SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
Amendment No. 1 to
Form 10-SB
General Form for Registration of Securities of Small Business
Issuers under Section 12(b) or (g)
of the Securities Exchange Act of 1934
ADVANCED WIRELESS SYSTEMS, INC.
(Name of Small Business Issuer in its charter)
Alabama 63-1205304
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
927 Sunset Drive
Irving, Texas 75061
(Address of principal executive offices)
Issuer's telephone number: 972-254-7604
Securities registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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TABLE OF CONTENTS
Item 1 Business -1-
The Mobile LLC Bankruptcy -1-
Our Business Plan -5-
Regulation -8-
Markets -15-
Competition -15-
Risks -18-
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations -22-
New Accounting Pronouncements -24-
Results of Operations -25-
Liquidity and Capital Resources -27-
Year 2000 Compliance -30-
Item 3 Description of Property. -30-
Item 4 Security Ownership of Certain Beneficial Owners and
Management -31-
Item 5 Directors, Executive Officers, Promoters and Control
Persons -32-
Item 6 Executive Compensation -34-
Summary Compensation Table -34-
Stock Options Granted in 1998 -34-
Year End Stock Option Value -34-
Directors' Compensation -35-
Item 7 Certain Relationships and Related Transactions. -36-
Item 8 Legal Proceedings. -36-
Item 9 Market for Common Equity and Related Stockholder Matters. -36-
Item 10 Recent Sales of Unregistered Securities. -36-
Item 11 Description of Securities. -39-
Item 12 Indemnification of Directors and Officers -40-
Item 13 Financial Statements and Supplementary Data -40-
Item 14 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure -40-
Item 15 Financial Statements and Exhibits -41-
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Signatures -41-
Financial Statements F-1
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ADVANCED WIRELESS SYSTEMS, INC.
Item 1 Business
We deliver wireless cable television signals and provide high speed Internet
service in the Mobile, Alabama, area. We provide cable TV services over
eleven wireless signal frequencies that are licensed by the Federal
Communications Commission and either leased or owned by us. We intend to
expand our use of our FCC licenses to provide high speed Internet services to
customers in and around Mobile.
We were incorporated in Alabama in December 1997 to take over the assets and
continue the business of Mobile Limited Liability Company, as part of the
confirmation by the U.S. Bankruptcy Court for the Northern District of Texas
of a Plan of Reorganization of Mobile Limited Liability Company./1 Since
confirmation of the Mobile Limited Liability Company Plan of Reorganization on
January 8, 1998, we have operated the wireless cable television service that
Mobile Limited Liability Company formerly operated in the Mobile, Alabama,
area. We have begun to use our wireless frequencies to develop a high speed
Internet service. In this registration statement, Mobile Limited Liability
Company is called Mobile LLC, and the Plan refers to the Mobile LLC Plan
of Reorganization approved in 1998.
Forward-Looking Statements.
This registration statement contains forward-looking statements. The words,
anticipate, believe, expect, plan, intend, estimate, project,
could, may, foresee, and similar expressions are intended to identify
forward-looking statements. These statements include information regarding
expected development of the Company's business, lending activities,
relationship with clients, and development of the industry in which the
Company will focus its marketing efforts. Such statements reflect the
Company's current views with respect to future events and financial
performance and involve risks and uncertainties, including without limitation
the risks described in Risks. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove incorrect, actual
results may vary materially and adversely from those anticipated, believed,
estimated or otherwise indicated.
The Mobile LLC Bankruptcy
History of Mobile LLC
Mobile LLC was a Nevada limited liability company formed in 1994 to acquire
and operate FCC licenses in the Mobile, Alabama area. Mobile Wireless
Partners, a general partnership, owned 94.5% of Mobile LLC. Mobile Wireless
Partners had been formed and capitalized by sales of partnership units to the
general public, and its only business was to invest in Mobile LLC.
1/ In Re: Mobile Limited Liability Company, d/b/a Mobile Wireless
TV, Case No. 397-37735-HCA-11, United States District Court, Northern
District of Texas, Dallas Division.
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In the early 1990s the Federal Communications Commission attempted to
establish a more competitive playing field among the providers of cable TV by
granting licenses for the use of new frequencies for broadcasting wireless TV
transmission. The FCC initially granted these licenses through the use of
lotteries and later through auctions. The initial grant of these licenses
created a frenzy of activity among promoters, both legitimate and
illegitimate. One illegitimate promoter was a company, based in Las Vegas,
Nevada, by the name of Midas Media, Inc. Midas Media acquired a number of
the new wireless cable TV licenses and developed a scheme to market these
licenses. Essentially, Midas Media, Inc., would form partnerships and enter
into joint ventures with the partnership to establish wireless cable TV
transmission in a given area. Then Midas Media would offer units of
participation in the partnership to raise capital necessary to buy equipment
and begin broadcasting TV signals.
Using this general framework, Midas Media formed Mobile Wireless Partners.
Midas Media initially offered for sale to the general public 2,450 partnership
units at an initial price of $3,475 per unit. The price per unit
gradually increased over a period of months to $4,875, and the number of
units offered increased to 2,685. Through this sales effort Midas Media
raised approximately $11,500,000.00 from 1,130 partners. Mobile Wireless
Partners, Midas Media, and another company, Telecom Marketing, Inc., then
entered a joint venture in which Midas Media owned 16.5%, Telecom Marketing
owned 1%, and Mobile Wireless Partners owned 82.5% of the joint venture.
After the first 200 Mobile Wireless Partners units were sold, Midas Media
called a meeting of the partners in Las Vegas. At that meeting, the partners
elected a managing general partner and authorized Mobile LLC to be created to
operate the general partnership. Shortly after this initial meeting, Midas
Media caused Mobile Wireless Partners to enter into leases for facilities
including office space and tower facilities and set about the business of
broadcasting wireless TV transmissions.
The assets that were contributed to the joint venture were eleven leased
wireless cable licenses in Mobile and about $2,000,000 in operating capital.
After forming Mobile LLC, Mobile Wireless Partners purchased from the
lessors, three of the wireless cable channels that were originally leased to
the Company. Other wireless TV licenses were promised to the enterprise but
were never transferred. Midas Media also transferred to the partnership
$2,000,000.00 for operating capital. The eleven licenses and the two million
in capital were the only assets that the partnership received in consideration
for the $11,500,000.00 raised by sales of partnership units.
The market for wireless TV transmission in the Mobile, Alabama, market, did
not prove to be profitable for the enterprise. There are three other cable TV
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companies in the area as well as satellite TV providers, and all of these
providers have many more channels at their disposal than Mobile LLC, which was
never able to compete successfully for cable TV subscribers. In addition,
Mobile LLC, was not capitalized with enough funds to adequately develop the
business, especially in light of the revenues and profits that would have been
required to return the $11,500,000 initial investment within a reasonable
time.
In 1995, after about $1,000,000.00 of the original capital of the partnership
had been expended, the partners of the general partnership called a meeting
and ousted the initial managing general partner from office. Five of the
partners were elected as a directors' committee of Mobile Wireless Partners,
four of whom serve as four of our directors today. Several partners
complained to the Securities and Exchange Commission and Federal Trade
Commission.
In about March 1996, The SEC and FTC instituted a receivership action against
Mobile LLC, Midas Media, and others, after investors in Mobile Wireless
Partners complained to the SEC. Initially, the receiver was to liquidate the
assets of Mobile LLC. However, the receivership later was dissolved against
Mobile LLC, and Mobile LLC retained its assets, including the FCC licenses.
Ultimately, the SEC, FTC, the receiver and the other defendants in the lawsuit
entered into a settlement agreement in which 10% interest in Mobile LLC that
was claimed by Midas Media and its affiliates was extinguished, the Mobile LLC
interests of Mobile Wireless Partners increased from 82.5% to 92.5%, and the
remaining 7.5% Mobile LLC interests were owned by third party transferees from
Midas Media and its affiliates.
At the beginning of the receivership, the receiver collected $200,000 from the
Mobile Wireless bank account to pay for fees and expenses of the receivership.
During the receivership, the receiver marshaled assets of Mobile LLC and the
other defendants. Upon completion of the receivership Mobile LLC received a
return of $313,717 from the receiver, which we recorded for the year ended
December 31, 1997, as other income -- funds recovered during the bankruptcy.
In the summer of 1997, Mobile LLC instituted the Chapter 11 proceedings that
resulted in formation of the Company as part of the Mobile LLC Plan of
Reorganization. In that proceeding, Mobile Wireless Partners objected to the
7.5% Mobile LLC ownership interests claimed by the transferees from Midas
Media and its affiliates. The bankruptcy court disallowed the 7.5% interests
of the Midas Media transferees, and thus Mobile Wireless Partners owned 100%
of Mobile LLC at the time of the reorganization.
The SEC and FTC instituted injunctive lawsuits against Midas Media and others,
including Mobile Wireless Partners. Those suits resulted in a receivership of
Midas Media and Mobile Wireless Partners in early 1996. At the beginning of
the receivership, the receiver collected $200,000 from the Mobile Wireless
bank account to pay for fees and expenses of the receivership. Initially, the
receiver planned to liquidate the assets of Mobile Wireless Partners.
However, Mobile Wireless Partners hired its own counsel and obtained a
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dissolution of the receivership against it. Ultimately, the SEC, FTC,
receiver, and other defendants entered a settlement agreement. The receiver
had marshaled assets of Mobile Wireless and the other defendants during the
receivership, and upon completion of the receivership we received a return of
$313,717 from the receiver, which we recorded for the year ended December 31,
1997, as other income -- funds recovered during the bankruptcy.
Because Mobile Wireless Partners had so many partners, the partnership could
not meet all of the requirements concerning ownership imposed by the FCC.
Eventually, Mobile Wireless Partners and Mobile LLC were given until December
31, 1997, to reorganize and to comply with the standards set by the FCC. The
Plan, which was confirmed on January 8, 1998, was designed to meet this
requirement through the new entity, Advanced Wireless Systems, Inc.
