10-Q 1 wwci10q3q011.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-10588 WIRELESS WEBCONNECT!, INC. (Exact name of registrant as specified in its charter) Delaware 75-1993841 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification number) 620 Lakeview Road Clearwater, FL 33756 -------------------- (Address of Principal Executive Offices) (727) 445-1500 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports 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) 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 latest practicable date. Outstanding at Class November 14, 2001 --------------------------- ----------------- Common Stock $.01 par value 35,386,459 INDEX WIRELESS WEBCONNECT!, INC. Part I. Financial Information Item 1. Financial Statements Balance Sheets at September 30, 2001 (Unaudited) and December 31, 2000...................... 2 Statements of Operations (Unaudited) for the three months ended September 30, 2001 and 2000...................... 3 Statements of Operations (Unaudited) for the nine months ended September 30, 2001 and 2000...................... 4 Statement of Stockholders' Deficit for the nine months ended September 30, 2001 (Unaudited).................... 5 Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2001 and 2000...................... 6 Notes to Financial Statements (Unaudited) .............. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................................... 18 Part II. Other Information Item 1. Legal Proceedings ...................................... 19 Item 2. Changes in Securities and Use of Proceeds............... 19 Item 4. Submission of Matters to a Vote of Security Holders..................................... 19 Item 6. Exhibits and Reports on Form 8-K........................ 21 Signatures ........................................................ 22 1 Wireless WebConnect!, Inc. (Formerly Known as Intellicall, Inc.) Balance Sheets September 30, 2001 and December 31, 2000 (in thousands)

See accompanying notes to the financial statements 2 Wireless WebConnect!, Inc. (Formerly Known as Intellicall, Inc.) Statements of Operations Three Months Ended September 30, 2001 and 2000 (Unaudited) (in thousands, except per share amounts)

See accompanying notes to the financial statements 3 Wireless WebConnect!, Inc. (Formerly Known as Intellicall, Inc.) Statements of Operations Nine Months Ended September 30, 2001 and 2000 (Unaudited) (in thousands, except per share amounts)

See accompanying notes to the financial statements 4 Wireless WebConnect!, Inc. (Formerly Known as Intellicall, Inc.) Statements of Changes in Stockholders' Deficit Nine Months Ended September 30, 2001 (Unaudited) (in thousands)

See accompanying notes to the financial statements 5 Wireless Webconnect!, Inc. (Formerly Known As Intellicall, Inc.) Statements of Cash Flows Nine Months Ended September 30, 2001 and 2000 (Unaudited) (in thousands)

See accompanying notes to the financial statements 6 Wireless WebConnect! Inc. (Formerly Known as Intellicall, Inc.) Notes to Financial Statements Nine Months Ended September 30, 2001 and 2000 Note 1-- Basis of Presentation, Merger and Business Wireless WebConnect!, Inc. (the "Company") was formerly known as Intellicall, Inc. ("Intellicall"). The Company changed its name to Wireless WebConnect!, Inc. after the completion of the merger between a newly-formed subsidiary of Intellicall and Wireless WebConnect!, Inc., a Florida corporation ("Wireless WebConnect!"). See "Merger" below. The accompanying unaudited financial statements, in the opinion of the Company's management, contain all material, normal and recurring adjustments necessary to present accurately the financial condition of the Company and the results of its operations for the periods indicated. The results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire year. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Report on Form 8-K for the year ended December 31, 2000 filed with the Securities and Exchange Commission in May 2001. Merger On March 15, 2001, the shareholders of the Company (i) approved the issuance of 21,803,148 shares of the Company's common stock (the "Common Stock"), pursuant to a merger (the "Merger") consummated under an Agreement and Plan of Merger (the "Merger Agreement") dated August 29, 2000, by and among the Company, a wholly-owned subsidiary of the Company ("Merger Sub"), and Wireless WebConnect!, (ii) approved an increase in the number of authorized shares of Common Stock to 60,000,000, and (iii) approved the change of the Company's name to "Wireless WebConnect!, Inc." The merger was consummated on March 30, 2001. Pursuant to the Merger Agreement, Merger Sub merged with and into Wireless WebConnect!. Wireless WebConnect! survived the Merger and is a wholly-owned subsidiary of the Company. The former shareholders of Wireless WebConnect! received an aggregate of 21,803,148 shares of Common Stock as part of the Merger. The six former shareholders of Wireless WebConnect! own collectively approximately 62.5% of the issued and outstanding shares of Common Stock. Wireless WebConnect! is considered the accounting acquirer since the former Wireless WebConnect! shareholders control the Company through their holdings of approximately 62.5% of the combined outstanding shares of Common Stock and have control of the Company's Board of Directors. Because the Company is the legal acquirer, this is considered a "reverse acquisition." 