SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A/2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ____________
COMMISSION FILE NUMBER 0-21061
SPEEDCOM WIRELESS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 58-2044990
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
7020 PROFESSIONAL PARKWAY EAST
SARASOTA, FL 34240
(941) 907-2300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) Yes[x] No[ ], and (2) has been subject to such
filing requirements for the past 90 days Yes[x] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the last practicable date: October 29, 2001 - 10,122,113
common shares, $.001 par value and 3,835,554 preferred shares, $.001 par
value.
Transitional small business disclosure format (check one): Yes [ ] No [x]
SPEEDCOM WIRELESS CORPORATION
FORM 10-QSB FOR THE PERIOD ENDED SEPTEMBER 30, 2001
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 2001 (as restated) and
December 31, 2000 3
Statements of Operations for the three and nine months ended
September 30, 2001 (as restated) and 2000 4
Statements of Cash Flows for the nine months ended
September 30, 2001 (as restated) and 2000 5
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II. OTHER INFORMATION
Item 2. Recent Sales of unregistered Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 23
Exhibit Index 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SPEEDCOM WIRELESS CORPORATION
BALANCE SHEETS
September 30, December 31,
2001 2000
----------------------------------------
(unaudited)
(as restated)
Assets
Current assets:
Cash $ 591,904 $ 227,066
Accounts receivable, net of allowances of $315,777 and $296,330 in 2001
and 2000, respectively 1,409,965 1,788,206
Leases receivable 624,768 43,389
Inventories, net 1,768,845 2,388,283
Prepaid expenses and other current assets 301,426 732,753
----------------------------------------
Total current assets 4,696,908 5,179,697
Accounts receivable -- 586,578
Leases receivable 671,795 36,157
Property and equipment, net 1,076,043 956,133
Other assets, net 347,168 158,405
Investments 92,717 76,994
Intellectual property 1,352,140 --
----------------------------------------
Total assets $ 8,236,771 $ 6,993,964
========================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,570,092 $ 2,673,570
Accrued expenses 1,228,369 700,815
Current portion of loans from stockholders -- 336,780
Current portion of deferred revenue 81,926 90,047
Current portion of notes and capital leases payable 36,809 52,901
----------------------------------------
Total current liabilities 2,917,196 3,854,113
Loans from stockholders, net of current portion -- 203,733
Deferred revenue, net of current portion 17,417 50,141
Notes and capital leases payable, net of current portion 23,103 57,294
----------------------------------------
Total liabilities 2,957,716 4,165,281
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized, 3,835,554 and 0 shares
issued and outstanding in 2001 and 2000, respectively 5,455,702 --
Common stock, $.001 par value, 30,000,000 shares authorized, 10,005,613
and 9,289,529 shares issued and outstanding in 2001 and 2000, respectively 10,005 9,289
Additional paid-in capital 21,504,623 7,889,817
Accumulated deficit (21,691,275) (4,995,423)
Notes receivable - related party -- (75,000)
----------------------------------------
Total stockholders' equity 5,279,055 2,828,683
----------------------------------------
Total liabilities and stockholders' equity $ 8,236,771 $ 6,993,964
========================================
See accompanying notes.
3
SPEEDCOM WIRELESS CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
Three months ended September 30, Nine months ended September 30,
2001 2000 2001 2000
-------------------------------- ---------------------------------
(as restated) (as restated)
Net revenues $ 2,247,585 $3,182,673 $ 10,300,158 $ 7,183,655
Operating costs and expenses:
Cost of goods and services 1,622,530 1,756,529 6,205,223 3,886,256
Salaries and related 1,486,651 719,272 4,498,028 2,433,880
General and administrative 767,376 770,365 2,843,166 1,320,768
Selling expenses 420,579 319,320 1,370,657 555,056
Provision for bad debt 529,225 182,821 716,299 207,299
Depreciation and amortization 157,657 31,032 417,054 61,032
Severance costs 531,769 -- 531,769 --
--------------------------------- ---------------------------------
5,515,787 3,779,339 16,582,196 8,464,291
--------------------------------- ---------------------------------
Loss from operations (3,268,202) (596,666) (6,282,038) (1,280,636)
Other (expense) income:
Interest expense, net (1,375,012) (2,216) (3,036,351) (10,434)
Other income, net 174,583 -- 180,402 13,488
--------------------------------- ---------------------------------
(1,200,429) (2,216) (2,855,949) 3,054
Net loss before extraordinary items (4,468,631) (598,882) (9,137,987) (1,277,582)
Extraordinary loss from early (2,377,008) -- (3,786,369) --
extinguishment of debt --------------------------------- ---------------------------------
Net loss (6,845,639) (598,882) (12,924,356) (1,277,582)
Assumed dividend from
beneficial conversion feature 3,771,496 -- 3,771,496 --
--------------------------------- ---------------------------------
Net loss attributable
to common stockholders $(10,617,135) $ (598,882) $(16,695,852) $(1,277,582)
================================= ==================================
Net loss before extraordinary items
per common share:
Basic and diluted $(0.46) $(.07) $(0.96) $(0.16)
================================= =================================
Net loss per common share attributable to
common stockholders:
Basic and diluted $(1.10) $(.07) $(1.75) $(0.16)
================================= =================================
Shares used in computing basic and
diluted net loss before
extraordinary items per common share
and net loss per common share 9,687,102 8,505,279 9,530,391 8,075,241
================================= =================================
See accompanying notes.
4
SPEEDCOM WIRELESS CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30,
2001 2000
-----------------------------------
(as restated)
Operating activities
Net loss $(12,924,356) $(1,277,582)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 417,054 61,032
Provision for bad debt 716,299 207,299
Provision for inventory obsolescence 14,768 11,000
Common stock issued for services 228,038 5,000
Amortization of original issue discount 2,457,304 --
Warrants issued for severance costs 124,920 --
Gain on sale of InstallGuys division (167,771) --
Extraordinary charge for early extinguishment of debt 3,786,369 --
Changes in operating assets and liabilities:
Restricted cash -- 35,671
Accounts receivable (1,050,656) (1,393,861)
Leases receivable 13,940 --
Inventories 570,627 (803,991)
Prepaid expenses and other current assets 346,347 (273,615)
Intellectual property (360,000) --
Other assets 6,809 (12,048)
Accounts payable and accrued expenses 199,519 324,987
Deferred revenue (40,845) (5,056)
-----------------------------------
Net cash used in operating activities (5,661,634) (3,121,164)
Investing activities
Purchases of equipment (446,641) (587,266)
-----------------------------------
Net cash used in investing activities (446,641) (587,266)
Financing activities
Net payments from factor -- (111,731)
Net proceeds from sale of stock and warrants 2,291,971 4,665,714
Proceeds from loans from stockholders 6,560,000 (45,639)
Proceeds from issuance of notes and capital leases 12,206 40,000
Payments of loans from stockholders, notes and capital leases (2,391,064) (191,048)
Purchase of treasury stock -- (223,510)
-----------------------------------
Net cash provided by financing activities 6,473,113 4,133,786
-----------------------------------
Net increase in cash 364,838 425,356
Cash at beginning of period 227,066 108,564
-----------------------------------
Cash at end of period $ 591,904 $ 533,920
===================================
See accompanying notes.
5
SPEEDCOM WIRELESS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited)
Nine Months Ended September 30,
2001 2000
----------------------------------
(as restated)
Supplemental disclosure of noncash activities
Conversion of accounts receivable to lease receivable $1,333,000 --
Conversion of accounts payable to notes payable $ 558,442 --
Conversion of accounts payable to preferred stock $ 25,000 --
Common stock issued for services $ 228,038 $ 5,000
Common stock issued for note -- $95,000
Common stock issued for intellectual property $1,149,500 --
Conversion of debt to common stock $ 40,000 --
Conversion of debt to preferred stock $3,240,758 --
Conversion of debt issuance costs to equity $ 163,651 --
Conversion of accrued interest to preferred stock $ 88,764 --
See accompanying notes.