The Plan of Reorganization
Mobile LLC filed a petition for relief under Chapter 11 of the U.S. Bankruptcy
Code in the Northern District of Texas on August 27, 1997. On October 18,
1997, the Bankruptcy Court authorized the issuance and sale of up to
$1,000,000 in Certificates of Indebtedness to raise new capital pursuant to
Section 364(c) of the Bankruptcy Code. On November 6, 1997, our sponsors
filed a proposed Plan in which all assets and liabilities of the debtor,
Mobile LLC, and all equity interests in Mobile LLC, would be extinguished, and
Advanced Wireless Systems, Inc., would be organized to take over and continue
the business of the LLC, including the eleven FCC licenses in Mobile, Alabama.
The Plan was premised on the sale of part of the Certificates of Indebtedness,
and the acquisition of licenses from Mobile Wireless Partners for $225,000 in
additional Certificates of Indebtedness. The $225,000 in Certificates were
convertible into 3,192,518 shares of our common stock plus 3,068,066 warrants.
Each warrant entitles the holder to purchase one share of our common stock for
$1.00 per share. When the partnership was dissolved after confirmation of
the Plan, 3,068,066 shares of the common stock and all of the warrants were
issued and distributed to the partners of the Mobile Wireless Partners.
The Plan required payment of some creditors' claims shortly after confirmation
of the Plan by the Bankruptcy Court in January 1998. During 1998, we
discharged $138,320 in prepetition claims of creditors (incurred prior to
institution of the Chapter 11 case) and $61,500 in postpetition liabilities
(incurred after institution of the Chapter 11 case). As of December 31, 1998,
all such prepetition and postpetition liabilities had been discharged.
Two of our directors, Oscar Hayes and Demetrios Tsoutsas, had lent Mobile
Wireless Partners a total of $175,000, secured by all of the assets of Mobile
Wireless Partners, in May 1997. Upon Plan confirmation, they received secured
obligations of the Company to repay these debts with interest at 9% per annum.
Mr. Tsoutsas made an additional $75,000 loan in March 1998, on the same terms
as the previous loans. These obligations became due in March and May 1999.
In July 1999, we repaid the $75,000 principal amount of Mr. Hayes' 1997 loan,
but the $175,000 of remaining principal of these debts, including accrued
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interest which totaled $50,097 on June 30, 1999, remain outstanding and
unpaid. These obligations are secured by all of our property, including our
FCC licenses which are essential to our operation. The lenders have not
demanded payment nor declared a default in the loans, but neither have they
waived their right to do so. We are negotiating with the lenders to settle or
renegotiate the terms of our debt to them. At present, we could not repay
them from our cash reserves without jeopardizing our ability to continue
operating.
Our Business Plan
Historically, the business of our predecessor, Mobile LLC, was to provide
subscription television service. Competition in the television broadcast and
cable business is intense. Our predecessor was unsuccessful in this business,
and we probably would not succeed in it either, in the long term. We
continue to service existing wireless cable accounts, but we are not marketing
wireless cable services nor connecting new customers. Mobile, Alabama, is
already served by broadcast television, cable TV, and direct satellite TV. We
suspended new wireless TV installations in the first quarter of 1999 because
we believe that current installation costs exceed the anticipated subscriber
revenues from those installations. To become profitable, we must provide
additional services using our existing licenses. We believe that high speed
Internet access will generate those revenues. Other companies that have
operated wireless TV service are also turning to the Internet for future
revenues and growth. We expect to gradually reduce and eventually eliminate
our wireless cable TV business as we switch to the Internet access business.
Our wireless TV service is available for $21.95 per month. We presently have
about 190 TV customers. We are limited by the number of channels we have for
the number of TV channels we may transmit to customers; we offer only
seventeen channels now. We believe that our service appeals to customers who
want only a small number of channels (compared to most current cable
providers) for a monthly rate that is lower than other cable services.
Our long-term business strategy is to pursue implementation of a Wireless
Broadband Access (WBA) capability that we believe will eventually be the
best use of the wireless cable spectrum. One significant impediment to
increased use of the Internet is data transmission speed. WBA means the use
of microwave signals to provide large volumes of data to be transferred
between the Internet and the user, because of higher capacity of the signal to
carry data (measured by bandwith). We believe that market, technological and
regulatory developments are creating an opportunity for the current wireless
cable spectrum to be used to serve small and medium-sized business customers
with fixed, one-way and two-way, high-speed data and telephony services.
Regulatory developments have begun to benefit the WBA business strategy. In
1996, the FCC authorized the use of digital transmission over the wireless
cable spectrum. In September 1998, the FCC issued regulations that permit
two-way use of the wireless cable spectrum. Some WBA providers have since
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petitioned the FCC to refine its two-way rules to permit simpler deployment of
commercial operations under the two-way rules. Actual implementation of
two-way commercial businesses will require, among other factors, some changes
in the existing rules along with creation of filing windows by the FCC to
submit two-way license applications. Currently we are unable to offer two-way
access, and our wireless system only provides one-way service for high-speed
downloading of data from the Internet.
The Mobile, Alabama, Chamber of Commerce estimates that there are 12,000
businesses in Mobile, Alabama. We believe that all of these businesses are
potential users of our wireless Internet service. Each of our eleven
frequencies can serve approximately 1,650 subscribers at any given time. We
have dedicated one of our broadcast channels to the Internet service. In
order to dedicate one channel to Internet service, we had to remove one TV
channel from our wireless cable TV service. Each additional frequency that we
dedicate to Internet service will require a corresponding deletion of another
TV channel from our wireless cable TV service, which is another reason that we
decided to gradually eliminate our wireless cable TV service.
In 1998 we began to offer one-way, high speed Internet access. In one-way
high-speed access, customers can download data, video, graphics and high
fidelity audio at speeds that are much faster than available for most Internet
users over telephone lines, but they must upload their communications to the
Internet via traditional telephone lines. We intend to offer our services to
the business community and to a lesser extent to individuals in the Mobile,
Alabama, market. This service uses a high speed cable modem for downstream
Internet access.
As of April 7, 1999, we were providing dial-in Internet service to 251
customers at the lower speeds of conventional telephone connections, at a
monthly subscription charge of $14.95 each. Also as of April 1999, we provide
were providing high speed Internet service to eight customers on 27 work
stations. Our high speed Internet service is available at $49.95 per month
for one user, and at a base price of $99.95 per month for multi-users, with
each additional user connection costing $10 per month up to a maximum monthly
fee of $199.95 per month.
For the present we intend to continue soliciting new business for our
conventional telephone dial-in Internet service and our high speed, one-way
Internet access. We plan to apply to the FCC for two-way high speed Internet
licenses when the FCC announces the window for accepting applications for the
licenses. The FCC has announced its intention to act expeditiously on these
applications, so long as the license application is complete when submitted,
including required engineering studies to support the application. We cannot
be sure how long it will take the FCC to grant applications when it begins to
accept them, but we understand from industry observers that the FCC intends to
grant properly completed applications without holding hearings or delaying the
applications while the FCC considers additional regulatory requirements.
In addition, we are looking into applying for a development authority permit
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to test and put into place a microwave frequency two-way product. A two-way
product packages an electronic service from our transmitter to a customer with
a similar electronic service from the customer back to our transmitter. When
a customer connects to the Internet, he or she needs to send commands to the
Internet to get information, then the Internet sends the information back to
the customer. Currently, most two-way Internet service is via telephone land
lines. Two-way microwave service is a relatively new product.
Our plan in applying for a test permit is to ask the FCC to grant a test
permit for two-way service at less than our fully allowable license capacity,
which could be granted while we wait for the FCC to announce its timetable for
accepting two-way applications. The major cost components of either the two-
way license or the development authority are engineering costs and legal costs
to prepare and submit the application. We estimate that we can afford to
complete and submit either the development authority or the two-way license
application from our existing cash reserves.
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Another possible means to enter high speed, two-way Internet service might
involve use of a spread spectrum in which unused frequencies at ranges that
do not require an FCC license could be used for the incoming access from
customers. This method has technical limitations that make it appear
unfeasible right now. Spread spectrum frequencies generally have a range of
only one or two miles. To reach customers, many point to point antennas would
have to be erected close to the customers' locations. Installing these point
to point antennae would be very expensive. Other spread spectrum solutions
are being explored and tested by various developers that are unaffiliated with
our Company. We have considered the possibility of a spread spectrum approach
but are not pursuing it now because it appears to us to be too expensive and
risky.
The high speed, two-way Internet business has many risks and uncertainties,
including:
- - not receiving the necessary FCC authorizations for two-way licenses on
terms acceptable or affordable to us; and
- - not having access to sufficient channel capacity on commercially
acceptable terms;
We cannot be sure that our business plan will provide our stockholders with a
recovery on their investments or that it will produce or maximize future
value.
We are also uncertain about the degree of subscriber demand for WBA services,
especially at pricing levels at which we can achieve an attractive return on
investment. We cannot be sure that there will be sufficient subscriber demand
for such services to justify the cost of their introduction, or that we can
successfully compete against existing or new competitors in the market for
such broadband services. We expect that the market for any such services will
be extremely competitive. See, Competition.
On April 7, 1999, we had six full time and one part time employees. We do not
presently have sufficient sales staff to develop our proposed Internet
business. As of April 7, 1999, three computer stores in the Mobile area were
demonstrating our high speed download product on thirteen work stations.
Before we can fully develop its Internet business it will be necessary to
develop a sales program. We are attempting to train our existing sales staff
on marketing techniques, including telemarketing. See, Risks.
We have no subsidiaries.
Regulation
The wireless cable industry is highly regulated by the FCC and other
governmental agencies. Wireless cable companies are subject to federal, state
and local regulation, as described below.
