17,540 in revenue during the nine months ended September 30, 2001 compared to $459,986 during the nine months ended September 30, 2000, a decrease of $442,446, or 96.2%. We realized only marginal revenues, about $700, from our operating subsidiary, X-traWeb Europe S.p.A., based in Milan, Italy, which is in charge of our marketing efforts in Europe. Cost of sales for the nine months ended September 30, 2001 declined to $ 684,225 from a total of $962,022 in 2000, or a reduction of $277,797 or 28.9%. The resulting gross profit was $179,090 or 20.7% of sales, for the nine months ended September 30, 2001 compared to $381,102, or 28.4%, for the nine months ended September 30, 2000. During the third quarter of 2001, we marked a portion of our inventory down to reflect its fair value. As a result we recognized $198,000 in expense as cost of sales during the third quarter of 2001. Excluding the adjustment to the value of our inventory, we realized a gross profit of $377,090, or 43.7% of sales. Research and development expenses declined from $1,060,760 to $406,155 or a decrease of $654,605 or 61.7% for the comparable nine month periods ended September 30, 2001 versus September 30, 2000. This decrease is consistent with the increasing maturity of our X-traWeb(TM) product line, and the shift in resources from research and development to applications engineering. These costs continue to relate to the ongoing development of the X-traWeb(TM) proprietary technology in 2001. Total selling, general, and administrative expenses amounted to $4,949,948 for the nine months ended September 30, 2001 compared to $4,147,612 for the nine months ended September 30, 2000, representing an increase of $802,336, or 19.3%. Selling and marketing expenses decreased by $312,107, or 26.9%, during the nine months ended September 30, 2001 over 2000 and represents a reduction in staffing levels for our full-time permanent sales force and a reduced investment in media consulting. Total general and administrative expenses for the comparable nine month periods ended September 30, 2001 and 2000 increased by $1,114,443, or 37.3%, and resulted from (1) an increase in operating expenses for the X-traWeb Europe offices of $417,000 for promotion of X-traWeb(TM) products, and other international business opportunities, and (2) an increase in expenses related to applications engineering representing the allocation of resources away from research and development. Interest and other income for the nine months ended September 30, 2001 was $29,945 compared to $278,677 for the nine months ended September 30, 2000, with the decrease directly attributable to decreased available funds in overnight interest bearing accounts provided by the $13.6 million private placement securities issued in the first quarter of 2000. Interest expense increased to $375,513 during the nine months ended September 30, 2001 compared to $117,119 for the nine months ended September 30, 2000, and represents a $258,394 increase, or 220.6% increase. This increase is directly related to our issuance of the 2001 Notes and warrants, and represents the amortization of discount and accrued interest. -17- LIQUIDITY AND CAPITAL RESOURCES Our liquidity at September 30, 2001 consisting of cash and cash equivalents was $83,456, which represents a decrease of $3,014,168 over our cash and cash equivalents of $3,097,624 as of December 31, 2000. Our current assets were $1,139,194 as of September 30, 2001, a decrease of $3,012,069 from our current assets of $4,151,263 as of December 31, 2000. As of September 30, 2001, our total liabilities were $3,046,317, which was an increase of $2,092,185 from our total liabilities of $954,132 as of December 31, 2000. Our liquidity decreased significantly due to our net loss and due to changes in operating assets and liabilities during the nine-month period ended September 30, 2001. For the period ended September 30, 2001, the net change in operating assets and liabilities generated a increase of net cash flow of $227,899 compared to a net decrease of cash for the nine months ended September 30, 2000 of $277,208, exclusive of the change in accrued manufacturing exit costs. On May 17, 2001, we issued $1,125,000 of our 15% Senior Secured Convertible Notes to an affiliate of our largest stockholder, which mature on September 15, 2001 (unless mandatorily converted into shares of our Common Stock before such date) (the "2001 Notes"). The 2001 Notes are secured by a first security interest in substantially all of our assets. For a further description of this financing, see "Senior Secured Indebtedness Financing" in Item 2 of Part II of this Report. We also issued warrants to purchase 562,500 shares of our Common Stock at $0.50 per share. During the quarter ended September 30, 2001, we received an additional $625,000 in loans from Lancer Partners L.P., an affiliate