6
SPEEDCOM WIRELESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Business
SPEEDCOM Wireless Corporation (SPEEDCOM or the Company) was incorporated in
Florida on March 16, 1994 and reincorporated in Delaware on September 26, 2000.
The Company manufactures and installs custom broadband wireless networking
equipment for business and residential customers internationally. Through its
Wave Wireless Networking division, the Company manufactures a variety of
broadband wireless products, including the SPEEDLAN family of wireless Ethernet
bridges and routers. Internet service providers, telephone company operators
and private organizations in over 60 countries use SPEEDCOM products to provide
"last-mile" wireless connectivity between multiple buildings at speeds up to 155
Megabits per second and distances up to 25 miles. SPEEDCOM Wireless Corporation
is an ISO 9001 registered company.
2. Basis of Presentation
On September 26, 2000, SPEEDCOM Wireless International Corporation merged with
LTI Holdings, Inc. (LTI). The parties renamed the combined company SPEEDCOM
Wireless Corporation and continued the business of SPEEDCOM Wireless
International Corporation (Old SPEEDCOM).
Since LTI was a non-operating shell company, the merger was treated as a
recapitalization of the Company for accounting purposes. As a result, the
Company recorded the transaction as the issuance of common stock for the net
monetary assets of LTI (principally cash), accompanied by a recapitalization of
equity. The Company recorded a net increase in equity of $1,215,937, which
represented the total net assets of LTI. The Company has recorded the
transaction to reflect the shares outstanding under the current structure.
There has been no change in the basis under which the assets and liabilities of
the Company are recorded. Accordingly, except as specifically noted to the
contrary, (1) the financial information herein that predates the merger consists
of information about Old SPEEDCOM, and (2) all references to SPEEDCOM or the
Company refer to Old SPEEDCOM before the merger and to the combined company
after the merger. The financial statements presented in this Form 10-QSB
reflect the financial position of the remaining legal entity, LTI, which
subsequently changed its name to SPEEDCOM Wireless Corporation. All shares,
options and warrants issued by SPEEDCOM prior to the merger have been
retroactively restated for all periods presented.
The accompanying financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules
7
and regulations. The accompanying financial statements should be read in
conjunction with the Company's annual financial statements and notes thereto
included in the Company's Form 10-KSB.
In the opinion of management, the financial statements reflect all adjustments
(consisting of only normal and recurring adjustments) necessary to present
fairly the financial position, results of operations and cash flows for those
periods presented. Operating results for the nine months ended September 30,
2001 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2001.
3. Inventories
A summary of inventories at September 30, 2001 and December 31, 2000 is as
follows:
2001 2000
-----------------------------------
(unaudited)
Component parts $ 824,205 $1,156,966
Completed assemblies 944,640 1,231,317
-----------------------------------
$1,768,845 $2,388,283
===================================
4. Property and Equipment
A summary of property and equipment at September 30, 2001 and December 31, 2000
is as follows:
2001 2000
------------------------------------
(unaudited)
Computer and office equipment $1,109,456 $ 822,006
Automobiles 26,063 51,737
Leasehold improvements 108,213 86,207
Furniture and fixtures 159,773 135,415
Store and warehouse 83,276 101,719
Construction in progress 89,369 49,244
------------------------------------
1,576,150 1,246,328
Less accumulated depreciation and amortization (500,107) (290,195)
------------------------------------
$1,076,043 $ 956,133
====================================
Property and equipment included computer and office equipment of $67,797 at
September 30, 2001 and December 31, 2000 acquired under capital lease
arrangements. Depreciation expense amounted to $259,694 and $61,032 for the
nine months ended September 30, 2001 and 2000, respectively. Depreciation
expense amounted to $92,809 and $31,032 for the three months ended September 30,
2001 and 2000, respectively. Amortization of assets under capital lease
arrangements is included in depreciation expense.
8
5. Accrued Expenses
A summary of accrued expenses at September 30, 2001 and December 31, 2000 is as
follows:
2001 2000
-----------------------------------
(unaudited)
Accrued payroll $ 261,868 $287,252
Accrued commissions 46,104 109,052
Severance costs 431,129 --
Other 489,268 304,511
-----------------------------------
$1,228,369 $700,815
===================================
6. Loans from Stockholders
SPEEDCOM issued a $250,000 promissory note to the Company's former President in
December 2000. The note had an interest rate of the greater of 12% or DLJ's
standard margin rate plus 1.5%. The note was payable in December 2001 or at the
closing of an equity offering by the Company of at least $5,000,000, whichever
was earlier. The Company concurrently granted a total of 25,000 warrants with a
$3.60 strike price in connection with this note. The proportionate fair value of
the warrants amounted to $62,500 and has been recorded as an addition to paid-in
capital and as an original issue discount reducing the carrying value of the
note. The discount was being amortized to interest expense over the life of the
note. The loan was not convertible into preferred stock per the original loan
agreement. On August 23, 2001, this loan was converted to 111,111 shares of
preferred stock, 88,889 Series A Warrants and 132,111 Series B Warrants. The
Series A Warrants were valued at $93,333. The Series B Warrants vest contingent
upon certain performance factors and was valued at $84,551. The difference in
the carrying value on the promissory note as compared to the combined fair value
of the warrants and preferred stock is recorded as an extraordinary loss from
the early extinguishment of debt.
The Company issued a $252,000 non-interest bearing promissory note in December
2000, with beneficial conversion features. The note was due in December 2001,
payable in cash or 70,000 shares of common stock, at the holder's option. The
70,000 shares had a fair value of $115,500 more than the face value of the note
based on the per-share value at the date of the note. This amount has been
recorded as an addition to paid-in capital and as an original issue discount
reducing the carrying value of the note. The discount was being amortized to
interest expense over the life of the note. On August 23, 2001, this loan was
converted to 112,000 shares of preferred stock, 89,600 Series A Warrants and
133,168 Series B Warrants. The Series A Warrants were valued at $51,096 based on
the proportionate fair value of the warrants at the date of the conversion. The
Series B Warrants vest contingent upon certain performance factors and was
valued at $85,227. The unamortized portion of the original issue discount on the
promissory note is less the fair value of the warrants and preferred stock fully
recorded to interest expense.
In December 2000, the Company issued a $200,000 non-interest bearing promissory
note, with beneficial conversion features. The note was due in January 2002,
payable in cash or 50,000
9
shares of common stock, at the holder's option. The 50,000 shares had a fair
value of $37,500 more than the face value of the note based on the per-share
value at the date of the note. This amount has been recorded as an addition to
paid-in capital and as an original issue discount reducing the carrying value of
the note. The discount was being amortized to interest expense over the life of
the note. On June 29, 2001, this loan, along with a $25,000 trade payable, was
converted to 100,000 shares of redeemable preferred stock, 75,000 Series A
Warrants and 100,000 Series B Warrants. The Series A Warrants were valued at
$90,000 based on the fair value of the warrants at the date of the conversion.
The Series B Warrants vest contingent upon certain performance factors and were
valued at $49,000. The unamortized portion of the original issue discount on the
promissory note is fully recorded to interest expense. On August 23, 2001, the
redeemable preferred stock was exchanged for 100,000 shares of preferred stock,
80,000 Series A Warrants and 118,900 Series B Warrants. The Series A Warrants
were valued at $45,622 based on the proportionate fair value of the warrants at
the date of the conversion. The Series B Warrants vest contingent upon certain
performance factors and are valued at $76,095.