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FCC Regulation
The FCC has granted wireless cable service providers access to a series of
channel groups, generally in the 2.5 to 2.7 GHz range of microwave radio
frequencies. These channel groups consist of Multipoint Distribution Service
(MDS) channels, which are allocated for commercial use and Instructional
Television Fixed Service (ITFS) channels that are primarily authorized for
educational purposes. Currently, up to 33 total channels are potentially
available for licensing, lease or purchase by wireless cable companies in each
market. Up to 13 MDS channels in any given market typically can be owned or
leased by wireless cable operators for full-time usage without programming
restrictions. The remaining 20 frequencies in a given market generally are
allocated for ITFS use. Wireless cable providers can lease excess channel
capacity from ITFS licensees as long as the licensees provide a prescribed
minimum amount of educational programming over their channels. Wireless cable
companies generally are prohibited from owning ITFS channels. ITFS licensees
are currently allowed to meet their minimum educational programming
requirements for all licensed channels using only one channel per four-channel
group via channel loading, if desired.
In the Mobile, Alabama, market, we control seven of the eleven MDS frequencies
that are licensed for full time usage without programming restrictions. We
lease the E Group (E-1, E-2, E-3, and E-4) frequencies from TV Communications
Network, Inc. (TVCN), of Denver. We were unable to lease the E Group for a
second five year term when this lease expired earlier this year, and we are
currently leasing the E Group from TVCN on a month to month basis for $1,200
per month. We believe that we would be offered an equal opportunity to bid on
the E Group, should TVCN decide to sell them, but we cannot be sure that we
would succeed in purchasing them. We own the licenses for three MDS
frequencies in the H Group (H-1, H-2, and H-3). The remaining four MDS
frequencies in Mobile are owned by an unaffiliated third party, and we do not
have rights to use them.
We also lease the Mobile, Alabama, G Group of four ITFS frequencies from the
North American Catholic Educational Programming foundation, Inc. (NACEPH)
for $1,000 per month. We are in our second five year term for this lease,
which expires in August of 2002.
We believe that we comply with all FCC requirements to operate our licenses.
The basic requirement is that we place the frequencies in service according to
their licenses. Annually, we complete a report that tells the FCC how many
hours we transmitted during the preceding year, what categories of programming
were transmitted and any periods of service outages we experienced. Each
August the FCC publishes a regulatory fee assessment for each category of
operations, with the fee due in September. The FCC has the authority to issue
fines for default on any of these requirements, or the FCC may rescind our
license authority, requiring that our transmissions be terminated. We believe
we are current in all regulatory requirements, and we have legal counsel
monitor regulatory developments to assist us in our compliance.
FCC rules generally prohibit the ownership or leasing of MDS and ITFS
authorizations by traditional franchise cable companies if the MDS facility is
located within 35 miles, or the ITFS facility is located within 20 miles, of
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the cable company's franchise or service areas. Pursuant to the
Telecommunications Act of 1996, the cable-MDS cross-ownership rule does not
apply to a cable operator in a franchise area in which the operator is subject
to effective competition.
Authorizations have been issued, or applications are currently pending, for
the vast majority of MDS licenses in major U.S. markets. Under the current
regulatory structure, as discussed below, only holders of a Basic Trading Area
(BTA) authorization may apply for available, unlicensed, MDS frequencies
within the BTA. In a number of markets, certain ITFS frequencies are still
available. However, except as noted below, eligibility for ownership of ITFS
licenses is generally limited to accredited educational institutions,
governmental organizations engaged in the formal education of enrolled
students and non-profit organizations whose purposes are educational and
include providing educational and instructional television material to such
accredited institutions and governmental organizations. Non-local, qualified
applicants must demonstrate that they have arranged with local educational
entities to provide them with programming and that they have established a
local programming committee.
From November 1995 through March 1996, the FCC auctioned all available MDS
rights on the basis of BTAs, with one such authorization available per BTA.
The winning bidder has the exclusive right to apply to operate one or more
unlicensed MDS channels within the BTA, as long as proposed stations operating
on these channels comply with the FCC's interference requirements and certain
other rules. In order to provide wireless cable service in these markets, the
BTA licensee must also secure the right to a transmission facility. A BTA
licensee has a five-year build-out period within which to expand or initiate
new service within its BTA. It may sell, trade or otherwise alienate all or
part of its rights in the BTA and may also partition its BTA along
geopolitical boundaries and contract with eligible parties to allow them to
apply for MDS authorizations within the partitioned area, and conversely,
acquire such Rights from other BTA licensees. The license term for each
station authorized under these BTA procedures is ten years from the date on
which the BTA auction closed.
It was in this regulatory environment that we received our eleven licenses
designed for wireless cable TV operations in the Mobile, Alabama, area. We
own licenses for three MDS channels and we lease eight ITSF channels from a
Roman Catholic educational institution. See, Description of Property.
The licenses granted to us by the FCC require us to construct transmission
capabilities for a number of channels in our Mobile market. If we do not
meet these construction commitments, and if the FCC does not grant an
extension of time to construct the required transmission facilities, the FCC
has the authority to revoke our licenses and we would lose our rights to lease
these channels. We have fulfilled all of our present construction commitments
for our FCC licenses.
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Two-Way Operations
In September 1998, the FCC issued formal rules for two-way use of MDS and ITFS
channels. We expect to apply for two-way licenses in accordance with the
filing schedule established by the FCC. Some other cable operators have
filed petitions with the FCC for reconsideration which propose to refine the
two-way rules. We believe that actual implementation of two-way commercial
businesses will require some changes in the existing two-way rules along with
filing windows by the FCC for operators such as our Company to submit
licensing applications.
The FCC has also adopted a number of ITFS rule changes that permit licensees
to meet the ITFS educational programming requirements by providing voice and
data services. In a digital environment, the ITFS licensee must retain 5% of
its capacity for such ITFS programming. ITFS leases may now extend for a
period of fifteen years. Certain of these new rules are also subject to
pending petitions for reconsideration.
The two-way licensing process will require substantial frequency engineering
studies and negotiations with other MDS and ITFS license holders in markets
adjacent to that of a two-way license application. These studies and
negotiations are expected to significantly increase the implementation costs
of two-way digital services. The process may involve channel swapping among
licensees within individual markets. If we decide to apply for two-way
licensing from the FCC, we may be required to negotiate with other MDS and
ITFS frequency licensees for the frequencies that will be necessary to operate
such a system.
Telecommunications Act of 1996
The Telecommunications Act of 1996 Act became law on February 8, 1996 (the
1996 Act). Among other things, the 1996 Act eliminated the cable/telephone
cross-ownership restriction, allowing a telephone company the option of
providing video programming within its telephone service area over a cable
system or a video platform. Conversely, cable companies are now permitted to
provide telephone service. The 1996 Act also limited, and in some cases
eliminated, FCC regulation of cable rates established by the Cable Television
Consumer Protection and Competition Act of 1992 (1992 Cable Act), depending
upon the size of the cable system and whether that system is subject to
effective competition and the nature of the rate. Small cable operators and
systems subject to effective competition are now exempt from rate regulation
as a result of the 1996 Act. The 1996 Act also vests the FCC with exclusive
jurisdiction over the provision of Direct Broadcast Satellite (DBS) and
preempts the authority of local authorities to impose certain taxes on such
services.
While current FCC regulations are intended to promote the development of a
competitive subscription television industry, we cannot be sure that these
regulations will have a favorable impact on the wireless cable industry as a
whole and/or our Company in particular. In addition, the FCC's regulation of
other spectrum could permit the operation of other wireless services to
interfere with MDS and ITFS frequencies.
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The 1996 Act mandated that the FCC adopt regulations to prohibit restrictions
that impair customers' ability to receive video programming services through
reception devices. The FCC has adopted rules that prohibit restrictions that
impair the installation, maintenance or use of an antenna that receives
wireless cable signals, where the antenna is one meter or less in diameter or
diagonal measurement. The FCC has concluded that a restriction impairs if it
unreasonably delays, prevents or increases the cost of installation,
maintenance or use, or precludes reception of an acceptable quality signal.
Prohibited regulations include, but are not limited to, any state or local law
or regulation, including zoning, land use, or building regulation, or any
private covenant, homeowner's association rule or similar restriction on
property within the exclusive use or control of the antenna user where the
user has a direct or indirect ownership interest in the property. The matter
of whether the FCC's preemption authority extends to property not within the
exclusive use or control of a person with an ownership interest, such as a
rental property, remains pending.
The 1996 Act also requires all providers of telecommunications services to
contribute to a national Universal Service Fund (the Fund). The Fund was
created to promote the availability of telecommunications services to those in
low income, rural, insular and high cost areas at rates that are reasonably
comparable to the lower rates charged in urban areas. The 1996 Act expanded
the purpose of the Fund to include provision of affordable access to advanced
telecommunications services for schools, classrooms, health care facilities
and libraries. Previously, only telephone companies were required to
contribute to the Fund. The FCC is considering whether and to what extent
wireless cable operators, such as our Company, must contribute to the Fund.
This matter remains pending before the FCC.
Pursuant to the 1996 Act, video programming distributors, including wireless
cable operators, will be required to provide closed captioned video
programming on a phased-in basis starting on January 1, 2000. Requirements to
pass-through captions already contained in programming and to maintain
captioning at 1997 levels became effective on January 1, 1998. Because ITFS
programming, as a class, is exempt from captioning requirements, wireless
cable operators that retransmit such programming are not required to provide
it with closed captioning.
Pending Legislation
The State of Alabama and its local, political subdivisions do not impose any
direct taxes, such as sales tax or franchise taxes, on our wireless services,
either television or Internet. From time to time discussions are had about
the possibility of imposition of such taxes in Alabama, but no concrete
proposals are pending before the Alabama legislature now.
Legislation has been introduced in several other states that would authorize
state and local authorities to impose taxes on providers of subscription
television programming, including wireless cable operators, based upon their
gross receipts comparable to the franchise fee cable operators pay. While the
proposals vary among states, such legislation would require as much as five
percent of gross receipts to be paid by wireless cable operators to local
authorities.