of our largest stockholder, comprising part of the 2001 Notes. In October, 2001, we received an additional $25,000 as a loan from Lancer Partners L.P. and an additional $435,000 as loans from Lancer Offshore, Inc. comprising part of the 2001 Notes. On November 14, 2001, Lancer Offshore Inc. loaned us an additional $1,000,000 comprising part of the 2001 Notes. We also issued detachable five-year warrants to purchase 1,042,500 shares of our Common Stock as a result of these additional loans, of which total warrants to purchase 312,500 shares of our Common Stock were issued with respect to the quarter ended September 30, 2001. For a further description of this financing, see "Senior Secured Indebtedness Financing" in Item 2 of Part II of this Report. Also, the parties made certain amendments to the terms of the May 17, 2001 financing, as further described in "Senior Secured Indebtedness Financing" in Item 2 of Part II hereof. Based on our current cash position and our plans for 2001, we believe that additional capital will be required by the end of February, 2001. We recently obtained financing proceeds from Lancer Offshore, Inc., an affiliate of our largest stockholder, which management believes is adequate to fund our operations through February 28, 2002. Our agreement with Lancer Offshore, Inc. and Lancer Partners L.P. also allows for such loan to be increased to a total of $5,000,000 from its current outstanding principal amount of $3,200,000, provided that both parties agree to do so, although we cannot assure you of such mutual agreement. See "Senior Secured Indebtedness Financing" in Item 2 of Part II of this Report, including, without limitation, Item 2(b)2 thereof. We previously obtained a financing commitment letter totaling $4,000,000 from a third party, to be provided as private equity placements on or before May 31, 2001, which management believed was adequate to fund our operations in 2001.The funding party did not provide the financing within the terms of the commitment, and to date, no funds have been received thereunder. Upon the lapse of the commitment deadline, management believed our best interests would be served by accommodating -18- the funding party's interest in seeking to arrange substitute financing with other accredited investors on a best efforts basis, and waiving the funder's prior unconditional commitment therefor. We and the funding party have verbally agreed to allow the funding party to seek substitute financing through November 30, 2001. As the result of the foregoing events and since the $3,200,000 loan from the Lancer entities matures on February 28, 2002, we are currently seeking funding from other sources. SUMMARY During 2000, we implemented our redirection efforts to focus on the growth of our X-traWeb(TM) business segment and proprietary radio products. We raised $13,646,000 in new equity capital, paid off substantially all outstanding debt, redeemed all mandatorily redeemable preferred stock outstanding, relocated our corporate headquarters to the Denver, Colorado area, and exited from all in-house manufacturing activities, including termination of our lease obligation for facilities in Utah. Also, we realized revenues from the sales of our X-traWeb products for the first time during 2000 and signed various marketing alliance agreements during the year. During the first nine months of 2001, we continued to focus on our sales of X-traWeb(TM) products and services. We continued to receive revenues from the sale of our X-traWeb products, albeit at a slower pace than anticipated, and also signed additional marketing alliance agreements during the year. While we believe that (i) a number of our pending proposals for projects or products will be accepted in whole or in part, (ii) we will develop additional sources of sales in the United States, Italy and other foreign countries and (iii) will derive substantial revenues therefrom in 2002 and thereafter, we cannot assure you that any such sales will be made or the amount thereof, although we anticipate that X-traWeb(TM) product sales will constitute the bulk of our revenues during the year 2002 and thereafter. We also believe that we will derive significant revenues from the sale of our proprietary radio products in the future, but we cannot assure you as to the amount of such sales or when such sales will occur. We do not expect the sales of our antenna products to contribute materially to our consolidated net sales or income in the foreseeable future. As a result of the slower receipt of revenues from the sale of our X-traWeb products, we decided in July, 2001 to focus our activities principally on the sale of such products in the automatic meter reading and facilities management field (in part due to the current energy crisis experienced in parts of the United States), although we will continue to market