Also in December 2000, the Company issued a $10,800 non-interest bearing
promissory note with beneficial conversion features. The note was due in
December 2001, payable in cash or 3,000 shares of common stock, at the holder's
option. The 3,000 shares had a fair value of $4,950 more than the face value of
the note based on the per-share value at the date of the note. This amount has
been recorded as an addition to paid-in capital and as an original issue
discount reducing the carrying value of the note. The discount was being
amortized to interest expense over the life of the note. On August 23, 2001,
this loan was converted to 4,800 shares of preferred stock, 3,840 Series A
Warrants and 5,708 Series B Warrants. The Series A Warrants were valued at
$2,190 based on the fair value of the warrants at the date of the conversion.
The Series B Warrants vest contingent upon certain performance factors and are
valued at $3,653. The unamortized portion of the original issue discount on the
promissory note is fully recorded to interest expense.
During January 2000, the Company issued a 10% convertible subordinated
promissory note for $40,000, due for payment in January 2003. The note was
convertible into 10,000 shares of common stock at any time during its term. The
note was subordinate to all other debt instruments. The $40,000 note and
accrued interest was converted in January 2001.
In April 2001, SPEEDCOM borrowed $3,000,000 from an institutional investor. The
loan was due in April 2002 and had an interest rate of 9% for the first 90 days
and 12% thereafter. This loan is convertible at the option of the investor into
debt or equity securities at a conversion price equal to 110% of the outstanding
principal amount. As part of the transaction, SPEEDCOM issued warrants to
acquire 333,333 shares of SPEEDCOM common stock at $5.00 per share. The 333,333
warrants had a fair value of $930,000 more than the face value of the note based
on the per-share value at the date of the note. Additionally, this loan has
beneficial conversion features based on the value of the warrants and the
ability to convert to other securities at 110% of the principal amount. The
value of this beneficial conversion feature of $1,230,000 is combined with the
$930,000 yielding a total of $2,160,000 that has been recorded as an addition to
paid-in capital and as an original issue discount reducing the carrying value of
the note. The debt discount was being amortized to interest expense over the
life of the note. Additional warrants were issuable contingent upon the date on
which the loan was repaid. The holder of the loan had certain rights of first
refusal on subsequent financings. Interest was due under the loan in quarterly
installments with principal payable in total at the maturity date of the loan.
On June 29, 2001, the Company permitted $1,000,000 of this loan plus accrued
interest to be converted to 497,812 shares of redeemable preferred stock,
373,359 Series
10
A Warrants and 497,812 Series B Warrants. The Series A Warrants were valued at
$448,030 based on the fair value of the warrants at the date of the conversion
utilizing the Black-Scholes pricing model. The Series B Warrants vest contingent
upon certain performance factors and were valued at $243,928. On August 23,
2001, the redeemable preferred stock was exchanged for 497,812 shares of
preferred stock, 398,225 Series A Warrants and 591,898 Series B Warrants. On
August 23, 2001, the remaining $2,000,000 of this loan plus accrued interest was
converted to 1,011,756 shares of preferred stock, 809,506 Series A Warrants and
1,203,104 Series B Warrants. The Series A Warrants were valued at $461,638 based
on the fair value of the warrants at the date of the conversion. The Series B
Warrants vest contingent upon certain performance factors and were valued at
$769,987.
SPEEDCOM issued a 9% $40,000 promissory note to the Company's Vice President of
Sales in May 2001. The note and interest were paid in August 2001.
In June 2001, SPEEDCOM issued a $250,000 promissory note to the Company's former
President. The note had an interest rate of 10% and was payable in April 2002.
The Company concurrently granted a total of 73,333 warrants with a $3.25 strike
price in connection with this note. The proportionate fair value of the warrants
amounted to $92,500 and has been recorded as an addition to paid-in capital and
as an original issue discount reducing the carrying value of the note. The loan
was not convertible into preferred stock per the original loan agreement. On
June 29, 2001, this loan plus accrued interest was converted to 111,667 shares
of redeemable preferred stock, 83,751 Series A Warrants and 111,667 Series B
Warrants. The Series A Warrants were valued at $169,177. The Series B Warrants
vest contingent upon certain performance factors and were valued at $54,717. The
difference in the carrying value on the promissory note as compared to the
combined fair value of the warrants and preferred stock is recorded as an
extraordinary loss from the early extinguishment of debt. On August 23, 2001,
the redeemable preferred stock was exchanged for 111,667 shares of preferred
stock, 89,334 Series A Warrants and 132,773 Series B Warrants.
In June 2001, SPEEDCOM borrowed $1,500,000 from three institutional investors.
The loan had an interest rate of 10% and was payable in April 2002. The Company
concurrently granted a total of 440,000 warrants with a $3.25 strike price in
connection with this loan. The proportionate fair value of the warrants amounted
to $555,000 and has been recorded as an addition to paid-in capital and as an
original issue discount reducing the carrying value of the loan. The loan was
not convertible into preferred stock per the original loan agreement. On June
29, 2001, $550,000 of this loan was converted to 245,667 shares of redeemable
preferred stock, 184,251 Series A Warrants and 245,667 Series B Warrants. The
Series A Warrants were valued at $372,187. The Series B Warrants vest contingent
upon certain performance factors and were valued at $120,377. The difference in
the carrying value related to the converted portion of this loan as compared to
the combined fair value of the warrants and preferred stock is recorded as an
extraordinary loss from the early extinguishment of debt. On August 23,
11
2001, the redeemable preferred stock was exchanged for 245,667 shares of
preferred stock, 196,550 Series A Warrants and 292,096 Series B Warrants. On
August 23, 2001, the remainder of this loan plus accrued interest was converted
to 430,785 shares of preferred stock, 344,529 Series A Warrants and 512,056
Series B Warrants. The Series A Warrants were valued at $196,475. The Series B
Warrants vest contingent upon certain performance factors and were valued at
$327,716. The difference in the carrying value related to this loan as compared
to the combined fair value of the warrants and preferred stock as compared to
the combined fair value of the warrants and preferred stock is recorded as an
extraordinary loss from the early extinguishment of debt.
SPEEDCOM recorded a loss from the early extinguishment of debt related to some
of the conversions discussed above. When the nonconvertible loans originated,
value was allocated to the warrants based on the Black-Scholes pricing model.
This value was being amortized over the maturity of the loan. When the loan was
converted to preferred stock, Series A Warrants and Series B Warrants the
difference in the carrying value as compared to the combined fair value of the
warrants and preferred stock as compared to the combined fair value of the
warrants and preferred stock was immediately expensed to loss from the early
extinguishment of debt.
7. Notes and Capital Leases Payable
A summary of notes and capital leases payable at September 30, 2001 and December
31, 2000 is as follows:
2001 2000
-----------------------------------
(unaudited)
10.5% bank note payable in monthly installments through $ 35,770 $ 46,631
June 2003, secured by equipment and inventories
8% automobile loan payable in monthly installments 6,174 29,460
through January 2003, secured by equipment
Capital lease obligations 17,968 34,104
-----------------------------------
59,912 110,195
Less current portion (36,809) (52,901)
-----------------------------------
$ 23,103 $ 57,294
===================================
8. Preferred Stock
On June 29, 2001, SPEEDCOM converted loans, accrued interest and trade payables
of $2,149,075 to 955,146 shares of $.001 par value preferred stock, 716,361
Series A Warrants and 955,146 Series B Warrants. The Series A Warrants were
valued based on the proportionate fair value of the warrants at the date of the
conversion. The Series B Warrants vest contingent upon certain performance
factors. The Series B Warrants vest (i) fully if SPEEDCOM does not achieve
positive EBITDA in the fourth quarter of 2001, (ii) partially if SPEEDCOM
achieves positive EBITDA in the fourth quarter of 2001, but less than $100,000,
and (iii) fully if SPEEDCOM has less than $4,500,000 of revenue in the fourth
quarter of 2001. The Company has estimated the Series B Warrants to have a value
of $468,022, based on the results of the Black-Scholes pricing model, reduced by
one-half due to the uncertainty of whether the warrants will be fully or
partially exercisable, or not exercisable at all. Each of the Series A Warrants
is convertible into .75 shares of common stock and each of the Series B Warrants
is convertible into one share of common stock. This preferred stock was only
redeemable upon the occurrence of a Triggering Event as defined in the
agreement, which is generally a sale, merger or reorganization of the Company,
failure of the Company to maintain an effective Registration Statement related
to the redeemable preferred stock or failure to have the Company's common stock
listed on certain exchanges.