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Although the majority of states impose a sales/use tax on the sale of certain
telecommunication services, the proliferation of new and emerging services has
made unclear the distinction between taxable telecommunication services and
non-telecommunication services. Internet access services could be classified
as telecommunication services in some states. In 1998 the United States
Congress enacted a three-year moratorium on the imposition of any new
taxes on Internet services.
We cannot be sure that legislation similar to what is described in the above
paragraphs will not be introduced or adopted in Alabama in the foreseeable
future.
Other Forms of Regulation
Federal law requires all cable companies to obtain local or state
franchises prior to constructing a subscription television distribution
system. Cable companies are defined in Section 602 of the Communications Act.
Because wireless cable systems deliver programming to subscribers by means of
microwave facilities rather than through coaxial cable that cross public
rights-of-way and are not specifically defined as cable systems in Section
602 of the Communications Act, the 1992 Cable Act, or in earlier statutes or
FCC regulations, wireless cable systems have not been considered cable
companies under FCC rules in this context. In Alabama, wireless cable
companies such as ours are not required to obtain franchises and are generally
not subject to state regulation by public utility or cable commissions.
The Company is also subject to various FCC regulatory limitations relating to
ownership and control. The 1996 Act and FCC rules require the FCC's approval
before a license may be assigned or control of the licensee may be
transferred. Moreover, the 1996 Act provides that certain types of licenses,
including those for MDS stations, may not be held directly by corporations of
which non-U.S. citizens or entities (Aliens) own of record or vote more than
20% of the capital stock. In situations in which such a FCC license is
directly or indirectly controlled by another corporation, Aliens may own of
record or vote no more than 25% of the controlling corporation's capital
stock.
Wireless cable operators are also subject to regulation by the Federal
Aviation Administration (FAA) and the FCC with respect to construction of
transmission towers and certain local zoning regulations affecting
construction of such towers and other facilities. The FAA must approve
antenna towers that are more than 200 feet tall. We lease space on a tower
that has already been approved by the FAA. Therefore, we have not needed and
do not expect to apply for tower permits from the FAA.
Under the federal copyright laws, permission from the copyright holder
generally must be secured before a video program may be retransmitted. Under
Section 111 of the Copyright Act, certain cable systems are entitled to
engage in the secondary transmission of broadcast programming without the
prior permission of the holders of the copyright in the programming. To do so,
a cable system must secure a compulsory copyright license. Such a license is
obtained upon the filing of certain reports with, and the payment of certain
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fees, to the U.S. Copyright Office. In 1994, Congress amended copyright law to
permit wireless cable operators to rely on the cable compulsory license under
Section 111 of the Copyright Act.
Section 119 of the Copyright Act provides for a similar compulsory-licensing
program for the retransmission of broadcast programming to the home via
satellite. In 1997, the Copyright Arbitration Royalty Panel significantly
increased the rates of entities operating under Section 119. While this action
has no direct impact on the rates applicable to our services, it has generated
a debate over the differences in the compulsory licensing schemes and the
disparity of the rates. Our operations may be adversely affected if existing
laws or regulations applicable to our copyright royalty liability are modified
or new laws are adopted.
Under the retransmission consent provisions of the 1992 Cable Act, wireless
and hardwire cable operators seeking to retransmit certain commercial
television broadcast signals must first obtain the permission of the broadcast
station whose signal it wishes to retransmit. However, wireless cable
systems, unlike hardwire cable systems, are not required under the FCC's must
carry rules to retransmit a specified number of broadcast television
channels. We carry seven such off-the-air channels in Mobile, including ABC,
CBS, NBC, and Fox.
Internet Regulation
Internet access providers are not currently subject to direct economic
regulation by the FCC or any state regulatory body, other than the regulations
that apply to businesses generally. In April 1998, the FCC reaffirmed that
Internet access providers should be classified as unregulated information
service providers rather than regulated telecommunications providers under
the terms of the Federal Telecommunications Act of 1996. As a result, we are
not subject to federal regulations applicable to telephone companies and
similar carriers merely because we provide our services using
telecommunications services provided by third-party carriers.
On June 3, 1999, the U.S. District Court for the District of Oregon ruled that
the City of Portland and Multnomah County could adopt open access
ordinances, requiring AT&T Corp to allow ISPs who are unaffiliated with AT&T
to connect their equipment directly to AT&T's cable modem platform, bypassing
AT&T's own proprietary cable ISP. The court ruled that the city and county
ordinances are not preempted by federal laws, including the FCC's regulation
of cable television. The court's decision would allow local governments to
mandate existing cable TV operators to permit unaffiliated, competing ISP's to
use the cable lines to provide service to homes and businesses. Coaxial cable
permits Internet access at much higher speeds than can be had over telephone
lines including ISDN lines.
AT&T has appealed the Oregon court's decision, and on August 16, 1999, the FCC
filed a friend of the court brief with the 9th Circuit which also urged the
court to overturn the District Court decision. The decision raises major
uncertainties for the future of wireless Internet access services like ours.
For instance, open access to cable lines could greatly increase the
competitiveness of ISP's in high speed access, because they could provide high
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speed access over existing cable lines without making the capital investment
required for a cable system. In addition, the court's ruling may mean that
state and local governments have authority impose a variety of additional
regulations on the Internet. We are uncertain how the Oregon decision may
affect our business. If the decision is allowed to stand, it may adversely
affect our business in many unforeseen ways, including greatly increasing high
speed Internet competition or by permitting additional local regulations that
restrict our business or raise our cost of doing business.
Governmental regulatory approaches and policies to Internet access providers
and others that use the Internet to facilitate data and communication
transmissions are continuing to develop and in the future we could be exposed
to regulation by the FCC other federal agencies or by state regulatory
agencies or bodies. For example, the FCC has expressed an intention to
consider whether to regulate providers of voice and fax services that employ
the Internet or IP switching as telecommunications providers even though
Internet access itself would not be regulated. The FCC is also considering
whether providers of Internet-based telephone services should be required to
contribute to the universal service fund, which subsidizes telephone service
for rural and low income consumers, or should pay carrier access charges on
the same basis as applicable to regulated telecommunications providers. To the
extent that we engage in the provision of Internet or Internet protocol based
telephony or fax services, we may become subject to regulations promulgated by
the FCC or states with respect to such activities. We cannot assure you that
such regulations will not adversely affect our ability to offer certain
enhanced business services in the future.
Due to the increasing popularity and use of the Internet by broad segments of
the population, it is possible that laws and regulations may be adopted with
respect to the Internet pertaining to content of Web sites, privacy, pricing,
encryption standards, consumer protection, electronic commerce, taxation, and
copyright infringement and other intellectual property issues. We cannot
predict the effect, if any, that any future regulatory changes or developments
may have on the demand for our access or enhanced business services. Changes
in the regulatory environment relating to the Internet access industry,
including the enactment of laws or promulgation of regulations that directly
or indirectly affect the costs of telecommunications access or that increase
the likelihood or scope of competition from national or regional telephone
companies, could materially and adversely affect our business, operating
results and financial condition.
Markets
International Data Corporation estimates that there were over 38 million Web
users in the United States and over 68 million worldwide at the end of 1997.
International Data Corporation projects that the number of Web users will
increase to over 135 million in the United States and over 319 million
worldwide by the end of 2002. In a report issued in April 1998, the U.S.
Department of Commerce estimates that traffic on the Internet is doubling
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every 100 days. Additionally, Forrester Research estimates that the number of
Web sites in the United States will increase from approximately 450,000 in
1997 to nearly four million in 2002.
We currently propose to serve only one local market -- in and around Mobile,
Alabama. The Mobile, Alabama, market has 12,000 potential business users of
our service. Each of our eleven frequencies -- 7 MDS frequencies and 4 ITFS
frequencies -- can serve approximately 1,650 subscribers at any given time.
Although we may expand to other markets if we believe we can successfully and
profitable develop those markets, our efforts for the present will be focused
on Mobile.
Competition
Wireless Cable TV
In the Mobile, Alabama television market, we must compete against television
signal transmission from local stations, including those with national network
affiliations including ABC, CBS, NBC, and Fox and cable television, against
three cable systems in Mobile, and against direct satellite systems, including
Primestar, Echostar, and Direct TV. We lease or own eleven wireless
frequencies, which also limits our programming capacity, compared to cable and
direct broadcasters.
We have decided to gradually reduce and eventually discontinue our wireless
cable TV business, because, among other things, existing competitors can
provide better service to TV viewers in a more cost effective manner. We are
no longer marketing our wireless cable TV service or making new installations.
As customers discontinue our service, which they may do for a variety of
reasons including better channel selection, better signal reception, and
better maintenance service, we are reducing our TV customer base. We are
refocusing our attention on wireless Internet access service.
Internet Access
The Internet is available to anyone who has conventional telephone service.
The market for Internet access is highly competitive and fragmented with over
4,800 Internet service providers, primarily in local markets and averaging
less than 5,000 customers each. Although most service providers are small and
local, a number of very large companies have entered the business on a
national scale, with resources for development of proprietary, value-added
services and networks. These large businesses, such as America Online,
Microsoft, and AT&T, have brand name recognition and use marketing techniques
and resources, including television, radio, and mass mailing campaigns, that
give them competitive advantages over small, new companies like ours.
Average Internet download speeds may vary widely based upon a number of
factors including the capacity of the Internet Service Providers (ISPs)
connectivity to the Internet, the number of users downloading information at
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any one time from an ISP, speed of the telephone return path and the
characteristics of the user's personal computer. The Company's principal
target market is small to mid-size business customers. The overall demand
throughout the United States for Internet services is expected to grow
substantially, led by increased utility of the Internet to corporate and
consumer users, new software applications, availability of faster access
speeds and rising personal computer penetration.