7 Wireless WebConnect!, Inc. (Formerly Known as Intellicall, Inc.) Notes to Financial Statements Nine Months Ended September 30, 2001 and 2000 Note 1--Basis of Presentation, Merger and Business (continued) In addition, on March 15, 2001, the former employees of Wireless WebConnect!, who became employees of the Company received options to purchase an aggregate of 1,896,500 shares of Common Stock under the Company's 1991 Stock Option Plan. The options, which were issued with a strike price of $.40 per share (which equaled the market price on the date of grant), vest 33 1/3% on March 15, 2002 and 33 1/3% on March 15 of each of the following two years, except in the case of 500,000 of the options which vest 25% on September 15, 2001, 25% on March 15, 2002, 25% on September 15, 2002 and 25% on March 15, 2003. Certain warrants outstanding prior to the Merger that were issued to Banca del Gottardo, a beneficial owner of approximately 13% of the outstanding Common Stock, were amended as a result of the Merger. The increase in the fair value of such warrants as a result of the amendments was $67,000, which has been recorded as an expense of the Merger and additional paid-in capital. Assets held for sale represented inventory and fixed assets associated with Intellicall's payphone business operations and were recorded at their estimated net realizable value. Subsequent to March 31, 2001, the potential buyer of the payphone business operations terminated its letter of intent with the Company. As a result, the Company recorded an impairment loss on assets held for sale of $.6 million during the three months ended June 30, 2001. The Company disposed of Intellicall's remaining payphone business operations in August 2001. Intellicall will have no continuing operations. Accordingly, the transaction has been accounted for as an acquisition of the net assets of Intellicall in exchange for stock, similar to a recapitalization of Wireless WebConnect!. The assets acquired and liabilities assumed have been recorded at their estimated fair value on the date of acquisition, March 30, 2001, with a corresponding entry to equity for the shares issued. The net assets acquired are as follows (in thousands): Assets: Cash............................................. $ 706 Accounts receivable.............................. 387 Note receivable from Wireless WebConnect!........ 1,011 Other current assets ............................ 95 Assets held for sale............................. 950 Other assets..................................... 475 ----- Total assets..................................... 3,624 ----- Liabilities: Accounts payable................................. 1,056 Accrued liabilities.............................. 178 Long-term debt to related party.................. 1,893 ----- Total liabilities................................ 3,127 ----- Net assets............................. $ 497 ===== 8 Wireless WebConnect!, Inc. (Formerly Known as Intellicall, Inc.) Notes to Financial Statements Nine Months Ended September 30, 2001 and 2000 Note 1...Basis of Presentation, Merger and Business (continued) The note receivable from Wireless WebConnect! of $1.0 million, which represents the amounts advanced by the Company to Wireless WebConnect! prior to the Merger, has been eliminated pursuant to the loan agreement between Wireless WebConnect! and the Company. Business Wireless WebConnect! was originally formed in 1996 as Business Tel, a California Partnership. On May 30, 2000, Wireless WebConnect! was incorporated by the partners contributing their respective interests in the net assets of the partnership to a newly formed Florida corporation in exchange for all of Wireless WebConnect!'s issued and outstanding common stock. Wireless WebConnect! became a wholly-owned subsidiary of the Company effective March 30, 2001. See "Merger." Prior to July 2000, Wireless WebConnect! provided customer acquisition services to Metricom, Inc. ("Metricom") for Metricom's Ricochet wireless Internet access services and was a reseller of Metricom's services to selected customers. Effective July 2000, Wireless WebConnect!, along with other competitors, began marketing and providing Metricom's 128.8 kbps wireless Internet access service. Additionally, Wireless WebConnect!, contracted with Metricom to be the exclusive provider of 28.8 kbps service to Metricom's existing customers in certain geographic service areas. A portion of these customers was previously acquired for Metricom by Wireless WebConnect!. The Company operates in a highly competitive environment subject to rapid technological change and emergence of new technology. Although management believes its services are transferable to emerging technologies, rapid changes in technology could have an adverse financial impact on the Company. See Note 2. Note 2. Liquidity and Capital Resources On July 2, 2001, Metricom, owner and operator of the Ricochet network, filed a voluntary petition in the Northern District of