On August 23, 2001, SPEEDCOM converted the (i) 955,146 shares of
12
redeemable preferred stock, (ii) 716,361 Series A Warrants and (iii) 955,146
Series B Warrants that were issued on June 29, 2001 and (iv) loans to
shareholders of $3,462,800 in exchange for (i) 2,625,598 shares of preferred
stock, (ii) 2,100,473 Series A Warrants, and (iii) 3,121,814 Series B Warrants.
This conversion was due to the Company's commitment to the holders of preferred
stock and warrants issued in June 2001 that if the Company issues similar
instruments at more favorable terms, the Company will adjust the terms of the
securities issued in June 2001 in response to this commitment based on a
conversion ratio of two shares of common stock for each share of preferred stock
rather than the ratio of one-to-one in the preferred stock issued in June 2001.
The Company has recorded an assumed dividend of $2,292,350, which equals the
increase in the intrinsic value of the preferred stock based on the incremental
number of shares of common stock (955,146) that may be obtained on conversion of
the preferred stock into common stock valued at the price per share ($2.40) on
June 29, 2001. There was no difference in the fair value of Series A and B
warrants issued in August 2001 compared to the fair value of the Series A and B
warrants issued in June 2001.
Concurrently on August 23, 2001, SPEEDCOM issued (i) 1,209,956 shares of
preferred stock, (ii) 967,975 Series A Warrants and (iii) 1,438,667 Series B
Warrants for $2,397,010 in cash net of stock issuance costs. The Series A
Warrants were valued at their proportionate value of $481,587 and the Series B
Warrants were recorded at their proportionate value of $436,277 as additions to
Additional Paid in Capital. Additionally, the preferred stock has a beneficial
conversion feature valued at $1,479,146 based on the value of the warrants and
the ability to convert the preferred stock to two shares of common stock. This
amount is recorded as an assumed dividend from beneficial conversion feature
because the preferred stock was convertible when issued.
Each share of preferred stock issued in August 2001 is convertible at any time
into two shares of common stock, subject to anti-dilution protection, and will
accrue dividends, beginning August 23, 2003, to be paid upon conversion at the
rate of 14% per year times the $2.25 per share liquidation preference. The
conversion ratio is subject to adjustment to 2.25 shares of common stock for
each share of common stock if a change of control transaction is not signed or
announced or closed by specified dates ending on March 31, 2002. The liquidation
preference will increase to $3.38 ($4.50 if paid in stock) if a change of
control agreement is not announced by February 23, 2002 and closed by April 23,
2002. The liquidation preference will increase to $3.04 ($3.83 if paid in stock)
if a change of control agreement is announced by February 23, 2002 and closed by
April 23, 2002. In addition, the terms of the Series B convertible preferred
stock provide for mandatory conversion, automatically, without any action on the
part of the holder, if (1) at least 12 months after the date of issuance of the
Series B convertible preferred stock, the closing bid price of the common stock
exceeds $2.25 for a period of twenty consecutive trading days, and (2) the
underlying common stock is registered under the Securities Act of 1933.
Under the anti-dilution provisions of the preferred stock, if the Company issues
common stock or common stock equivalents at a purchase price, conversion price
or warrant or option exercise price that is less than the current preferred
stock conversion price of $1.125 per share, the conversion price of the
preferred stock will be reduced using a customary weighted average basis
formula. Under the anti-dilution provisions of the Series A and Series B
Warrants issued in August 2001, (1) the exercise price will be lowered to equal
the purchase price, conversion price or warrant or option exercise price for any
common stock or common stock equivalents issued (other than to employees) at a
purchase price, conversion price or warrant or option exercise price less than
the current per share exercise price of the applicable Warrants ($2.50 in the
case of the Series A Warrants and $0.01 in the case of the Series B Warrants),
and (2) the number of Warrants will be increased by the same percentage as the
percentage by which the exercise price is reduced. Alternatively, (1) the
exercise price will be reduced by the percentage by which the purchase price,
conversion price or warrant or option exercise price of any of an issued
security (other than to employees) is less than the current market price of the
common stock, and (2) the number of Warrants will be increased by the same
percentage as the percentage by which the exercise price is reduced, if this
formula results in a lower exercise price than the adjustment described in the
preceding sentence. Similar anti-dilution provisions apply to warrants to
acquire 513,333 shares at an exercise price of $2.50 per share.
The Company may recognize an additional assumed dividend when these
contingencies regarding the conversion ratio are revalued.
9. Shareholder's Equity
In January 2001, SPEEDCOM acquired worldwide rights to PacketHop(TM), a
revolutionary wireless routing software developed by SRI International (SRI).
PacketHop(TM) overcomes the traditional need for a direct line of sight between
a base station and an end user's location. Under the terms of the agreement,
SPEEDCOM obtains worldwide rights to SRI's PacketHop(TM) technology in the fixed
wireless infrastructure market for the primary frequencies below 6 GHz. Per the
agreement, SRI International is entitled to receive a total of 325,000 shares of
common stock of SPEEDCOM to be issued in four traunches. Each traunch is
measured on the specific date that the stock is issued on. The first traunch
was due on signing the agreement. The three remaining traunches are due on
achievement of certain performance criteria. The first traunch was granted in
January for 100,000 shares at $6.50 per share. The second traunch was granted
in April for 75,000 shares at $4.30 per share. The third traunch was granted in
July for 75,000 shares at $2.36 per share. The fourth traunch was granted in
October for 75,000 shares at $1.20 per share. As of September 30, 2001, the
value of these shares at the date of grant was included in Intellectual Property
in the balance sheet. SPEEDCOM also has paid $360,000 in cash, included in
Intellectual Property in the balance sheet, which is being amortized over six
years (the term of the agreement barring default). For the three and nine
months ended September 30, 2001, $64,848 and $157,360 have been amortized of the
Intellectual Property, respectively. The final pilot utilizing the
PacketHop(TM) technology software in combination with the new hardware is
scheduled for the first quarter of 2002.
10. Bad Debt Expense
In the fourth quarter of 2000 and in the first and second quarters of 2001,
SPEEDCOM sold its SPEEDLAN product line for a total of $573,612 to a large
Korean based company (Korean Customer). One of the major clients of SPEEDCOM's
customer declared bankruptcy earlier in the year 2001, which had a significant
financial impact on the Korean Customer. The inventory that was sold to the
Korean Customer is in the possession of a principal of that company. SPEEDCOM
is retaining an attorney to issue legal letters, apply to the courts to capture
the inventory and to gain access to the inventory for assessment. It is unclear
if SPEEDCOM will be successful in its efforts. Accordingly, SPEEDCOM has
written off $228,000 of the receivable and has fully reserved for $227,647,
which represents the remaining unpaid balance.
11. Severance Costs
In the third quarter of 2001, SPEEDCOM recorded severance costs of $531,769,
reflecting employee termination costs relating to staff reductions. The staff
reductions include 20
13
employees (2 at the executive management level) and are expected to be completed
in the third and fourth quarters of 2001. The costs include severance pay and
other employee benefits, including amounts to be paid over future periods. As of
September 30, 2001, SPEEDCOM has paid approximately $100,640 of the total
$531,769 charged to expense.