The Internet access business is highly competitive. Barriers to entry are
relatively low. Current and potential competitors include local, regional and
national ISPs, telephone companies, franchise cable operators and DBS service
providers. We believe our principal competition will come from high-speed
Internet access alternatives and not from slower dial-up connections to the
Internet. These principal competitors include franchise cable companies
offering high-speed Internet over their networks, telephone companies such as
local exchange carriers (LECs) and competitive local exchange carriers (CLECs)
using ISDN, and digital subscriber lines (DSL) or T1 connections,
ISP's offering a similar variety of connections as LECs and CLECs, and DBS
providers.
We believe that we have a competitive advantage in achieving relatively fast
download speed from the Internet with less capital investments than typically
required by franchise cable operators to upgrade their networks or by LECs and
CLECs offering DSL connectivity. Our transmitters radiate a broadcast signal
in about a 35 mile radius from the antenna tower, covering about 4,000 square
miles. The cost for us to cover that territory might be $500,000 in capital
expenditures, compared to capital expenditures for telephone or cable TV lines
of several million dollars. Therefore, we expect to be able to charge a lower
service fee for our service than networks using land lines.
We believe that competition will intensify in the future and that our ability
to be successful in this business will depend on a number of factors,
including customer demand for high-speed Internet access services, acceptable
pricing structures for high-speed Internet services, reliable subscriber
equipment and our financial ability to service and grow the high-speed
Internet business. Many of our existing or potential competitors in the
Internet access business have greater name recognition and financial,
technical and human resources than we do and may be better equipped to
develop, deploy and operate Internet access systems.
The high-speed Internet access business and other businesses, such as WBA,
that use digital technologies present increased competition to us for the
renewal of channel lease agreements. This increased competition arises because
high-speed Internet access and certain other businesses that use digital
technologies may require fewer channels than the traditional analog video use
of wireless cable spectrum where a practical minimum of about 20 channels is
required. We could lose channels to competitors or incur higher costs to renew
or retain its existing channels.
We believe that our service offers communications links at higher speeds,
reducing the waiting time that is characteristic of Internet services in which
users must wait for large computer files to be downloaded to them over
traditional telephone lines.
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Most telephone services in the U.S.A. that connect customers to the Internet,
do so at 28 kilobits per second. With these accounts, called dial-up
accounts because they use a conventional telephone service, a customer has to
wait while large files such as graphics download to the computer screen. To
get higher speeds on telephone lines, higher quality lines are needed. If
Telephone carriers charge more for the higher quality lines. For example,
telephone companies currently charge $1,000 to $1,500 per month to deliver
commercial quality, high speed broadband service with speeds up to 1.2
megabits per second over land lines. Wireless cable microwave service can
deliver the same commercial quality, high speed broadband service for $500 per
month. Sprint and MCI/WorldCom have recently entered or begun acquisitions of
companies that provide wireless cable service in order to provide high speed
broadband service to customers.
We hope to take competitive advantage of the higher access speed as well as
the comparatively low capital investment requirements of our system, compared
to laying and maintaining land lines for telephonic or cable connections. The
communications industry has identified the need for higher speed
communications as a major competitive goal in providing Internet access, and
it is likely that large businesses will improve their Internet access speeds
by improving land line capacity and speed, improving computer communication
efficiency (such as faster modem speed), and offering wireless access similar
to our own. Thus, the already intense competition not only for content but
also for speed, dependability, and quality of delivery, will only increase
pressure on small businesses such as ours to stay competitive in the future.
Wireless Broadband Access
We believe that the best use of wireless cable spectrum is to serve small and
medium-sized business customers with fixed, two-way high-speed data and
telephony services. We are not presently offering WBA services. We face two
principal types of competition for WBA services. One group of competitors is
telephone companies such as LECs and CLECs that offer a wide variety of
non-wireless broadband T1, T3, DSL and fiber connectivity for business
customers. The other group of competitors is companies that offer or plan to
offer WBA services using radio frequencies other than wireless cable spectrum.
These competitors include companies operating in local multipoint distribution
service spectrum (27.5 to 28.35 GHz, 29.1 to 29.25 GHz and 31.0 to 31.3 GHz)
and in the 24 GHz and the 39 GHz bands. The Company believes that other
frequencies of radio spectrum are also being evaluated for WBA services by
competitors. All WBA providers are potentially competitors of the LECs because
the WBA technologies bypass the local customer access lines of the LECs and
the related costs charged by the LECs to access such lines. The various radio
spectrum used by WBA providers is subject to different physical broadcast
properties and FCC licensing rules.
A broad range of companies engaged in the communications and entertainment
businesses will be actual or potential competitors. Pending and future
technological and regulatory developments may result in additional competitors
and alternate means of providing broadband services. Almost all of our
competitors for broadband services are larger and have more capital,
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technology and human resources. We depend upon regulatory and technology
actions, among other factors, in order to successfully implement our strategy.
(See -- Our Business Plan.)
Bundled Services
Many franchise cable companies have begun offering or announced their
intentions to offer, high-speed Internet access over their networks. At least
one DBS provider also offers high-speed Internet access. AT&T Corp. (AT&T)
has completed its acquisition of Tele-Communications, Inc. (TCI) and has
announced its intention to use the cable network of TCI to distribute data and
telephone services of AT&T. AT&T has also announced ventures with other
franchise cable companies to distribute AT&T products. This bundling activity
increases competition for the Company because of the attractiveness to
customers of purchasing bundled services from one provider and because of the
opportunity for the provider to price bundled services more competitively than
individual services that we can offer.
Risks
We are a new company with limited operating history.
Our Company was formed in late 1997 and began operations with the confirmation
of the Plan and emergence of our business from bankruptcy in January 1998.
Since then we have continued to operate our wireless cable TV business in
Mobile, Alabama, but we have suspended our efforts to attract new wireless
cable TV business. We began offering high speed, one-way Internet service in
1998. We cannot be sure that we will be successful in this or any other
business line and do not have a track record of success in any business.
We have a history of losses and expect more losses in the foreseeable future.
Our predecessor, Mobile LLC, filed for Chapter 11 bankruptcy proceedings in
1997 because it was unable to operate profitably. Since we emerged from
bankruptcy in early 1998, we have continued to experience losses from
operations. We have determined to suspend installations for new customers in
our only business line with an operating history, the wireless cable TV
business, because we believe new installations would not be profitable. We
can expect losses in our Internet business line until we build a large enough
customer base to generate revenue in excess of start-up and operating costs.
We do not have reliable projections of how long it may take to generate
positive cash flow or operating profits from the Internet business. We have
ongoing operating costs including rent, license fees for our broadcast
frequencies, and debt service. We believe that, to make a profit from our
current business, we must expand our Internet customer base to at least 3,000
customers from a current customer list of approximately 260. Accordingly, we
cannot expect to operate at a profit in the foreseeable future.
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We will need additional capital to continue and expand operations.
Since we began operations we have depended on capital provided by financing
during the bankruptcy proceedings as well as on equity provided by exercise of
warrants for our common stock which were issued as part of the reorganization.
Assuming we can successfully grow our new high speed Internet access business,
we likely must find additional capital, either in the form of loans or sale of
more equity, to invest in equipment necessary for that business and to provide
operating capital until the Internet business generates positive cash flow.
Given our history of losses and lack of operating history, we cannot be sure
that we will be able to raise sufficient capital to continue in business until
we become profitable.
Our management is inexperienced in the wireless cable or Internet business.
Our board of directors was formed from investors in Mobile LLC who were
willing to invest their time and energy in saving that business and in
building our Company when it was formed. None of our directors have any prior
experience either in the wireless cable business or in the Internet access
business. We have existing staff in Mobile with experience in the wireless
cable business not in the Internet access business. We are currently seeking
a manager with the talent and experience necessary to make our new business
succeed. We do not know if we will be able to attract the necessary new
employees and managers with our limited resources.
Our senior secured indebtedness is due and unpaid.
In 1997 and 1998, our operations were partially financed by loans from two or
our directors, totaling $250,000 principal amount. Each loan is secured by
essentially all of our assets, including our wireless frequency licenses.
These loans are now due and payable in full, together with accrued, unpaid
interest. The lenders have not demanded payment nor declared the loans in
default, but they also have not waived any provisions of the loan agreements.
We are negotiating an extension or settlement of this indebtedness, but if we
are unable to renegotiate the terms of this debt, the lenders could demand
payment and foreclose on assets which are essential to continuing our
business.
System failure could disrupt our business.
All of our broadcasting facilities are located in Mobile, Alabama. A failure
of our broadcasting capability at our Mobile facilities due to mechanical
failure, or due to natural disasters such as hurricanes that periodically
occur on the coast of the Gulf of Mexico, where we are located, could cause a
complete cessation of our ability to offer any services to customers. Such a
failure would interrupt all revenues from subscriber services and prevent us
from continuing or expanding our business until the system is fixed. Not only
would we lose revenues, but customers might cancel their subscriptions and
potential customers would not subscribe to our services, which would
materially and adversely affect our financial condition and operating results.
We have built a facility with redundant equipment to protect against equipment
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failure, and we believe that we could withstand all but the most severe
natural disasters or equipment failures.
We must adapt to changing technologies and markets.
Both the wireless cable market and the Internet services market are
susceptible to rapid changes due to technology innovation, evolving industry
standards, changes in subscriber needs and frequent new service and product
introductions. New services and products based on new technologies or new
industry standards expose us to risks of equipment obsolescence. We will need
to use leading technologies effectively, develop our technical expertise and
continually improve our existing services on to compete successfully. We
cannot be certain that we will be successful in using new technologies
effectively, developing new services or enhancing existing services or that
any new technologies or enhancements used by us or offered to our customers
will be accepted in the marketplace.
Our ability to compete successfully will also depend on the continued
compatibility and interoperability of our services with products and systems
sold by various third parties. We cannot be certain that industry standards
will be established or, if they become established, that we will be able to
conform to these new standards to develop a competitive position in the
market.