California for Chapter 11 bankruptcy protection and on August 8, 2001, ceased operations of the Ricochet network. In a Form 8-K released July 11, 2001, Wireless WebConnect! stated that substantially all of the Company's revenue was generated from the reselling of the Ricochet service. Thus the Metricom Chapter 11 bankruptcy and network shutdown has materially and adversely affected the Company due to, among other things, the inability of the Company to sign up new Ricochet subscribers and, the loss of current subscriber revenue. Company management, recognizing the need to have other sources of income, began looking for other products and services to market and sell during the second quarter. In late September 2001 the Company began marketing and selling Anywhere WebConnect!, a non-roaming Cellular Digital Packet Data (CDPD) service plan provided by Verizon Communications (Verizon). CDPD, at 19 kbps, operates much slower than the Ricochet system, but currently covers approximately 70% of the US population. The Company bills each subscriber a flat rate and pays Verizon a specific amount per subscriber per month. 9 Wireless WebConnect!, Inc. (Formerly Known as Intellicall, Inc.) Notes to Financial Statements Nine Months Ended September 30, 2001 and 2000 Note 2. Liquidity and Capital Resources (continued) Another result of the search for other products and services was the signing of an agreement early in the third quarter with Expertcity, Inc. to resell its GoToMyPC software, which enables a user anywhere on the Internet to access and control, via a standard browser, such as Internet Explorer, a remote PC, such as one at the office while the user is at home. Although management continues to search for new products and services, there is no assurance that the above efforts will generate sufficient revenue to maintain the Company's current operational requirements. In October 2001, the Company filed a claim in the Metricom bankruptcy filing for lost revenues. The claim, although significant, is not expected to result in a material cash settlement. However, it may result in the forgiveness of liabilities owed to Metricom by the Company. Included in accounts payable and accrued expenses as of September 30, 2001 are amounts payable to Metricom totaling $3.6 million. At September 30, 2001, the Company had cash of $1.1 million. The events in connection with the bankruptcy proceedings of Metricom may continue to have a significant negative impact on the Company's liquidity. As a result of the shut down of Metricom's network, customers of the Company who have prepaid for services (customer liabilities at September 30, 2001 were $3.1 million) may demand a refund if the Company is unable to transition the customers to an alternative service acceptable to the customers. On November 2, 2001, Ricochet Networks, Inc., a newly formed subsidiary of Aerie Networks, Inc. ("Aerie"), purchased the assets and intellectual property of the Ricochet wireless broadband network from Metricom. It is not known, at this time, whether Aerie will elect to provide the type of wireless network services provided by Metricom or whether Aerie will permit the Company to resell those services. In the event that the Company is unable to find significant alternative sources of revenue or to obtain additional capital in the very near future, the Company is unlikely to be able to meet its financial obligations and commitments or to continue as a going business concern. The likely impact on the Company's business and financial condition of the termination of Metricom's wireless network services is that the Company may be required to seek protection from its creditors under the United States Bankruptcy Code. Any filing by the Company under the United States Bankruptcy Code would likely seek a liquidation of the Company. Note 3. Summary of Significant Accounting Policies Inventory - Inventory consists of modems (wireless Internet access devices). As a result of Metricom's bankruptcy and the shut down of Metricom's network (see Note 2), the Company recorded a write-down on inventory of $1.7 million and $2.4 million during the three months and nine months ended September 30, 2001, respectively. 10 Wireless WebConnect!, Inc. (Formerly Known as Intellicall, Inc.) Notes to Financial Statements Nine Months Ended September 30, 2001 and 2000 Note 3. Summary of Significant Accounting Policies (continued) Revenue Recognition-Prior to July 2000 Wireless WebConnect! derived commission revenue from Metricom for the sale of Metricom's wireless Internet services. Commission revenues were recognized as customer contracts were delivered to Metricom. Effective July 2000, Wireless WebConnect! began reselling wireless Internet access devices and service. Revenues and costs to the extent of revenues from the sale of devices and activation fees are recognized over the estimated life of the subscriber. Service revenues subject to money back guarantee provisions are deferred until such period has expired. Prepaid annual service fees are initially deferred and recognized as revenue as the services are provided over the related contract term. Management of the Company believes that the Company's accounting policies comply with Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements." Income Taxes-As a partnership, the partners of Wireless WebConnect's predecessor were taxed on their proportionate share of such predecessor's income. Therefore, the provision or liability for federal or state income taxes has been included only on a pro forma basis for the nine months ended September 30, 2000, a portion of which period was prior to the incorporation of Wireless WebConnect! in May 2000. Deferred tax assets and liabilities, if any, are recognized for the future tax consequences attributable to differences between the carrying amount of existing assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to reverse. The Company has fully reserved all of its deferred tax assets including NOL carryforwards at September 30, 2001, due to future projected taxable losses. Basic and Diluted Net Income (Loss) Per Share-Basic earnings per share is computed using the weighted average number of shares of Common Stock outstanding and excludes any dilutive effects of options, warrants and convertible securities. As Wireless WebConnect! operated as a partnership prior to June 2000, the basic and diluted income (loss) per share amount is presented on a pro forma basis as if the Merger was effective January 1, 2000. Diluted earnings per share is the same as basic earnings per share for the three and nine months ended September 30, 2001, due to the net loss. Basic and diluted earnings per share on a pro forma basis for the nine months ended September 30, 2000, are each less than $.01 per share. As of September 30, 2001, the Company had 3.3 million, 1.8 million and 1.3 million of outstanding options, warrants and convertible securities, respectively. Recent Accounting Pronouncements-In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivatives and Hedging Activities ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS 133, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS 133 had no impact on the Company's Financial Statements. 11 Wireless WebConnect!, Inc. (Formerly Known as Intellicall, Inc.) Notes to Financial Statements Nine Months Ended September 30, 2001 and 2000 Note 3. Summary of Significant Accounting Policies (continued) Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), is effective July 1, 2001 and prohibits pooling-of-interests accounting for acquisitions. Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), is effective January 1, 2002 and specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The Company has not yet determined the effect adopting SFAS 142 will have on its financial statements. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS retains the fundamental provisions of generally accepted accounting principles with respect to the recognition and measurement of long-lived asset impairment contained in Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." However, SFAS 144 provides new guidance intended to address certain significant implementation issues associated with SFAS 121, including expanded guidance with respect to appropriate cash flows to be used to determine whether recognition of any long-lived asset impairment is required, and, if required, how to measure the impairment. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company does not believe that adoption of SFAS 144 will have a material impact on its financial position, results of operations or cash flows. Note 4. Long-Term Debt to Related Party Long-term debt to related party consists of $2 million of 7% convertible subordinated notes, due 2004, net of unamortized debt discounts of $.1 million. The debt is payable to Banca del Gottardo, a beneficial owner of approximately 13% of the issued and outstanding Common Stock as of September 30, 2001. Note 5. Other Long-Term Liabilities Other long-term liabilities consist of a $250,000 note payable for a contract termination fee. The principal amount of the note is due November 2, 2002. 12 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Financial Statements of the Company, the Notes thereto and information included elsewhere in this report. Forward-Looking Statements - Cautionary Statements This Form 10-Q contains certain "forward-looking statements" intended to fall within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Specifically, all statements other than statements of historical facts included in this report regarding the Company's financial position, business strategy and plans and objectives of management of the Company for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. When used in this report, the words "anticipate," "believe," "estimate," "expect," "intend", and words or phrases of similar import, as they relate to the Company or Company management, are intended to identify forward-looking statements. Such statements (the "cautionary statements") reflect the current view of the Company with respect to future events and are subject to risks, uncertainties and assumptions related to various factors including, without limitation, competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, product introductions and acceptance, technological change, changes in industry practices and one-time events. Although the Company believes that expectations are reasonable, it can give no assurance that such expectations will prove to be correct. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the applicable cautionary statements. The Company's future operating results are subject to a number of risks and uncertainties. Overview The Company currently provides high-speed wireless data solutions and its revenue is generated as a wireless Internet service provider selling services and wireless modems. Wireless WebConnect! began selling wireless data services in July 1995. Since its inception, it has internally funded its activity of acquiring wireless Internet service subscribers. The Company's plan is to continue to expand its customer base by identifying and providing additional cutting edge wireless services throughout the United States. With the introduction of additional wireless service offerings in major United States markets, the Company expects to incur significant operating losses for at least the next several quarters. Its profitability will be dependent on growing its customer base for existing and new wireless data services offerings. Prior to the shutdown of the Ricochet network (see Recent Developments), the Company generated nearly all its revenue from the resale of wireless data services provided by Metricom, Inc. and the sales of wireless devices (modems) manufactured by Metricom, Sierra Wireless and Novatel Wireless. Prior to the launch of Metricom's Ricochet 128k wireless Internet service in July 2000, Wireless WebConnect!'s generated its revenue primarily from commissions paid by Metricom for subscribers acquired by the Company for Metricom's earlier 28.8 kbps service. In July 2000, Wireless WebConnect! entered into an agreement with Metricom to become a non-exclusive national wireless Internet service provider/reseller, wherein the Company provided comprehensive customer support including sales, activation, and technical support. 13 The Company charged subscribers monthly service fees for wireless high-speed Internet access and incurred sales, marketing, personnel, general administrative and overhead costs as well as fees to Metricom for access to its wireless network for each subscriber. The Company billed each subscriber a flat rate and paid Metricom a specific amount per subscriber per month. The Company's 128 kbps service enabled subscribers to receive 128k or better mobile wireless Internet service with unlimited usage and no roaming charges for $74.95 per month or promotional pricing as occasionally offered. Monthly subscribers paid the monthly fee with a $30 activation fee. All customers are were given a 30-day money back guarantee excluding the activation fee. Additionally, all customers had the option to purchase the wireless modem of their choice with prices ranging from $99 to $299. The Company's subscriber acquisition costs consist primarily of the establishment and running of sales offices, call centers, marketing, and management expenses. Modem devices are purchased from third party manufacturers and there may be a need to subsidize the sale of these devices to customers in order to stay competitive. The Company's delivery expenses include technical delivery and support personnel, equipment and maintenance, bandwidth, hardware, systems development and management. The Company's general and administrative expenses consist primarily of compensation and related costs for general corporate, business development and technology development personnel, along with rent and other related costs. After Metricom filed bankruptcy in July 2001, the Company implemented certain cost cutting strategies. In addition to an approximately 66% reduction in its work force, the Company consolidated offices by relocating its corporate office from Dallas, Texas to Clearwater, Florida. Additionally, certain sales offices were closed. Recent Developments On July 2, 2001, Metricom, owner and operator of the Ricochet network, filed a voluntary petition in the Northern District of California for Chapter 11 bankruptcy protection and on August 8, 2001, ceased operations of the Ricochet network. In a Form 8-K released July 11, 2001, Wireless WebConnect! stated that substantially all of the Company's revenue was generated from the reselling of the Ricochet service. Thus the Metricom Chapter 11 bankruptcy and network shutdown has materially and adversely affected the Company due to, among other things, the inability of the Company to sign up new Ricochet subscribers and, the loss of current subscriber revenue. Company management, recognizing the need to have other sources of income, began looking for other products and services to market and sell during the second quarter. In late September 2001 the Company began marketing and selling Anywhere WebConnect!, a non-roaming Cellular Digital Packet Data (CDPD) service plan provided by Verizon Communications (Verizon). CDPD, at 19 kbps, operates much slower than the Ricochet system, but currently covers approximately 70% of the US population. The Company bills each subscriber a flat rate and pays Verizon a specific amount per subscriber per month. Another result of the search for other products and services was the signing of an agreement early in the third quarter with Expertcity, Inc. to resell its GoToMyPC software, which enables a user anywhere on the Internet to access and control, via a standard browser, such as Internet Explorer, a remote PC, such as one at the office while the user is at home. Although management continues to search for new products and services, there is no assurance that the above efforts will generate sufficient revenue to maintain the Company's current operational requirements. 