our products in the areas of (i) vending machines, (ii) security systems and (iii) food services equipment. We also decided to reduce the number of our employees, particularly in the engineering and administrative areas, and also closed our office in Kansas City, Kansas. Thus, as of October 31, 2001, we had a total of 33 employees, a reduction of 15 from the total of 48 employees we has as of January 1, 2001. In summary, while we are optimistic about our future, we are fully aware that anticipated revenue increases from sales of our X-traWeb(TM) products and our proprietary radios are by no means assured, and that our requirements for capital are substantial. If significant revenues with adequate margins are not generated and/or the additional financing is not obtained, we have a contingency plan to further reduce overhead and other operating costs so as to remain a going concern. These contingency plans, however, would require additional reductions in product development and marketing costs, which could impact the timing and ultimate amount of future revenues. -19- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 20, 2001 the Pinnacle Fund L.P., Barry M. Kitt and Tom and Denise Hunse filed a lawsuit against us with respect to the purchase of a total of 230,000 shares of our common stock at $3.00 per share in a private placement transaction in February 2000. The plaintiffs seek rescission of the transaction and/or damages, including treble damages, which they allege arise out of our failure to file a registration statement on or before December 31, 2000. The lawsuit is currently pending in the United States District Court for the District of Utah. The case is in the discovery stage, with each party having exchanged documents and written responses to questions asked. We believe that we have meritorious defenses to such action and intend to prosecute our defense of the action vigorously, but there can be no assurance as to the outcome thereof. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS We made several sales of shares of our securities during the third quarter of 2001 each of which is exempt from registration under the Act, as set forth below: (a) As of August 7, 2001, we issued (i) a Senior Secured Note in the principal amount of $350,000 (described immediately below) and (ii) a warrant expiring on August 6, 2006 to purchase 225,000 shares of our Common Stock at an exercise price of $0.30 per share, to Lancer Partners L.P., an affiliate of our largest stockholder. We believe that Lancer Partners L.P. is an accredited investor within the meaning of Regulation D issued under the Act. We issued such securities in reliance upon Section 4(2) of the Act. (b) As of September 6, 2001, we issued a Senior Secured Note in the principal amount of $100,000 to Lancer Partners L.P., an affiliate of our largest stockholder. We believe that Lancer Partners L.P. is an accredited investor within the meaning of Regulation D issued under the Act. We issued such securities in reliance upon Section 4(2) of the Act. (c) As of September 18, 2001, we issued (i) a Senior Secured Note in the principal amount of $175,000 to Lancer Partners L.P. (described immediately below) and (ii) a warrant to purchase 87,500 shares of our Common Stock at an exercise price of $0.30 per share, expiring on September 17, 2006, to Lancer Partners L.P., an affiliate of our largest stockholder. We believe that Lancer Partners L.P. is an accredited investor within the meaning of Regulation D issued under the Act. We issued such securities in reliance upon Section 4(2) of the Act. Senior Secured Indebtedness Financing (a) May 17, 2001 Financing On May 17, 2001, the Company sold an investment unit consisting of (a) $2,250,000 principal amount of its Senior Secured Convertible Notes (the "2001 Notes") and (b) warrants to purchase 1,125,000 shares of Common Stock of the Company to Lancer Offshore, Inc., an affiliate of the Company's largest stockholder, in a private placement transaction exempt from registration under the Act, subject to the following terms and conditions. -20- 1. The 2001 Notes bear simple interest at the rate of 15% per annum and mature on September 15, 2001, unless they are mandatorily converted into shares of our Common Stock prior to such date. 2. Under the 2001 Notes, we received the principal amount of $1,125,000 on May 17, 2001, issued a Note for such amount and the holder agreed to loan the additional amount of $1,125,000 on or before July 15, 2001, provided that we raised a minimum of $2,000,000 in equity from persons other than Michael Lauer and his affiliates, including Lancer Offshore Inc., Lancer Partners L.P., and The Orbiter Fund Ltd. 3. The 2001 Notes are secured by a first security interest of substantially all of our assets, including its machinery, equipment, automobiles, fixtures, furniture, accounts receivable and general intangibles, including patents, patent applications and any stock in any subsidiary. 