12. Sale of Assets
During the third quarter of 2001, SPEEDCOM sold the InstallGuys division of the
Company. In return, SPEEDCOM received two 6% secured promissory notes totaling
$211,295. SPEEDCOM recorded a gain on the sale of $167,771. The notes and
interest are due in August 2004.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion in this document contains trend analysis and other 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 that involve risks and uncertainties, such as statements concerning
growth and future operating results; developments in markets and strategic
focus; new products and services and product technologies and future economic,
business and regulatory conditions. Such forward-looking statements are
generally accompanied by the words such as "plan", "estimate", "expect",
"believe", "should", "would", "could", "anticipate", "may" and other words that
convey uncertainty of future events or outcomes. These forward-looking
statements and other statements made elsewhere in this report are made in
reliance on the Private Securities Litigation Reform Act of 1995. The section
below entitled "Certain Factors That May Affect Future Results, Financial
Condition and Market Price of Securities" sets forth factors that could cause
actual results to differ materially from these statements.
Overview
SPEEDCOM is a multi-national company based in Sarasota, Florida. The Company
employs approximately 75 people as of September 30, 2001. Through its Wave
Wireless Networking division, SPEEDCOM manufactures a variety of broadband
wireless products, including its SPEEDLAN family of wireless Ethernet bridges
and routers. Internet service providers, telephone company operators and
private organizations in more than 60 countries use SPEEDCOM products to provide
"last-mile" wireless connectivity between multiple buildings at speeds up to 155
Megabits per second and distances up to 25 miles.
Results of Operations
The following table sets forth the percentage of net revenues represented by
certain items in the Company's Statements of Operations for the periods
indicated.
14
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
-------------------------------------------------------------------------------
Net revenues 100% 100% 100% 100%
Operating costs and expenses:
Cost of goods and services 72% 55% 60% 54%
Salaries and related 66% 23% 44% 34%
General and administrative 34% 24% 28% 18%
Selling expenses 19% 10% 13% 8%
Provision for bad debt 24% 6% 7% 3%
Depreciation and
amortization 7% 1% 4% 1%
Severance costs 24% 0% 5% 0%
-------------------------------------------------------------------------------
246% 119% 161% 118%
-------------------------------------------------------------------------------
Loss from operations (146)% (19)% (61)% (18)%
Other (expense) income:
Interest expense, net (61)% 0% (28)% 0%
Other income, net 8% 0% 2% 0%
-------------------------------------------------------------------------------
(53)% 0% (26)% 0%
Net loss before extraordinary (199)% (19)% (89)% (18)%
items
Extraordinary loss from early (106)% -- (37)% --
extinguishment of debt
-------------------------------------------------------------------------------
Net loss (305)% (19)% (126)% (18)%
Assumed dividend from
beneficial conversion feature 168% -- 36% --
-------------------------------------------------------------------------------
Net loss attributable to
common stockholders (473)% (19)% (162)% (18)%
===============================================================================
Nine Months Ended September 30, 2001 and September 30, 2000
Net revenues increased 43% from approximately $7,184,000 in the nine months
ended September 30, 2000 to approximately $10,300,000 in the nine months ended
September 30, 2001. This increase was due to SPEEDCOM executing its business
plan of expanding the business in a growing market for broadband wireless in
2001. Cost of goods and services increased 60% from approximately $3,886,000
for the nine months ended September 30, 2000 to approximately $6,205,000 for the
nine months ended September 30, 2001, due primarily to increases in the
Company's revenues, increased sales through distribution channels, which have a
lower margin than direct sales and certain purchasing inefficiencies due to
lower cash balances associated with delays in completing financings for the
Company. Revenues from customers in foreign geographic areas increased to 50%
of revenues for the nine months ended September 30,
15
2001 as compared to 41% of revenues the nine months ended September 30, 2000.
The percentage of sales that are from international customers is expected remain
stable throughout the year ended December 31, 2001.
Salaries and related, general and administrative and selling expenses increased
by 102% from approximately $4,310,000 for the nine months ended September 30,
2000 to approximately $8,712,000 for the nine months ended September 30, 2001.
This increase was primarily due to an increase in salaries and related expenses
of approximately $2,064,000 related to the hiring of additional management in
the fourth quarter of 2000 and the first quarter of 2001, spending on investor
relations of approximately $295,000, increased spending on marketing and
promotion, such as attendance at industry trade shows of approximately $101,000,
and engineering related to the PacketHop(TM) product of approximately $290,000
and other one time expenses as described below. Additionally, SPEEDCOM incurred
substantially higher professional fees for legal and accounting services due to
the fact that the Company was a public entity in the first nine months of 2001
and a private entity for the majority of the first nine months in 2000 and
because of the complex debt and equity financings completed by the Company in
the first nine months of 2001. As discussed above, SPEEDCOM incurred one-time
charges in the first nine months of 2001 related to the termination of investor
relations contracts of approximately $281,000 and investment banking charges of
approximately $306,000. Excluding such charges, total salaries and related,
general and administrative and selling expenses would have been approximately
$8,125,000 for the nine months ended September 30, 2001.
Bad debt expense increased for the nine months ended September 2001 primarily
due to the partial write off and setting up a reserve for the remainder of a
Korean receivable. In the fourth quarter of 2000 and in the first and second
quarters of 2001, SPEEDCOM sold its SPEEDLAN product for a total of $573,612 to
a large Korean based company (Korean Customer). One of the major clients of
SPEEDCOM's customer declared bankruptcy earlier in the year 2001, which had a
significant financial impact on the Korean Customer. Accordingly, SPEEDCOM
incurred a significant increase in bad debt expense for the period.
In the third quarter of 2001, SPEEDCOM recorded a severance charge of $531,769,
reflecting employee termination costs relating to staff reductions. The staff
reductions include 20 employees (2 at the executive management level) and are
expected to be completed in the third and fourth quarters of 2001. The costs
include severance pay and other employee benefits, including amounts paid over
future periods.
Net interest expense increased from approximately $10,000 for the nine months
ended September 30, 2000 to approximately $2,856,000 for the nine months ended
September 30, 2001. This increase was due to the addition of notes payable and
loans from stockholders during the fourth quarter of 2000 and the first nine
months of 2001.
During the nine months ended September 30, 2001, SPEEDCOM sold the InstallGuys
division of the Company. Revenue from the InstallGuys division accounted for
less than 3% of total SPEEDCOM revenues for the nine months ended September
2001. The sale of the division is not expected to have a material effect on the
operations or liquidity of SPEEDCOM.
Net loss increased from approximately $1,278,000, or $.16 per share, in the nine
months ended September 30, 2000 to approximately $12,924,000, or $1.36 per
share, in the nine months ended September 30, 2001, as a result of the foregoing
factors.
As discussed in Note 8 of the Notes to the Financial Statements, the Company
issued preferred stock, Series A Warrants and Series B Warrants for cash. The
preferred stock has a beneficial conversion feature valued at $3,771,496 based
on the value of the warrants and the ability to convert the preferred stock to
two shares of common stock. The amount is recorded as an assumed dividend in the
quarter ended September 30, 2001 because the preferred stock was convertible
when issued.
On August 23, 2001, SPEEDCOM converted (i) 955,146 shares of redeemable
preferred stock, (ii) 716,361 Series A Warrants and (iii) 955,146 Series B
Warrants that were issued on June 29, 2001 for (i) 955,146 shares of preferred
stock, (ii) 764,109 Series A Warrants and (iii) 1,135,667 Series B Warrants. The
preferred stock issued on August 23, 2001 has a conversion ratio of two shares
of common stock for each share of preferred stock rather than the ratio of
one-to-one in the preferred stock issued in June 2001. The Company has recorded
an assumed dividend of $2,292,350 which is the value of the incremental number
of common shares issuable upon conversion of the preferred stock based on the
price per share of common stock of $2.40 at the commitment date of June 29,
2001. The preferred stock conversion ratio may be further increased in the
future as discussed in Note 8 of the notes to the financial statements, which
would result in additional assumed dividends.