We are also at risk due to fundamental changes in the way that Internet access
may be delivered in the future. Currently, Internet services are accessed
primarily by computers connected by telephone lines. Recently, several
companies have developed cable modems, some of which are currently offered for
sale. These cable modems have the ability to transmit data at substantially
faster speeds than the modems currently used. As the Internet becomes
accessible by broad segments of the U.S. population through these cable modems
and other consumer electronic devices, or as subscriber requirements change
the means by which Internet access is provided, we will have to develop new
technologies or modify our existing technology to accommodate these
developments and remain competitive. Our pursuit of these technological
advances may require substantial time and expense, and we cannot be certain
that we will succeed in adapting our Internet access services business to
alternative access devices and conduits.
Our new proposed Internet business depends on continued growth of the
Internet.
Widespread use of the Internet is a relatively recent phenomenon. Our future
success substantially depends on continued growth in the use of the Internet
and the continued development of the Internet as a viable commercial medium.
We cannot be certain that Internet usage will continue to grow as it has in
the past or that extensive Internet content will continue to be developed and
continue to be accessible for free or at nominal cost to Internet users. If
the use of the Internet does not continue to grow or evolves in a way that we
cannot address, our business, financial condition and operating results could
be materially and adversely affected.
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If we are unable to attract and retain qualified sales personnel for our sales
program, we may not be able to obtain customers.
Our business strategy depends on hiring and keeping a qualified marketing
staff to sell our new high speed Internet services, and we have not yet hired
that sales staff. Our future success in high speed Internet services depends
on our ability to market successfully to new customers in an environment that
is increasingly competitive. We may not succeed in attracting and retaining
qualified sales managers or other sales people, which is necessary for this
type of marketing approach.
No market for our stock.
Prior to filing this registration statement there has been no active market
for the sale of our stock. An active public market for our common stock may
not develop in the future, and if it does not develop, investors may not be
able to sell their stock at prices reasonably related to its fair market
value. We filed this registration statement to comply with the Securities and
Exchange Act of 1934 and to provide current, publicly available information on
our Company in order to assist the development of a public market for our
stock, which is held by a large number of small shareholders who received
stock and warrants as part of the Mobile LLC Plan. As a general proposition,
some of the following factors may affect the development of a market for our
stock and market prices:
- - Interest of the investment community in small, new companies in the high
speed Internet access business.
- - Our ability to follow through on our plans to develop a high speed
Internet access business.
- - Our actual or anticipated operating results.
- - Announcements of technical innovations or industry trends and our
ability to keep up with them.
- - Our ability to attract and retain key management, marketing, and
technical personnel.
- - Operating results of other competing companies.
Substantial stock sales by existing investors could cause our stock prices to
drop.
It is by no means certain that any market for our stock will develop. If a
market does develop, many current investors (who were Mobile LLC investors and
received their stock as part of the Plan), may wish to sell their stock. Most
of these investors received stock which is eligible for resale because it was
issued under an exemption from federal and state securities laws contained in
Section 1145 of the Bankruptcy Code. If a substantial number of investors
decide to sell their stock after a market develops, it is likely that the
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market price of our stock would fall. This might make it more difficult for
investors to sell their stock and might make it more difficult for us to raise
needed capital in a future securities offering.
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following information should be read in conjunction with our financial
statements and notes appearing elsewhere in this registration statement. This
registration statement contains forward-looking statements. The words,
anticipate, believe, expect, plan, intend, estimate, project, could, may,
foresee, and similar expressions are intended to identify forward-looking
statements. These statements include information regarding expected
development of our business and development of the wireless cable TV
and Internet access service business where we will focus our marketing
efforts. These statements reflect our current views about future events and
financial performance and involve risks and uncertainties, including without
limitation the risks described in Risk Factors. Should one or more of these
risks or uncertainties occur, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated.
Among the factors that could cause actual results to differ materially are the
following: a lack of sufficient capital to finance our business strategy on
terms satisfactory to us; pricing pressures which could affect demand for our
services; changes in labor, equipment and capital costs; our inability to
develop and implement new services such as wireless broadband access and
high-speed Internet access; our inability to obtain the necessary
authorizations from the FCC for such new services; competitive factors, such
as the introduction of new technologies and competitors into the wireless
communications business; or our Company's failure to attract strategic
partners; general business and economic conditions; inexperience of management
in deploying a wireless broadband access business.
We have sustained substantial losses since we began operations after
confirmation of the Plan and we expect to continue incurring losses in the
foreseeable future. We have suspended new installations of wireless cable
customers, which was the primary business of the partnership which was our
predecessor, and we have not yet substantially developed our high speed
Internet access services or any other business services. Nearly all operating
revenues since inception have come from wireless cable TV subscriptions, which
are declining. We expect that revenues from wireless cable service will
continue to decline. Unless we are able to find a new source of revenue, such
as our Internet access service, we will be unable to continue as a going
concern.
We do not have reliable projections of how long it may take to generate
positive cash flow or operating profits from the Internet business. We have
ongoing operating costs including rent, license fees for our broadcast
frequencies, and debt service. We believe that, to make a profit from our
current business, we must expand our Internet customer base to at least 3,000
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customers from a current customer list of approximately 260. Accordingly, we
cannot expect to operate at a profit in the foreseeable future.
We were formed in 1997 and took over the business of Mobile LLC upon
confirmation of the Plan in January 1998. Our financial statements that
accompany this registration statement present the results of operations for
the business which the Company acquired on emergence from bankruptcy, for the
years ended December 31, 1998 and 1997. Those financial statements have been
retroactively restated to present the reorganization of our business as if we
emerged from bankruptcy as of the earliest period presented. See, Note 1 to
our Financial Statements.
The bankruptcy proceedings affected our financial condition and the way that
we have reported our assets, liabilities, income and expenses. During the
bankruptcy, we accrued certain liabilities which were ultimately discharged
either as part of confirming the Plan at the beginning of 1998, or later
during the year in 1998 after we emerged from bankruptcy. Prior to December
31, 1997, we accrued $61,500 in postpetition liabilities and $138,320 as
prepetition liabilities subject to compromise. These amounts were both
discharged in 1998 after we emerged from bankruptcy. These items are reported
on the Statements of Cash Flows. We accrued $61,500 under Cash Flows from
Operating Activities, in postpetition liabilities at December 31, 1997, that
were discharged in fiscal 1998 with a resulting charge to Operating Cash Flow
of $61,500. Similarly, Under Cash Flows from Financing Activities, we accrued
$166,889 at December 31, 1997, and discharged prepetition liabilities of
$138,320 in fiscal 1998.
On June 3, 1999, the U.S. District Court for the District of Oregon ruled that
the City of Portland and Multnomah County could adopt open access
ordinances, requiring AT&T Corp. to allow ISPs who are unaffiliated with AT&T
to connect their equipment directly to AT&T's cable modem platform, bypassing
AT&T's own proprietary cable ISP. The court ruled that the city and county
ordinances are not preempted by federal laws, including the FCC's regulation
of cable television. The court's decision would allow local governments to
mandate existing cable TV operators to permit unaffiliated, competing ISP's to
use the cable lines to provide service to homes and businesses. Coaxial cable
permits Internet access at much higher speeds than can be had over telephone
lines including ISDN lines.
AT&T has appealed the Oregon court's decision, and on August 16, 1999, the FCC
filed a friend of the court brief with the 9th Circuit which also urged the
court to overturn the district court decision. The decision raises major
uncertainties for the future of wireless Internet access services like ours.
For instance, open access to cable lines could greatly increase the
competitiveness of ISP's in high speed access, because they could provide high
speed access over existing cable lines without making the capital investment
required for a cable system. In addition, the court's ruling may mean that
state and local governments have authority impose a variety of additional
regulations on the Internet. We are uncertain how the Oregon decision may
affect our business. If the decision is allowed to stand, it may adversely
affect our business in many unforeseen ways, including greatly increasing high
speed Internet competition or by permitting additional local regulations that
restrict our business or raise our cost of doing business.
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<PAGE>
Recent Events
Acquisition of Dibbs Internet
On August 25, 1999, Advanced Wireless Systems, Inc. (the Company) purchased
all of the assets of Dibbs Internet Services, Inc. (Dibbs), an Alabama
corporation, an Internet service provider in Mobile, Alabama, for a purchase
price of $225,000. Dibbs provides Internet services to approximately 730
Internet customers in the Mobile metropolitan area via dial-in telephone line
access. We will continue offering Dibbs customers the telephonic Internet
service that they have now, and we will also offer them the opportunity to
convert to use of our high speed wireless Internet service.
We acquired the Dibbs assets used in the operation of its Internet service,
including its equipment, software, and the right to use the Dibbs trade name,
for $225,000 cash, paid in full on August 25, 1999, to Dibbs and its sole
shareholder and president, Diane Summers. We negotiated the purchase price
with Ms. Summers, who is not affiliated with our Company, in arms-length
negotiations. We used cash from our working capital reserves to pay the
purchase price. We did not assume any liabilities of Dibbs in the
transaction.
The assets purchased include the equipment necessary to service the Dibbs
subscribers, including three computers, two network hubs, a Cisco 2500 router,
software, a backup power supply and other network accessories. Dibbs services
730 subscribers, who use 56k, 64k or 128k ISDN telephone services and e-mail
dial-up services. The Dibbs basic service begins at $19.95 per month. The
subscriber base includes 58 domains and 47 commercial websites. In the first
three months of 1999, Dibbs had average net income of $6,179 per month based
on average revenues of $16,795 per month.
The asset purchase agreement includes a two year non-competition clause in
which Dibbs and Ms. Summers agree not to compete with our Company in
providing Internet services within a 75 mile radius of Mobile for two years.
Ms. Summers also agreed to provide consulting services to us, to help us take
over and operate the Dibbs business, for up to 60 days after the purchase, for
$1,200 per week.
Impairment of Long-Lived Assets
In September 1999, the Company reconsidered and wrote down the value of its
wireless frequency licenses by $303,797 during the 1997 fiscal year. The
reasons for the write down include the decision in early 1998 to discontinue
the wireless cable TV business and instead to develop a high speed Internet
service, and to change the estimated useful lives of our license acquisition
costs down from 15 years to 5 years. In early 1999, we had discontinued new
installations of wireless cable TV service. The change in the way we use the
licenses created an uncertainty over the future revenues from these services.