4. Under the 2001 Notes, we and Lancer Offshore, Inc. may jointly agree to increase the amount of the loan to a total of $5,000,000 with a pro rata increase in the amount of warrants issuable by the Company. 5. The 2001 Notes are mandatorily convertible into shares of our Common Stock at the rate of $0.50 per share (i.e. one share for each $0.50 of debt) upon (i) our receipt of approval of our stockholders at a meeting of such conversion and (ii) our receipt of $2,000,000 in equity from persons other than Michael Lauer and his affiliates. 6. We agreed to give Lancer Offshore, Inc. registration rights with respect to the shares issuable upon conversion of the 2001 Notes and upon exercise of the warrants granted to it. 7. Any event of default under the 2001 Notes will require the issuance of 1,000,000 shares of our Common Stock commencing with the month in which such default first occurs and thereafter in each such month in which such default is not cured, up to a maximum amount of 10,000,000 shares. 8. The warrants issued and potentially issuable to Lancer Offshore Inc. have an exercise price at $0.50 per share, expire on the fifth anniversary date of the date of issuance and may be exercised in whole or in part, but the shares subject thereto are issuable only upon the approval of such issuance by our stockholders at a meeting. Based on the $1,125,000 loan made to us, we issued warrants to purchase 562,500 shares of our Common Stock. 9. We agreed to pay a finder's fee to Capital Research Ltd. and Sterling Technology Partners of a total of 10% of the gross proceeds received by it on the sale of the 2001 Notes payable on each closing of a tranche of the financing under the 2001 Notes. -21- On May 17, 2001 the closing price of a share of our Common Stock was $0.65, which was higher than the conversion rate of one share for each $0.50 of debt and the exercise price of each warrant of $0.50 per share. (b) August 7, 2001 Financing We failed to meet the conditions described in item 2 above on the May 17, 2001 financing by July 15, 2001. As a result, on August 7, 2001, Lancer Partners L.P., another affiliate of our largest stockholder, agreed to loan us an additional $875,000 as part of the 2001 Notes on the following terms and conditions: 1. Lancer Partners L.P. agreed to loan us the additional amount of $350,000 on August 7, 2001 provided our Board approved the terms of the August 7, 2001 financing (which it did). We issued an additional 2001 Note for the $350,000 loan. 2. Lancer Partners L.P. agreed to loan us $275,000 on or about September 15, 2001 and $250,000 on or about October 15, 2001, provided that we raised a minimum of $1,500,000 in equity from persons other than Michael Lauer and his affiliates, including Lancer Offshore Inc., Lancer Partners L.P. and The Orbiter Fund Ltd., on or before September 15, 2001. Each of these additional loans would mature on December 15, 2001 unless mandatorily convert into shares of our common stock. 3. This tranche of $875,000 comprising the 2001 Notes is mandatorily convertible into shares of our Common Stock at the rate of $0.20 per share (i.e. one share for each $0.20 of debt) upon (a) the receipt of approval of our stockholders at a meeting of such conversion and (b) our receipt of $2,000,000 of equity from non-Lancer entities or affiliates by December 31, 2001. 4. We agreed to issue additional warrants to purchase up to an additional 562,500 shares of our Common Stock if the entire $875,000 is loaned by Lancer Partners, LP to us. As a result of the $350,000 loan made on August 7, 2001, we issued warrants to purchase an additional 225,000 shares of our Common Stock at an exercise price of $0.30 per share. 5. We agreed as a condition to the August 7, 2001 financing to reduce our operating budget to a monthly burn rate of less than $250,000 effective September 1, 2001 and to curtail all our discretionary spending of funds until additional equity is raised. 6. We agreed to provide Lancer Partners L.P. with fully executed loan agreements, Uniform Commercial Code and other filings and warrant agreements by August 15, 2001. 