Three Months Ended September 30, 2001 and September 30, 2000
Net revenues decreased 29% from approximately $3,183,000 in the three months
ended September 30, 2000 to approximately $2,248,000 in the three months ended
September 30, 2001. This decrease was due to an economic slowdown during the
three months ended September 30, 2001, which delayed shipments to, and reduced
orders received from customers. SPEEDCOM does not expect this trend to continue
past the fourth quarter of 2001. Cost of goods and services decreased 8% from
approximately $1,757,000 for the three months ended September 30, 2000 to
approximately $1,623,000 for the three months ended September 30, 2001, due
primarily to decreases in the Company's revenues, partially offset by
16
increased sales through distribution channels which have a lower margin than
direct sales and certain purchasing inefficiencies due to lower cash balances
associated with delays in completing financings for the Company. Revenues from
customers in foreign geographic areas decreased to 49% of revenues for the three
months ended September 30, 2001 as compared to 59% of revenues the three months
ended September 30, 2000. The percentage of sales that are from international
customers is expected to remain stable throughout the year ended December 31,
2001.
Salaries and related, general and administrative and selling expenses increased
by 48% from approximately $1,809,000 for the three months ended September 30,
2000 to approximately $2,675,000 for the three months ended September 30, 2001.
This increase was primarily due to an increase in salaries and related expenses
of approximately $767,000 related to the hiring of additional management in the
fourth quarter of 2000 and the first quarter of 2001. Salaries and related,
general and administrative and selling expenses are expected to decrease in the
fourth quarter of 2001 due to employee terminations and the Company operating in
a capital constrained position, which will limit expenditures.
Bad debt expense increased for the three months ended September 2001 primarily
due to the partial write off and setting up a reserve for the remainder of a
Korean receivable. In the fourth quarter of 2000 and in the first and second
quarters of 2001, SPEEDCOM sold its SPEEDLAN product for a total of $573,612 to
a large Korean based company (Korean Customer). One of the major clients of
SPEEDCOM's customer declared bankruptcy earlier in the year 2001, which had a
significant financial impact on the Korean Customer. Accordingly, SPEEDCOM
incurred a significant increase in bad debt expense for the period.
In the third quarter of 2001, SPEEDCOM recorded a severance charge of $531,769,
reflecting employee termination costs relating to staff reductions. The staff
reductions include 20 employees (2 at the executive management level) and are
expected to be completed in the third and fourth quarters of 2001. The costs
include severance pay and other employee benefits, including amounts paid over
future periods.
Net interest expense increased from approximately $2,000 for the three months
ended September 30, 2000 to approximately $1,375,000 for the three months ended
September 30, 2001. This increase was due to the addition of notes payable and
loans from stockholders during the fourth quarter of 2000 and the first nine
months of 2001.
During the three months ended September 30, 2001, SPEEDCOM sold the InstallGuys
division of the Company. Revenue from the InstallGuys division accounted for
less than 3% of total SPEEDCOM revenues for the three months ended September 30,
2001. The sale of the division is not expected to have a material effect on the
operations or liquidity of SPEEDCOM.
Net loss increased from approximately $599,000, or $.07 per share, in the three
months ended September 30, 2000 to approximately $6,846,000 or $.71 per share,
in the three months ended September 30, 2001, as a result of the foregoing
factors.
As discussed in Note 8 of the Notes to the Financial Statements, the Company
issued preferred stock, Series A Warrants and Series B Warrants for cash. The
preferred stock has a beneficial conversion feature valued at $3,771,496 based
on the value of the warrants and the ability to convert the preferred stock to
two shares of common stock. The amount is recorded as an assumed dividend in the
quarter ended September 30, 2001 because the preferred stock was convertible
when issued.
On August 23, 2001, SPEEDCOM converted (i) 995,146 shares of redeemable
preferred stock, (ii) 716,361 Series A Warrants and (iii) 955,146 Series B
Warrants that were issued on June 29, 2001 for (i) 995,146 shares of preferred
stock, (ii) 764,109 Series A Warrants and (iii) 1,135,667 Series B Warrants. The
preferred stock issued on August 23, 2001 has a conversion ratio of two shares
of common stock for each share of preferred stock rather than the ratio of
one-to-one in the preferred stock issued in June 2001. The Company has recorded
an assumed dividend of $2,292,350 which is the value of the incremental number
of common shares issuable upon conversion of the preferred stock based on the
price per share of common stock of $2.40 at the commitment date of June 29,
2001. The preferred stock conversion ratio may be further increased in the
future as discussed in Note 8 of the notes to the financial statements, which
would result in additional assumed dividends.
Taxes
At September 30, 2001, SPEEDCOM had net operating loss carryforwards (NOLs) for
federal income tax purposes of approximately $4,400,000. The NOLs expire at
various dates through the year 2020.
Liquidity and Capital Resources
During the nine months ended September 30, 2001, SPEEDCOM used approximately
$5,662,000 of cash for its operating activities. This was primarily due to
increases in accounts receivable (due to increases in sales) and the net loss
for the period. SPEEDCOM purchased approximately $447,000 of fixed assets
during the nine months ending September 30, 2001 as compared to approximately
$587,000 during the same period in 2000. SPEEDCOM does not have any material
committments for capital expenditures in the future. To fund this growth in
assets and sales, SPEEDCOM raised approximately $6,473,000 primarily through the
issuance of promissory notes and loans from stockholders and the conversion of
these notes and loans to preferred stock. As of September 30, 2001, SPEEDCOM had
cash of approximately $592,000.
17
During the nine months ended September 30, 2000, SPEEDCOM used approximately
$3,121,000 for its operating activities. This was primarily due to increases in
accounts receivable (due to increases in sales) and its net loss for the period.
SPEEDCOM purchased approximately $587,000 of fixed assets during the nine months
ending September 30, 2000 as compared to approximately $69,000 during the same
period in 1999, a 746% increase. To fund this growth in assets and sales,
SPEEDCOM raised approximately $4,666,000 through the issuance of common stock
and warrants, through private investments and the reverse merger with LTI, as
described in footnote 2 to the financial statements. As of September 30, 2000,
SPEEDCOM had cash of approximately $534,000.
The Company believes that its current cash resources, from operating sources and
investors, are sufficient to maintain its business for the remainder of 2001.
However, the Company will seek additional capital to fund the growth of its
business, develop next generation products and to take advantage of
opportunities that may arise. This additional capital could come from the sale
of common or preferred stock, the exercise of outstanding warrants, or from
borrowings. Any material acquisitions of complementary businesses, products or
technologies could also require additional equity or debt financing. There can
be no assurance that such financing will be available on acceptable terms, if at
all. Projected cash flows from our current operations are not sufficient to
finance our current and projected working capital requirements. We need to raise
additional financing in order to continue to pursue our business plan in 2002.
If we are unable to secure significant additional financing, we will have to
further downsize our business or explore other alternatives.
Certain Factors That May Affect Future Results, Financial Condition and Market
Price of Securities
If we do not raise additional capital, we will not be able to fulfill our
business plan.
In order to take advantage of possible opportunities in 2001 and to execute our
business plan for 2002, we may need to raise additional financial capital. This
additional capital could come from the sale of common or preferred stock, the
exercise of outstanding warrants, from borrowings, customer deposits, or from a
strategic transaction such as a merger. If we are unsuccessful in raising that
capital, estimated to be $1,000,000 minimum, we may not have sufficient funding
to purchase necessary goods and services to execute our business plan.