14 In October 2001, the Company filed a claim in the Metricom bankruptcy filing for lost revenues. The claim, although significant, is not expected to result in a material cash settlement. However, it may result in the forgiveness of liabilities owed to Metricom by the Company. Included in accounts payable and accrued expenses as of September 30, 2001 are amounts payable to Metricom totaling $3.6 million. At September 30, 2001, the Company had cash of $1.1 million. The events in connection with the bankruptcy proceedings of Metricom may continue to have a significant negative impact on the Company's liquidity. As a result of the shut down of Metricom's network, customers of the Company who have prepaid for services (customer liabilities at September 30, 2001 were $3.1 million) may demand a refund if the Company is unable to transition the customers to an alternative service acceptable to the customers. (See "Recent Developments") On November 2, 2001, Ricochet Networks, Inc., a newly formed subsidiary of Aerie Networks, Inc. ("Aerie"), purchased the assets and intellectual property of the Ricochet wireless broadband network from Metricom. It is not known, at this time, whether Aerie will elect to provide the type of wireless network services provided by Metricom or whether Aerie will permit the Company to resell those services. In the event that the Company is unable to find significant alternative sources of revenue or to obtain additional capital in the very near future, the Company is unlikely to be able to meet its financial obligations and commitments or to continue as a going business concern. The likely impact on the Company's business and financial condition of the termination of Metricom's wireless network services is that the Company may be required to seek protection from its creditors under the United States Bankruptcy Code. Any filing by the Company under the United States Bankruptcy Code would likely seek a liquidation of the Company. Results of Operations Commissions and related revenue. Commissions and related revenue of $.7 million for the nine months ended September 30, 2000, represents commissions earned from Metricom for the delivery of new customers to Metricom's Ricochet 28.8 kbps service. Wireless WebConnect! discontinued selling Ricochet 28.8 kbps service in early 2000 with the introduction of the R2 service offering from Metricom in July 2000. The difference between commissions and related revenue and services revenue is that commissions and related revenue were one time commission and related payments from Metricom. Service revenues are service fees charged to customers by Wireless WebConnect! for wireless Internet access service. Wireless WebConnect! purchases the service from Metricom for resale to its customers. Services revenue. Services revenue of $2.0 million and $8.1 million for the three months and nine months ended September 30, 2001, respectively, represent fees earned from customers for wireless Internet access service. Fees are collected from customers for monthly or annual service and are recognized as services revenue ratably over the service period. The Company did not begin selling the Ricochet service until the third quarter 2000, which, primarily, accounts for the $7.9 increase for the nine months ended September 30, 2000 as compared to the nine months ended September 30, 2001. As of August 8, 2001, the date of the shutdown of the Ricochet network, Company had approximately 22,000 Ricochet customers. As of September 30, 2001, the Company had approximately 550 CDPD customers. 15 Equipment revenue. Equipment revenue of $.1 million for the three months ended September 30, 2001 represents the sale of CDPD wireless modems. Equipment revenue of $3.8 million for the nine months ended September 30, 2001 represents the sale of wireless modems to new customers. The Company sold Ricochet modems from July 2000 until the Ricochet network shut-down in early August 2001. The Company began selling CDPD modems in September 2001. Other revenue. Other revenue of $.03 million and $.4 million for the three months and nine months ended September 30, 2001, respectively, represents one-time, non-refundable activation fees charged to new customers for monthly service and royalties received related to the pay phone segment less discounts and rebates. Royalty income represented $.07 million of other revenue for the nine months ended September 30, 2001. The Company receives royalty payments on sales of certain telephonic switching equipment. Cost of services and equipment revenue. Costs of services and equipment revenue of $1.7 million and $9.8 million for the three months and nine months ended September 30, 2001, respectively, represents, primarily, costs