7. The terms set forth in the May 17, 2001 financing described in 1, 3, 4, 6, 7 and 9 apply with the same force and effect to the August 7, 2001 financing. In addition, under the August 7, 2001 financing, we agreed to amend the May 17, 2001 financing as follows: -22- (i) The $1,125,000 principal amount comprising a portion of the 2001 Notes is now mandatorily convertible into shares of our Common Stock at the rate of $0.20 per share (i.e. one share for each $0.20 of debt); (2) We agreed to give Lancer Offshore Inc. and Lancer Partners L.P. full anti-dilution protection in the event we sold shares of our Common Stock at a price of less than $0.20 per share during the one-year period commencing on May 12, 2001; (iii) The exercise price of the warrant to purchase 562,200 shares of our Common Stock was reduced to $0.30 per share; and (iv) The maximum amount of shares of our Common Stock issuable in the event of continuing monthly defaults was increased to 12,500,000 from 10,000,000. On August 7, 2001, the average of the high and low price per share of the Company's Common Stock was $0.38, which was higher than the conversion rate of one share for each $0.20 of debt and the exercise price of each warrant at $0.30 per share. (c) September, 2001 Financing We failed to meet the condition described in Item 2 above on the August 7, 2001 financing by September 15, 2001. Despite such failure, Lancer Partners L.P. loaned the Company an additional $100,000 and $175,000 on September 6, 2001 and September 18, 2001, respectively, which loans originally had a maturity date of December 15, 2001. As a result thereof, the Company issued a separate note comprising part of the 2001 Notes to such party (which originally were mandatorily convertible into 1,375,000 shares of our Common Stock at $0.20 per share) and also issued a warrant to purchase an aggregate of 87,500 shares of our Common Stock at $0.30 per share. In addition, the parties amended the August 7, 2001 financing as follows: (i) The maturity date of the two tranches of the 2001 Notes totaling $1,475,000 in principal amount was extended from September 15, 2001 until October 15, 2001; and (ii) The creditors extended the time for the Company to raise $1,500,000 until October 15, 2001 as a condition to the issuance of the $250,000 loan on or about October 15, 2001. Also, the holders of the 2001 Notes acknowledged that there was no default of any kind as of September 14, 2001. On September 8, 2001 and September 16, 2001, the average of the high and low price per share of the Company's Common Stock was $0.255 and $0.235, respectively, which was higher than the conversion rate of one share for each $0.20 of debt, but lower than the exercise price of each warrant at $0.30 per share. (d) October and November, 2001 Financing -23- We again failed to meet the condition to raise additional equity financing of $1,500,000 on or before October 15, 2001. Despite such failure, Lancer Partners L.P. loaned us an additional $25,000 (bringing its total loan to us to $650,000 in principal amount) and Lancer Offshore, Inc. loaned us an additional $85,000 on October 3, 2001, $175,000 on October 9, 2001, an $175,000 on October 29,2001 and $1,000,000 on November 14, 2001 (bringing its total loan to us to $2,560,000 in principal amount), or a total loan from such parties of $3,210,000. As a result, we issued separate notes comprising part of the 2001 Notes and issued additional warrants to such parties to purchase 730,000 shares of our Common Stock at an exercise price of $0.30 per share, expiring in each case on a date in 2006 five years after the date of their respective issuance. In addition, the parties agree on November 14, 2001 to amend the entire 2001 Note financing as follows: (i) The entire principal amount of $3,210,000 comprising the 2001 Notes is now mandatorily convertible into shares of our Common Stock at the rate of one share for $0.05 of debt; (ii) The maturity date of the entire principal amount of $3,210,000 comprising the 2001 Notes was extended until February 28, 2002 (unless mandatorily converted into shares of our Common Stock prior to such date); (iii) The amount of shares issuable in the event of a default is now increased to 1,605,000 for each month in which a default exists and continuing until such default is cured; (iv) We agreed to give Lancer Offshore Inc. and Lancer Partners L.P. full anti-dilution protection in the event we sold shares of our Common Stock at a price less than $0.05 per share during the one-year period commencing on November 14, 2001 (which was changed from May 12, 2001); and (v) The finders fee payable on the transaction was increased by requiring us to issue a five-year warrant to Capital Research Ltd. to purchase 2,000,000 shares of our Common Stock at an exercise price of $0.05 per share, which expires on November 13, 2006. On the date of the issuance of each of the additional Notes comprising part of the 2001 Notes and the warrants to purchase shares of our Common Stock, the average of the high and low price of a share of our Common Stock was higher than conversion rate of the Note and the exercise price of each Warrant. We plan to amend our Articles of Incorporation to permit the potential issuance of the shares of our Common Stock necessitated by the above-described financing and to obtain shareholders approval of the same. (e) American Stock Exchange Rules Under applicable American Stock Exchange Rules, we are required to obtain the approval of our