SPEEDCOM's 2002 business plan includes next generation products which will have
initial lead times for acquiring inventory that are much longer than current
ones and that may require deposits upfront. SPEEDCOM will need to raise
additional capital to fund these longer lead times for purchasing inventory in
order to execute its 2002 business plan. If this capital is not obtained,
additional changes in SPEEDCOM's cost structure and capital expenditures could
be required, such as employee terminations and delays in the introductions of
the next generation of products.
We may not be able to compete successfully in the fixed wireless broadband
market in view of rapid technological change and the resources required to deal
with technological change.
The markets for our products and the technologies utilized in the industry in
which we operate evolve rapidly and depend on key technologies, including
wireless local area networks, wireless packet data, modem and radio
technologies. SPEEDCOM is developing a series of next generation products,
which incorporates the PacketHop(TM) licensed technology from SRI. Delays in
developing these products could have a negative effect on our future
competitiveness as the industry is constantly changing as new technologies are
developed.
The fixed wireless broadband market is at an early stage of development and is
rapidly evolving. As is typical for a new and rapidly evolving industry, demand
and market acceptance for recently introduced wireless networking products and
services are subject to a high level of uncertainty. Market acceptance of
particular products cannot be predicted; however, it is likely that new products
will not be generally accepted unless they operate at higher speeds and are sold
at lower prices. While the number of businesses recognizing the value of
wireless solutions is increasing,
18
we do not know whether sufficient demand for our products will emerge and become
sustainable. Prospects must be evaluated due to the risks encountered by a
company in the early stages of marketing new products or services, particularly
in light of the uncertainties relating to the new and evolving markets in which
we operate. There can be no assurance that we will succeed in addressing any or
all of these risks, and the failure to do so would reduce demand for SPEEDCOM's
products.
We could encounter future competition from larger wireless, computer and
networking equipment companies. We could also encounter additional future
competition from companies that offer products that replace or are alternatives
to radio frequency wireless solutions including, for example, products based on
infra-red technology or laser technology and systems that utilize existing
telephone wires (such as DSL) or cables within a building as a wired network
backbone or satellite systems outside of buildings.
Major changes could render products and technologies obsolete or subject to
intense competition from alternative products or technologies or by improvements
in existing products or technologies. For example, Internet access and wireless
local loop equipment markets may stop growing, whether as a result of the
development of alternative technologies, such as fiber optic, coaxial cable or
satellite systems. Also, new or enhanced products developed by other companies
may be technologically incompatible with SPEEDCOM's products and render our
products obsolete.
Many of SPEEDCOM's current and potential competitors have significantly greater
financial, marketing, technical and other resources and, as a result, may be
able to respond more quickly to new or emerging technologies or standards and to
changes in customer requirements, or to devote greater resources to the
development, promotion and sale of products or to deliver competitive products
at a lower end user price. Current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the ability of their products to address the needs of
SPEEDCOM's existing and prospective customers. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition could result in price
reductions, reduced operating margins and loss of market share by SPEEDCOM.
SPEEDCOM's reliance on limited sources of wireless and computer components could
result in delayed product shipment and higher costs and could damage customer
relationships.
Many of the key hardware and software components necessary for the assembly of
SPEEDCOM's products are only available from a single supplier or from a limited
number of suppliers. Our reliance on sole or limited source suppliers involves
several risks, including:
. suppliers could increase component prices significantly, without advance
notice;
. suppliers could discontinue or delay delivery of product components for
reasons such as inventory shortages, new product offerings, increased cost
of materials, destruction of manufacturing facilities, labor disputes and
bankruptcy; and
19
. in order to compensate for potential component shortages or discontinuance,
in the future we may hold more inventory than is immediately required,
resulting in increased inventory costs.
If our suppliers are unable to deliver or ration components to us, we could
experience interruptions and delays in manufacturing and sales, which could
result in cancellation of orders for products or the need to modify products.
This may cause substantial delays in product shipments, increased manufacturing
costs and increased product prices. Further, we may not be able to develop
alternative sources for these components in a timely way, if at all, and may not
be able to modify our products to accommodate alternative components. These
factors could damage our relationships with current and prospective customers
lasting longer than any underlying shortage or discontinuance.
Expanding indirect distribution channels may result in increased costs and lower
margins.
To increase revenues, we believe that we must increase the number of our
distribution partners. Management's strategy includes an effort to reach a
greater number of end users through indirect channels. SPEEDCOM is currently
investing, and plans to continue to invest, significant resources to develop
these indirect channels. These efforts may not generate the revenues necessary
to offset such investments. We will be dependent upon the acceptance of our
products by distributors and their active marketing and sales efforts relating
to our products. The distributors to whom we sell products are independent and
are not obligated to deal with SPEEDCOM exclusively or to purchase any specified
amount of products. Because SPEEDCOM does not generally fulfill orders by end
users of its products sold through distributors, SPEEDCOM will be dependent upon
the ability of distributors to accurately forecast demand and maintain
appropriate levels of inventory. Management expects that SPEEDCOM's
distributors will also sell competing products. These distributors may not
continue, or may not give a high priority to, marketing and supporting our
products. This and other channel conflicts could result in diminished sales
through the indirect channels. Additionally, because lower prices are typically
charged on sales made through indirect channels, increased indirect sales could
adversely affect the average selling prices and result in lower gross margins.
Growth may divert management resources from current operations.
SPEEDCOM has significantly expanded its operations in recent years, and
anticipates that further expansion will be required to address potential growth
in the customer base and market opportunities. This expansion has placed, and
future expansion is expected to place, a significant strain on our management,
technical, operational, administrative and financial resources. SPEEDCOM will
need to effectively manage any expansion, which could divert attention and
resources from current operations. The expansion and planned expansion may be
inadequate to support future operations. We may be unable to attract, retain,
motivate and manage required personnel, including finance, administrative and
operations staff, or to successfully identify, manage and exploit existing and
potential market opportunities because of inadequate staffing.
20
We may also be unable to manage further growth in our multiple relationships
with original equipment manufacturers, distributors and other third parties.
Our international operations and sales involve significant risks that could
reduce sales and increase expenses.
We anticipate that revenues from customers outside North America will continue
to account for a significant portion of our total revenues for the foreseeable
future. Expansion of international operations has required, and will continue
to require, significant management attention and resources. In addition, we
remain heavily dependent on distributors to market, sell and support our
products internationally. International operations are subject to additional
risks, including the following:
. difficulties of staffing and managing foreign operations due to time
differences, language barriers and staffing constraints in the foreign
sales offices;
. longer customer payment cycles and greater difficulties in collecting
accounts receivable increase the amount of time that we have to fund our
purchase of the inventory sold;
. unexpected changes in regulatory requirements, exchange rates, trading
policies, tariffs and other barriers could increase our costs;
. uncertainties of laws and enforcement relating to the protection of
intellectual property could allow competitors to infringe on our
technology;
. limits on the ability to sue and enforce a judgment for
accounts receivable increase the risk of bad debt expense;
. potential adverse tax consequences could create additional expense; and
. political and economic instability in Latin America could limit our sales
in that region.
SPEEDCOM has a history of losses and may never achieve or sustain profitability.
We have incurred significant losses since our inception. SPEEDCOM intends to
decrease its operating expenses in an attempt to achieve profitability in the
fourth quarter of 2001, however revenues may not grow or even continue at their
current level. If revenues do not rapidly increase or if we are not able to
decrease expenses, we will never become profitable.
Our common stock price is volatile.
Our stock and the Nasdaq stock market in general have experienced significant
price and volume fluctuations in recent months and the market prices of
technology companies have been highly volatile. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been instituted against that company. Such
litigation could result in substantial costs and diversion of management's
attention.
21
Our manufacturing capabilities are limited and could prevent us from keeping up
with customer demand.
SPEEDCOM has no experience in large-scale manufacturing. If our customers were
to place orders substantially greater than current levels, SPEEDCOM's present
manufacturing abilities may not be adequate to meet such demand. There can be
no assurance that we will be able to contract additional manufacturing personnel
on a timely basis.