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New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 (SFAS 130), Reporting Comprehensive Income. This statement requires that
all items that must be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. We adopted SFAS 130
for the period ended December 31, 1997, which had no material effect on the
accompanying financial statements.
In June 1997, the FASB issued Statements of Financial Accounting Standards No.
131 (SFAS 131), Disclosures about Segments of an Enterprise and Related
Information. The statement requires us to report income/loss, revenue,
expense and assets by business segment including information regarding the
revenues derived from specific products and services and about the countries
where we operate. The Statement also requires that we report descriptive
information about the way that operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in our
general-purpose financial statements, and changes in the measurement of
segment amounts from period to period. We adopted SFAS 131 for the period
ended December 31, 1997.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AcSEC) issued Statement of
Position (SOP) 98-5, Reporting on the Costs of Start-up Activities. SOP
98-5 establishes standards for the reporting and disclosure of start-up costs,
including organization costs. We adopted SOP 98-5 on January 1, 1999. We
believe that the adoption of this statement will not have a material effect on
our financial position or results of operations.
Results of Operations
Results of Operations for the Six Months Ended June 30, 1999, as Compared to
the Six Months Ended June 30, 1998
During the first half of 1999, we discontinued new installations of our cable
TV service because it appeared to be unprofitable, and focused on generation
of new business from Internet access service, of both the land based
(telephonic) and microwave kinds. For the six months ended June 30, 1999, we
had a net loss from operations of $442,195, which was a $103,546 (31%)
increase from our operating loss of $338,649 in the first six months of 1998.
Our basic loss per share was $.11 in the first six months of 1999, the same
basic loss per share as in the first six months of 1998.
In the first half of 1999, we increased revenues and decreased operating
expenses. This was due to the cessation of new cable TV installations and
improvements in operating efficiency. We hired a general manager and office
manager who were much more qualified on the technical side of our business and
who were able to improve our operating efficiency in offering Internet
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<PAGE>
service. For the six months ended June 30, 1999, operating revenue increased
$1,679 (4%) to $42,490, up from $40,811 for the same period in 1998. At the
same time, operating expenses decreased by $11,744 (15%) to $64,353, down from
$76,097 in the first half of 1998. We substantially decreased operating
expenses by negotiating a reduction of $800 per month in our monthly lease
rate for one of our channel leases (from $2,000 to $1,200 monthly).
Our new general manager and office manager, together with our president, we
took several cost savings steps in late 1998 and early 1999. The monthly
salaries of the new general manager and office manager were $1,666 less than
the individuals they replaced. We renegotiated our building rent in Mobile
from $2,800 monthly to $1,500 monthly. We returned some cellular telephones
used in the field, saving $200 per month. We eliminated three telephone lines
saving $180 per month. We eliminated outside contractors for installations
and networking office personal computers and began doing that work with our
own personnel, saving about $800 per month. We changed the carrier for PRI
lines, saving $700 per month. These savings total about $4,840 monthly.
Our general and administrative expenses rose in the first half of 1999. First
half 1999 general and administrative expenses were $325,424, a $160,181 (97%)
decrease from first half 1998 G & A expenses of $165,243. We attribute the
increase mainly to increased salaries and professional fees in 1999 compared
to 1998, particularly in the three months ended June 30, 1999, as we prepared
our first annual audit since the bankruptcy and prepared this registration
statement. Professional fees totaled only $10,475 in the three months ended
June 30, 1998, but increased to $88,993 for the same period in 1999.
Depreciation and amortization expenses declined by $43,212 to $94,908 in the
first half of 1999, a 31% drop from depreciation and amortization charges of
$138,120 in the first half of 1998, primarily because some short-lived
equipment became fully depreciated by the end of 1998. We depreciate
substantially all of our capitalized assets using the straight-line method.
Interest expense increased by $1,027 (10%) in the first half of 1999 over
1998, due to increased borrowings from insiders. The interest charges are,
for the present, being accrued and not repaid. In March and May, 1999, the
loans on which this interest accrued became due and payable in full. These
loans were made to us by two of our directors during 1997 and 1998 to fund our
continued operations. The lenders have neither demanded repayment nor
declared a default in the loans, but they also have not waived their rights to
do so. The loans are secured by nearly all of our assets, including our
wireless frequency licenses. If we are unable to renegotiate or settle these
debts, the lenders could demand repayment of the loans and foreclose on our
property, in which case we would be unable to continue operations.
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<PAGE>
Results of Operations for the Twelve Months Ended December 31, 1998, as
Compared to the Twelve Months Ended December 31, 1997
We had a net operating loss for the year ended December 31, 1998, of $665,554,
compared to an operating loss of $901,523 in 1997. The net change in our
operating loss resulted from several factors:
- - In September 1999, the Company reconsidered the value of our wireless
frequency licenses and decided to write them down by $303,797 during the 1997
fiscal year. The reasons for the write down include the decision in early
1998 to discontinue the wireless cable TV business and instead to develop a
high speed Internet service, and to change the estimated useful lives of our
license acquisition costs down from 15 years to 5 years. In early 1999, we
had discontinued new installations of wireless cable TV service. The change
in the way we use the licenses created an uncertainty over the future revenues
from these services.
- - Nearly all operating revenues in both years came from wireless cable TV
subscriptions. Our operating revenues versus operating costs nearly broke
even in fiscal 1997 but suffered substantial losses in 1998, as we began to
reduce the wireless cable services that had produced our operating revenues.
Operating revenues decreased by $28,777 (21%) to $106, 602 in fiscal 1998,
from $135,379 in 1997. The decrease was mainly due to cancellations of
service by our wireless cable TV subscribers. At the same time, Operating
expense rose by $23,767 (17%) to $159,840 in 1998, compared to $136,073 in
1997. The increase was caused by costs, such as outside labor and consulting,
associated with the start-up of our Internet services, which we began to offer
in May 1998.
The largest component of the change in operating loss from 1997 to 1998 was
the $303,797 charge incurred for impairment of license acquisition costs.
In 1997, we realized non-recurring, non-operating income of $313,717 from
recovery of funds during the Chapter 11 bankruptcy case. This amount was more
than twice our 1997 operating income, and it dramatically reduced our net
loss. This payment, which is shown as Bankruptcy Recoveries on our
Statement of Operations for the year ended December 31, 1997, reduced the net
loss for 1997 from $605,575 to $291,858.
In 1998, our total losses were $683,771, a $88,616 (15%) increase from 1997
losses of $595,656. The total 1997 loss included the $303,797 expense for
impairment of assets, which was offset by the extraordinary $313,717 gain for
bankruptcy recoveries. Without these two components, our 1997 total loss
would have been $605,575.
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<PAGE>
Liquidity and Capital Resources
Our financial statements for the years ended December 31, 1999 and 1998,
contain a going concern qualification from our auditors. We emerged from
bankruptcy in early 1998 and since then have continued to sustain operating
losses. During the past two years, both during and after the Chapter 11 case,
we have satisfied our working capital needs primarily through our financing
activities including raising capital through sale of certificates of
indebtedness, loans from our directors, and the exercise of warrants that were
issued as part of the Plan. In order to continue as a going concern we must
develop a profitable Internet access service. We probably must also raise
additional equity capital for development and expansion, possibly in a public
offering of securities. We believe that we have sufficient liquidity for the
short term. We estimate that our existing reserves could provide about six
months of operating capital, as of September 1999.
Secured loans from two of our directors in the principal amount of $250,000,
plus accrued interest of $44,472, became due and payable on March 31 and May
21, 1999. At June 30, 1999, accrued interest on these loans was $50,097. The
directors have not demanded repayment of these loans, but neither have they
waived their rights to demand payment or declare a default. We are attempting
to settle or renegotiate these loans, but if we are unable to settle or
renegotiate them, we could not repay them from our cash reserves without
jeopardizing our capital reserves. The loans are secured by all of our
property including our FCC licenses, which are essential to our continued
operations.
We had total assets of $756,479 at June 30, 1999, $519,854 at December 31,
1998, and 955,249 at December 31, 1997. At December 31, 1998, license
acquisition costs represented $256,962 (49% of our total assets), compared to
$361,203 (38% of our total assets) in 1997. License acquisition costs include
costs incurred to develop or acquire our wireless cable licenses. All of our
licenses were acquired prior to January 2, 1998.
Under SFAS No. 121, we are required to periodically review our long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. We implemented
the provisions of this policy for the years ended December 31, 1998 and 1997.
After considering the Company's history of operating losses and the
uncertainty of a continuation of future operating losses, changes in the
Company's strategic direction, and certain industry factors, the Company
determined that assets with a carrying value of $620,848 were impaired
according to the provisions of SFAS No. 121, and wrote down the carrying
value of such assets by $303,797 as of December 31, 1997, to their estimated
fair value. Fair value was based on recent transactions in the wireless cable
industry, including changes in the Company's use of these assets, and
estimates of the future earnings from alternative uses for these assets.
At June 30, 1999, license acquisition costs had decreased by another $52,120
to $204,236. This decrease represented amortization of these costs in the
first six months of 1999.
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<PAGE>
Our inventory did not change materially from December 31, 1999 to June 30,
1999, because we did not continue using our inventory after discontinuing new
wireless cable TV service. Our accounts receivable rose to $24,600 at June
30, 1999, from $18,000 at December 31, 1998, $6,400 (a 36% increase). Our
deposits decreased to $300 at June 30, 1999 from $15,900 at December 31, 1998,
again because of our phasing out the wireless cable TV service. License
acquisition costs and organization costs continued to decrease in the first
half of 1999 because of depreciation and amortization of those costs.