stockholders if we propose to issue shares of our Common Stock (i) to a controlling stockholder at a per share price less than the market value thereof and (ii) such issuance involves -24- an amount of shares that is more than 5% of the number of the corporation's then issued and outstanding shares of Common Stock in any one year. Such rule applies to our recent financing transaction with Lancer Offshore, Inc. and Lancer Partners L.P.. Accordingly, the approval of our stockholders is required in order to permit the mandatory conversion of the 2001 Notes owned by Lancer Offshore, Inc. and Lancer Partners L.P. into shares of our Common Stock, and the issuance of the shares of our Common Stock upon the exercise of the warrants granted to Lancer Offshore, Inc. and Lancer Partners L.P. in connection with the above financing. (f) Risk of Default Under Our Senior Secured Indebtedness. While we use our best efforts to raise $3,200,000 in additional equity as a further condition for the mandatory conversion of the 2001 Notes into our shares of Common Stock, we cannot assure you of such result. Moreover, we cannot assure you that we will not commit a default under the 2001 Notes in the future when they mature on February 28, 2002. In the event that the holders of the 2001 Notes sell our assets securing the 2001 Notes following any future default by us, a remedy available under the 2001 Notes, such sale would materially and adversely affect our business and financial condition. (g) Special Risk Factor -- One Principal Stockholder May Increase His Control of US Michael Lauer and his affiliates currently own 7,295,853 shares of our Common Stock. In addition, he and his affiliates potentially will increase their ownership in us by 65,805,000 shares of our Common Stock (a) through the mandatory conversion of the $3,210,000 in principal amount of the 2001 Notes if (i) our stockholders approve the mandatory conversion thereof at a stockholders meeting and (ii) we receive $3,210,000 in equity from sources other than Michael Lauer, Lancer Offshore, Inc., Lancer Partners L.P., and the Orbiter Fund Ltd. on or before February 28, 2002 and (b) if the warrants to purchase 1,605,000 shares of our Common Stock granted to them are exercised after stockholder approval thereof at a stockholders meeting. If such additional shares of our Common Stock are issued, then Michael Lauer would control approximately 75% of our then issued and outstanding shares of Common Stock (excluding the issuance by us of any other shares prior to such time, including the shares issued for the equity investment needed to convert the note) which represents an increase of 51.1 percentage points from the Lancer group's current ownership of 23.4%. However, we cannot actually determine the Lancer group's actual percentage ownership of the shares of our Common Stock without knowing the final terms of any new equity infusion of $3,210,000. In any event as a result of the $3,210,000 in loans made to us, Mr. Lauer will be able, in all likelihood, to determine effectively the vote on any matter being voted on by our stockholders, including the election of directors and any merger, sale of assets or other change in control of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: Financial Statements of the Company (unaudited), including Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operation, Condensed Consolidated Statements of Cash Flow and Notes to Financial Statements as at and for the three months and nine months ended September 30, 2001 and the Exhibits which are listed on the Exhibit Index reflected below and attached hereto: 10.39 Amended and Restated Loan Agreement by and among the Registrant, Lancer Offshore, Inc. and Lancer Partners L.P. dated as of August 7, 2001, together with the Note, Warrant, Amended and Restated Pledge/Security Agreement, Subordination Agreement, Pledgee Representation Agreement and the Amended and Restated Registration Rights Agreement. 10.40 Amendment of Agreements by and among the Registrant, Lancer Offshore, Inc. and Lancer Partners L.P. dated September 14, 2001. (b) The following reports on Form 8-K were filed by the Registrant during the quarter ended September 30, 2001: None -25- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, there unto duly authorized. DATE: November 19, 2001 WORLD WIRELESS COMMUNICATIONS, INC. By: /s/ David D. Singer --------------------------------------- David D. Singer President, Chief Executive Officer By: /s/ Robert Hathaway --------------------------------------- Robert Hathaway Vice President Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) -26- EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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* 4.2 Form of Subscription Agreement used in private financing providing for registration rights* 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 Amended and restated 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.* 10.8 Asset Purchase Agreement dated October 31, 1997, between the Company and Austin Antenna, Ltd.* 10.9 Stock Exchange Agreement dated October 31, 1997, between the Company, TWC, Ltd. and the shareholders of TWC, Ltd.* 10.10 Settlement Agreement, Mutual Waiver and Release of All Claims dated November 11, 1997 between Digital Radio Communications Corp. and Digital Scientific, Inc.* 10.11 Agreement (undated) between the Company, Xarc Corporation and Donald J. Wallace relating to the Company's acquisition of Xarc Corporation*