Our concentrated ownership structure means that our two controlling shareholders
can control the outcome of any shareholder vote.
A majority of SPEEDCOM's common stock is currently controlled by Michael W.
McKinney and Barbara McKinney (the McKinneys). Therefore, certain corporate
actions, which the Board of Directors may deem advisable for the shareholders of
SPEEDCOM as a whole, such as a business combination, may not be approved by the
common shareholders if submitted to a vote, unless the McKinneys approve the
potential transaction.
SPEEDCOM is subject to extensive and unpredictable government regulation, which
could make our products obsolete, raise our development costs and create
opportunities for other competitors.
SPEEDCOM is subject to various FCC rules and regulations in the United States
and to other government regulations abroad. There can be no assurance that new
FCC regulations will not be promulgated or that existing regulations outside of
the United States would not adversely affect international marketing of
SPEEDCOM's products.
Regulatory changes, including changes in the allocation of available frequency
spectrum, could significantly impact operations by restricting development
efforts, rendering current products obsolete or increasing the opportunity for
additional competition. In September 1993 and in February 1995, the FCC
allocated additional spectrum for personal communications services. In January
1997, the FCC authorized 300 MHz of additional unlicensed frequencies in the 5
Gigahertz frequency range. In 2000, the FCC modified the rules for "frequency
hopping spread spectrum" radios to allow greater power utilization in certain
circumstances. These changes in the allocation of available frequency spectrum
could create opportunities for other wireless networking products and services
or shift the competitive balance between SPEEDCOM and its competitors.
PART II. OTHER INFORMATION
Item 2. RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended September 30, 2001, the Company sold the following
securities which were not registered under the Securities Act. The purchases and
sales were exempt pursuant to Section 4(2) of the Securities Act (and/or
Regulation D promulgated thereunder) as transactions by an issuer not involving
a public offering, where the purchasers represented their intention to acquire
the securities for investment only, not with a view to distribution, and
received or had access to adequate information about the registrant.
41,000 shares of common stock, (40,000 on 8/2/01 and 1,000 on 8/2/01) were
issued for services. These securities were issued to 2 investors, all of which
were accredited investors.
Item 4. Submission of Matters to a Vote of Security Holders
None.
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits in the accompanying Exhibit Index are filed as part of
this Quarterly Report on Form 10-QSB.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SPEEDCOM Wireless Corporation
/s/ Michael W. McKinney Chairman, Chief Executive January 2, 2002
--------------------------- Officer and Director
Michael W. McKinney
23
Exhibit Index
Number Description
------ -----------
2.1(1) Asset Purchase Agreement between Packaging Atlanta Corporation and
Laminating Technologies Inc. dated April 26, 1999
2.2 Agreement and Plan of Merger by and between SPEEDCOM Wireless
International Corporation and LTI Holdings, Inc., dated as of August 4, 2000
(included as Appendix A to the proxy statement/prospectus filed as part of Form
S-4 Registration Statement (File No. 333-43098) and incorporated herein by
reference)
3.1(8) Amended and Restated Certificate of Incorporation of SPEEDCOM Wireless
Corporation, as amended
3.2(4) Amended and Restated Bylaws
3.3(6) Amended and Restated Bylaws of SPEEDCOM Wireless Corporation
4.1(2) Form of Bridge Note
4.2(2) Form of Warrant Agreement
4.3(2) Form of Underwriter's Unit Purchase Option
4.4(6) Purchase Agreement, dated April 13, 2001, by and among SPEEDCOM
Wireless Corporation and the Purchasers, as defined therein
4.5(6) Registration Rights Agreement, dated April 13, 2001, by and among
SPEEDCOM Wireless Corporation and the Purchasers, as defined
4.6(6) Form of Warrant of SPEEDCOM Wireless Corporation, dated April 13, 2001
4.7(7) Note and Warrant Purchase Agreement by and among SPEEDCOM Wireless
Corporation, S.A.C. Capital Associates, LLC, SDS
Merchant Fund, L.P., Oscar Private Equity Investments, L.P. and Bruce Sanguinetti
4.8(7) Promissory Note for $500,000 issued to S.A.C. Capital Associates, LLC
4.9(7) Promissory Note for $250,000 issued to SDS Merchant Fund, L.P.
4.10(7) Promissory Note for $750,000 issued to Oscar Private Equity Investments, L.P.
4.11(7) Promissory Note for $250,000 issued to Bruce Sanguinetti
4.12(7) Warrant No. W-1 to Purchase 146,667 Shares of Common Stock issued to
S.A.C. Capital Associates, LLC
4.13(7) Warrant No. W-2 to Purchase 73,333 Shares of Common Stock issued to SDS Merchant Fund, L.P.
4.14(7) Warrant No. W-3 to Purchase 220,000 Shares of Common Stock issued to Oscar
Private Equity Investments, L.P.
4.15(7) Warrant No. W-4 to Purchase 73,333 Shares of Common Stock issued to Bruce Sanguinetti
4.16(8) Purchase Agreement, dated August 23, 2001, by and among SPEEDCOM Wireless
Corporation and the Purchasers, as defined herein
4.17(8) Registration Rights Agreement, dated August 23, 2001, by and among
SPEEDCOM Wireless Corporation and the Purchasers, defined herein
4.18(8) Form of Series A Warrant of SPEEDCOM Wireless Corporation dated August 23, 2001
4.19(8) Form of Series B Warrant of SPEEDCOM Wireless Corporation dated August 23, 2001
4.20(8) Settlement Agreement between SPEEDCOM Wireless Corporation and
I.W. Miller Group, Inc. dated June 25, 2001
10.1(3) Registration Rights Agreement between the registrant and Michael E. Noonan
10.2(2)* Amended and Restated 1996 Stock Option Plan
10.3(2)* Form of Indemnification Agreement
10.4(4)* Executive Employment Agreement between SPEEDCOM Wireless
International Corporation and Jay O. Wright
10.5(4)* Executive Employment Agreement between SPEEDCOM Wireless
International Corporation and Bruce Sanguinetti
10.6(4)* Executive Employment Agreement between SPEEDCOM Wireless
International Corporation and Michael McKinney
10.7(4)* Non-Qualified Stock Option Agreement
10.8(4)* Non-Qualified Stock Option Plan
10.9(9) Promissory Note for $250,000 issued to Bruce Sanguinetti dated
December 6, 2000.
10.10(9) Promissory Note for $40,000 issued to Bill Davis dated May 11, 2001.
10.11(9) Lease Agreement between SPEECOM Wireless Corporation and Lakewood Ranch
Properties, LLC.
10.12(9) Intellectual Property License Agreement between SPEEDCOM Wireless
Corporation and SRI International
16.1(5) Letter on change of certifying accountant
23.1(5) Consent of Independent Certified Public Accountants
24.1(8) Powers of Attorney
------------
(1) Incorporated by reference to the registrant's Definitive Proxy Statement
dated May 27, 1999.
(2) Incorporated by reference to the registrant's Registration Statement on
Form SB-2 (File No. 333-6711) filed with the SEC on June 24, 1996.
(3) Incorporated by reference to Amendment No. 1 to the registrant's
Registration Statement on Form SB-2 (File No. 333-6711) filed with the SEC
on July 31, 1996.
(4) Incorporated by reference to the Form 8-K filed October 11, 2000.
(5) Incorporated by reference to the Form 10-KSB filed April 17, 2001.
(6) Incorporated by reference to the Form 10-QSB filed May 14, 2001.
(7) Incorporated by reference to the Form 8-K filed July 2, 2001.
(8) Incorporated by reference to the Form S-3 filed September 18, 2001.
(9) Incorporated by reference to the Form 10-QSB filed November 14, 2001.
* Management contract or compensatory plan.