for wireless modems and fees to provide the service. Fees to provide the service are primarily fees paid to Metricom and Verizon for access to their wireless networks but also include costs for an Internet service provider and technical support costs. The Company sold the Ricochet service from July 2000 until the network shut-down in early August 2001. The Company began selling CDPD service in September 2001. Selling, general and administrative. Selling, general and administrative ("SG&A") expenses increased from $.9 million for the nine months ended September 30, 2000 to $6.3 million for the nine months ended September 30, 2001, an increase of $5.4 million. Approximately $2.3 million of this increase represents increases in salaries, wages and benefits ("SW&B") related to the establishment of sales offices, call centers, as well increased corporate office personnel related to providing comprehensive customer interface and support services. Additionally, $.6 million of the SW&B increase relates to Dallas corporate office personnel acquired in connection with the merger with Intellicall. Primarily as result of the shutdown of the Ricochet during the third quarter 2001, the Company initiated significant staff reductions, the impact of which is offset by severance and vacation costs. The remaining increase in SG&A of $2.5 million for the nine months ended September 30, 2001, compared to the same period in the prior year, relates primarily to increases in occupancy costs, professional fees, travel and general corporate overhead. Occupancy costs, travel and general corporate overhead increased as a result of the establishment of the sales offices and increased corporate personnel. Professional fees increased primarily due to the merger with Intellicall and increased costs of operating as a public entity. Bad debt expense. Bad debt expense of $1.2 million for the nine months ended September 30, 2001, represents the establishment of an allowance for doubtful accounts for the Company's invoiced customers. The balance of accounts receivable at September 30, 2001 has been fully reserved as a result of the uncertainty of resumption of the Ricochet service. Inventory write-down. The $1.7 million and $2.4 million inventory write-down for the three months and nine months ended September 30, 2001, respectively, represents the expected unrecoverable cost of modem inventory in connection with the Metricom bankruptcy filing and the shut down of the Ricochet network. Interest income. Interest income of $.02 million and $.06 million for the three months and nine months ended September 30, 2001, respectively, represents earnings on the Company's savings and investment cash accounts. Interest expense. Interest expense of $.05 million and $.1 million for the three months and nine months ended September 30, 2001, respectively, represent interest expense and amortization of debt costs related to the $2.0 million note payable to Banca del Gottardo. 16 Other expense. Other expense of $.5 million and $.9 million for the three months and nine months ended September 30, 2001, respectively, consist principally of the net payphone operations that the Company disposed of in August 2001, a $.2 million contract termination fee due to a third party vendor and $.2 million liability related to the Dallas lease abandonment. Impairment loss on assets held for sale. The $.6 million impairment loss on assets held for sale reflects the write-down of the assets of the payphone operations to zero (estimated net realizable value). The Company disposed of the payphone business in August 2001. Liquidity and Capital Resources Since Wireless WebConnect!'s inception and through August 2000, the Company financed its operations solely through revenue generated by the business. Subsequent to August 2000, the Company financed operations with the $1.0 million cash advanced by Intellicall as well as the $.7 million cash acquired in connection with the merger. Cash provided by operations was $.7 million for the nine months ended September 30, 2000, compared to cash used in operations of $1.6 million for the nine months ended September 30, 2001. For the nine months ended September 30, 2001, the $4.5 million net loss less non-cash items and the $2.4 million in inventory growth accounted for the majority of the use of cash for the nine months ended September 30, 2001. The increase in accounts payable and accrued expenses of $3.6 million and the deferral of $1.2 million in revenue at September 30, 2001, primarily generated from the sale of annual subscriber contracts, offset cash used in operations for inventory. At September 30, 2001, the Company had cash of $1.1 million. The events in connection with the bankruptcy proceedings of Metricom may continue to have a significant negative impact on the Company's liquidity. As a result of the shut down of Metricom's network, customers of the Company who have prepaid for services (customer liabilities at September 30, 2001 was $3.1 million) may demand a refund if the Company is unable to transition the customers to an alternative service acceptable to the customers. (See "Recent Developments") In October 2001, the Company filed a claim in the Metricom bankruptcy