-27- 10.12 Promissory Note dated December 4, 1997, by the Company, payable to William E. Chipman, Sr. in the principal amount of $125,000* 10.13 Promissory Note dated November 13, 1997, by the Company, payable to T. Kent Rainey in the principal amount of $200,000* 10.14 Investment Banking Services Agreement dated November 19, 1997, between the Company and PaineWebber Incorporated* 10.15 $400,000 Promissory Note dated December 24, 1997, payable to Electronic Assembly Corporation* 10.16 $400,000 Promissory Note dated January 8, 1998, payable to Tiverton Holdings Ltd.* 10.17 Loan Agreement by and among the Registrant and the Bridge Noteholders* dated as of May 15, 1998* 10.18 Amendment and Waiver Agreement by and among the Registrant and the Bridge Noteholders dated August 7, 1998* 10.19 Amendment and Waiver Agreement by and among the Registrant and the Bridge Noteholders dated September 11, 1998* 10.20 Loan Agreement by and among the Registrant and the Bridge Noteholders dated as of May 15, 1998 (Previously filed), together with the Notes, Pledge/Security Agreement, Pledgee/Representative Agreement, Subordination, and Registration Rights Agreement* 10.21 Separation and Mutual Release Agreement between the Registrant and William E. Chipman, Sr. dated as of May 26, 1998* 10.22 Registration Rights Agreement by and among the Registrant and the purchasers of common stock issued pursuant to the Registrants Confidential Private Placement Memorandum dated September 9, 1998, as amended* 10.23 Employment Agreement between the Registrant and James O'Callaghan dated May 20, 1998* 10.24 Lease agreement between the Registrant and NP#2 dated as of July 29, 1998 relating to the premises at 2441 South 3850 West, West Valley City, Utah 84120* 10.25 Agreement between KME and the Registrant dated October 19, 1998 relating to the Registrant's providing of technical assistance and development relating to the Gigarange telephone*
-28- 10.26 Agreement between KME and the Registrant dated as of March 1, 1998 relating to the Panasonic MicroCast System* 10.27 General and Mutual Release Agreement between the Registrant and Phil Acton dated November 2, 1998* 10.28 Agreement and Waiver Agreement by and among the Registrant and the Bridge Noteholders dated November 25, 1998* 10.29 1998 Employee Incentive Stock Option Plan* 10.30 1998 Non-qualified Stock Option Plan* 10.31 Amendment of Agreement by and among the Registrant and the Bridge Noteholders dated as of March 26, 1999* 10.32 Loan Agreement by and among the Registrant and the Senior Secured Noteholders dated as of May 14, 1999, together with the Notes, Pledge/Security Agreement, Pledgee Representative Agreement, Subordination and Registration Rights Agreement* 10.33 Two separate Agreements by and among the Registrant and the 1999 Bridge Noteholders dated August 19, 1999* 10.34 Waiver Agreement by and among the Registrant and the Bridge Noteholders dated as of December 7, 1999* 10.35 Registration Rights Agreement by and among the Registrant and the purchasers of common stock issued pursuant to the Registrant's Confidential Private Placement Memorandum dated January 12, 2000 as amended* 10.36 Settlement Agreement and Mutual Release between Internet Telemetry Corp. and the Registrant, dated as of August 7, 2000.* 10.37 Financing Commitment Letter between the Registrant and Insight Capital LLC dated April 2, 2001.* 10.38 Loan Agreement by and among the Registrant and Lancer Offshore, Inc. Noteholders dated as of May 17, 2001, together with the Notes, Warrant, Pledge/Security Agreement, Subordination Agreement, and Registration Rights Agreement.* 10.39 Amended and Restated Loan Agreement by and among the Registrant, Lancer Offshore, Inc. and Lancer Partners L.P. dated as of August 7, 2001, together with the Note, Warrant, Amended and Restated Pledge / Security Agreement, Subordination Agreement, Pledgee Representation Agreement and the Amended and Restated Registration Rights Agreement.** 10.40 Amendment of Agreements by and among the Registrant and Lancer Offshore, Inc. and Lancer Partners L.P. dated September 14, 2001.**
-29- ---------- * Filed previously ** Filed herewith. + Management contract or compensatory plan or arrangement filed previously. -30-