filing for lost revenues. The claim, although significant, is not expected to result in a material cash settlement. However, it may result in the forgiveness of liabilities owed to Metricom by the Company. Included in accounts payable and accrued expenses as of September 30, 2001 are amounts due and payable to Metricom totaling $3.6 million. The successful expansion of the business into emerging markets is dependent on the Company's ability to fund operations internally and/or procure adequate external financing in a timely basis. Currently, the Company has no other external sources of working capital funds. If Company's plans or assumptions change or are inaccurate, the Company may be required to seek additional capital or seek capital sooner than anticipated. In the event additional financing is not available, the Company will be required to significantly reduce its expenses and/or retract its expansion plans or file for protection under the bankruptcy laws. 17 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk The Company has no market risk exposure related to interest rates, derivative financial instruments or foreign currency. 18 PART II Item 1. Legal Proceedings. The Company is subject to ordinary legal proceedings incidental to and arising in the normal course of its business. It is the opinion of the management of the Company that the ultimate disposition of these proceedings will not have a material adverse effect on the Company's financial position or results of operations. Item 2. Changes in Securities and Use of Proceeds. None. Item 4. Submission of Matters to A Vote of Security Holders. None. 19 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are filed as a part of this Quarterly Report on Form 10-Q. (e)2.1 Agreement and Plan of Merger by and between the Company , WWC Acquisition, Inc. and Wireless WebConnect!, Inc. dated August 29, 2000. (a)3.1 Certificate of Incorporation of the Company and all amendments thereto through December 31, 1992. (c)3.2 Amendment to Certificate of Incorporation raising the authorized common stock from 10,000,000 shares to 50,000,000 shares. (d)3.3 Amendment to Certificate of Incorporation lowering the authorized common stock from 50,000,000 shares to 20,000,000 shares. (b)3.4 Bylaws of the Company, as amended. (a)4.1 Specimen certificate for Common Stock of the Company. (e)10.1 Intellicall, Inc. 1991 Stock Option Plan (f)3.5 Articles of Amendment of the Certificate of Incorporation of Intellicall, Inc. changing the name to Wireless WebConnect!, Inc. and raising the total number of authorized shares to 61,000,000 (60,000,000 million shares of common stock and 1,000,000 shares of preferred stock). ----------- (a) Incorporated by reference from the Company's Form S-1 filed August 28, 1987, file no. 33-15723. (b) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (c) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (d) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (e) Incorporated by reference from the Company's Definitive Proxy Statement filed on Form DEFM14A on February 14, 2001. (e) Incorporated by reference from the Company's Definitive Proxy Statement filed on Form DEFM14A on February 14, 2001. (f) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2001. 20 (b) Reports on Form 8-K: On August 30, 2001, the Company filed a report on Form 8-K dated August 15, 2001, which disclosed certain management changes. Mr. John J. McDonald, Jr., Chief Executive Officer of the Company, has resigned as an officer of the Company, but will continue as the Chairman of the Company's board of directors. The Company has terminated the employment of Mr. R. Philip Boyd, chief Financial Officer and Corporate Secretary of the Company. Ms. Sandra T. Everett will serve as interim Chief Financial Officer and Ms. Elizabeth Currier will serve as Corporate Secretary. 21 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WIRELESS WEBCONNECT!, INC. G.T. Finn -------------------------------------------- G. T. Finn President (Principal Executive Officer) Sandra T. Everett -------------------------------------------- Sandra T. Everett Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Date: November 19, 2001 22 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION ------ ----------- 2.1 Agreement and Plan of Merger by and between the Company , WWC Acquisition, Inc. and Wireless WebConnect!, Inc. dated August 29, 2000. 3.1 Certificate of Incorporation of the Company and all amendments thereto through December 31, 1992. 3.2 Amendment to Certificate of Incorporation raising the authorized common stock from 10,000,000 shares to 50,000,000 shares. 3.3 Amendment to Certificate of Incorporation lowering the authorized common stock from 50,000,000 shares to 20,000,000 shares. 3.4 Bylaws of the Company, as amended. 3.5 Articles of Amendment of the Certificate of Incorporation of Intellicall, Inc. changing the name to Wireless WebConnect!, Inc. and raising the total number of authorized shares to 61,000,000 (60,000,000 million shares of common stock and 1,000,000 shares of preferred stock). 4.1 Specimen certificate for Common Stock of the Company. 10.1 Intellicall, Inc. 1991 Stock Option Plan 23

WIRELESS WEBCONNECT INC 10-Q