Operating Activities. For the year ended December 31, 1998, cash used in
operating activities was $448,882, compared to cash used in 1997 operating
activities of $20,191. In the second half of 1997, we received a payment of
$313,717 from the former receiver for Mobile LLC, from funds which the
receiver had previously received from Mobile LLC plus funds the receiver
recovered from third parties on behalf of Mobile LLC. This payment, which is
shown as Bankruptcy Recoveries on our Statement of Operations for the year
ended December 31, 1997, dramatically reduced the net loss for 1997. No such
recoveries were received in 1998.
For the six months ended June 30, 1999, cash used in operating activities was
$338,276, compared to $251,602 for the first six months of 1998. Our
operating
loss rose in the first half of 1999 compared to 1998 as we increased operation
to ramp up our Internet business.
Investing Activities. For both 1998 and 1997, investing activities were
property and equipment purchases for Mobile, Alabama, operations to provide
high speed Internet services through our MMDS microwave transmitters. We
purchased $111,009 in property and equipment in 1997 but only $22,152 in 1998.
The 1997 equipment included a Cybermanager, downstream router, four cards to
expand capabilities, an ethernet switch, a modulator, and modems for customer
services. In 1998 we added an Ascend router and a Sun server.
For the six months ended June 30, 1999, we spent $20,715 to purchase
additional
equipment for our Internet service operations in Mobile, compared to $5,775
spent on equipment purchases in the same period in 1998. While first half
spending on equipment was up for 1999 compared to 1998, we expect overall
property and equipment purchases and investing activities to be lower for the
1999 fiscal year than for fiscal 1998.
Financing Activities. In 1997, during the bankruptcy, we raised a total of
$355,039 from financing activities. Sources of funds were the sale of debtor
certificates ($53,150) cash loans from insiders ($175,000), and deferring
prepetition liabilities ($126,889) associated with the bankruptcy filing.
In 1998, we raised an additional $417,836 from the issuance of warrants
($156,986), sale of additional debtor certificates ($185,850), and cash loans
from insiders ($75,000). These activities were partially offset by
discharging $138,320 for prepetition liabilities. As a result, the net cash
raised from financing activities decreased by $75,523 (21%) to $279,516 in
1998, from $355,039 in 1997. Because of the lack of net revenues from
operations, these financing activities were essential to our ability to meet
expenses in 1997 and 1998.
In the first half of 1999, we raised another $677,421 from the exercise of
warrants issued as part of the Plan. These funds were again used to meet
operating expenses. No funds were raised from the sale of warrants in the
first half of 1998; however, we did receive a $75,000 loan from one of our
directors during the first half of 1998.
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<PAGE>
Year 2000 Compliance
We believe that we are prepared for the challenges to management information
and other computer systems presented by Year 2000 (Y2K). In general, Y2K
issues relate to the way that many computer programs refer to dates and their
ability to recognize dates after the end of 1999. We have reviewed our
information systems and non-information based, automated systems for Y2K
compliance.
We have recently purchased and installed replacement software for our billing
system, which the developer represents is Y2K compliant. We have purchased
and installed other small software programs or updates to make other existing
systems Y2K compliant. We also have recently purchased a replacement server
computer hardware that is Y2K compliant. The cost of these hardware and
software purchases to date is about $6,500.
In early August 1999, we installed new software for our converter management
system in order to make our television reception system for our wireless cable
customers Y2K compliant. The software was provided at no cost by the
converter manufacturer, General Instruments. The software was necessary to
allow our wireless cable systems to operate after January 1, 2000, our
wireless cable system will become inoperable on New Year's Day. Installation
of the new software required approximately three hours and cost about $150.
The converter management system will not affect our Internet services, which
we believe are Y2K compliant as they exist today. We believe that we have
addressed all Y2K issues for our information systems and non-information
based, automated systems.
Item 3 Description of Property.
We rent approximately 7,000 square feet of office and warehouse space at 4123
Government Blvd., Mobile, Alabama, for a monthly rental of $1,300. The lease
expires in March 2000, but we have the right to renew it for three successive
three-year terms. We also lease the site for our transmitter for $1,000 per
month, expiring in March 2000. See, Note 4 to our Financial Statements.
We lease the site for our transmitter, located at 7100 Lenardo Drive, Mobile,
Alabama, subject to a five-year lease for $12,000 annually, expiring March 13,
2000.
All of our FCC frequency leases and licenses are located in the Mobile,
Alabama, market. We lease the E Group (E-1, E-2, E-3, and E-4) frequencies
from TV Communications Network, Inc., (TVCN), of Denver. We were not offered
a second five year term on this lease when it expired earlier this year, and
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<PAGE>
we are currently leasing the E Group from TVCN on a month to month basis for
$1,200 per month. We believe that we would be offered an equal opportunity to
bid on the E Group, should TVCN decide to sell them, but we cannot be sure
that we would succeed in purchasing them. We own the licenses for three MDS
frequencies in the H Group (H-1, H-2, and H-3). We acquired the H Group
frequencies in 1997, using funds raised from the Mobile Wireless partners.
The remaining four MDS frequencies in Mobile are owned by an unaffiliated
third party, and we do not have rights to use them.
We also lease the Mobile, Alabama, G Group of ITSF frequencies from the North
American Catholic Educational Programming foundation, Inc. (NACEPH) for $1,000
per month. We are in our second five year term for this lease, which expires
in August of 2002.
Item 4 Security Ownership of Certain Beneficial Owners and Management.
The following table contains information about the ownership our common stock,
as of August 15, 1999, by stockholders who beneficially own more than 5% of
our common stock, or who are our directors or executive officers. This
information was given to us by the stockholders, and the numbers are based on
definitions found in Rules 13d-3 and 13d-5 under the Securities Exchange Act
of 1934. On June 30, 1999, 4,559,263 shares of our common stock were
outstanding.
Shares Owned (1)
Shareholder Number Percent
Monte Julius 152,584 3.84%
Demetrios Tsoutsas (2) 102,270 2.61%
Oscar Hayes 102,600 2.62%
Miles Wm. Humphrey, Jr. 116,400 2.96%
Terry L. Hopkins 140,344 3.57%
All directors and officers as a
group
(5 persons) 613,898 14.16%
(1) Includes shares which the listed shareholder has the right to acquire
within 60 days after June 30, 1999, from options or warrants. Each of the
listed shareholders are directors who received the options listed below as
compensation for their service as director in 1998. See, Directors'
Compensation. Each of them also received the warrants listed below in
exchange for their claims against Mobile Limited Liability Company as part of
the Plan. The options and warrants are all currently exerciseable, but the
warrants expire on October 31, 1999.
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<PAGE>
Options Warrants Total
Monte Julius 115,600 18,492 134,092
Demetrios Tsoutsas 75,000 8,250 83,250
Oscar Hayes 75,000 13,800 88,800
Miles Wm. Humphrey, Jr. 75,000 20,700 95,700
Terry L. Hopkins 50,000 45,172 95,172
All officers and
directors as a group 390,600 106,414 497,014
Under SEC rules, we calculate the percentage ownership of each person
who owns exercisable options by adding (1) the number of exercisable options
for that person to (2) the number of total shares outstanding, and dividing
that result into (3) the total number of shares and exercisable options owned
by that person.
(2) Includes shares owned by Mr. Tsoutsas' spouse.
Item 5 Directors, Executive Officers, Promoters and Control
Persons.
Each of our directors became directors upon the confirmation of the Plan of
Mobile Limited Liability Company which capitalized our Company in January
1998. The directors are divided into three classes, each serving staggered
terms of up to three years.
Class of 2001
Name Position Biographic Information
Monte Julius President, Mr. Julius, who is 65, became involved
with our Director Company as an investor
in Mobile Wireless Partners in 1994.
He was semi-retired prior to
joining us, and since 1981 he has owned
and managed residential properties and
operated a plastic tools manufacturer.
Demetrios Tsoutsas Chairman of Mr. Tsoutsas, 65, is owner and
Directors President of the Board of Melstrom
Manufacturing Corporation,
engaged in military procurements as
a prime contractor to the U.S.
Department of Defense and various
airframe manufacturers. He is founder,
President, and C.E.O. of Super-Tech,
L.L.C., a maker of machine parts under
subcontracts with the U. S. Department of
Defense and for private industry, since
1996. From 1975 to 1996, he founded and
operated several companies in the
military procurement industry, including
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<PAGE>
D&A Electronics Manufacturing Company,
Inc, and Ulysses, Inc. He also founded
Pluto Industries, Inc., an electro-
mechanical product manufacturer, in 1975.
He received a degree in electrical
engineering from the Greek Air Force
Academy in 1954. He became involved with
our Company as an investor in Mobile
Wireless Partners and member of their
management committee in 1994, and was
also a director of Mobile LLC.
Class of 2000
Oscar Hayes Secretary, Director Mr. Hayes, 69, has owned and
operated Hayes Appraisal in Albany,
Georgia, since 1986.
Miles Humphrey Treasurer, Director Mr. Humphrey, 79, has been retired
since 1992.
He owned and operated a chicken
farming and egg
production company, Beaver Valley
Eggs, Inc., from 1971 until his
1992 retirement.
Class of 1999
Terry L. Hopkins Director Ms. Hopkins, 52, has managed her
private investments since 1991. She
also serves on the Board of
Directors of Pacific Diagnostic
Technologies, Inc., an OTC- Bulletin
Board company.
We do not have committees of the Board of Directors, and all Directors
participate in decisions regarding compensation of management, including Mr.
Julius, who is the Chief Executive Officer as well as a Director.
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<PAGE>
Item 6 Executive Compensation
Summary Compensation Table
The following table summarizes the compensation of our President for 1998.
Long Term Compensation (1)
Securities
Restricted Stock Underlying
Salary Awards (2) Options/SARs (3)
Monte Julius,
President $12,000 $10,400 130,132
(1) No market existed for our common stock during 1998.
(2) On December 18, 1998, Mr. Julius was awarded 14,532 restricted shares
of common stock for his services. The Board of Directors valued these shares
at $10,400, or $0.72 per share, on the date of the award.
(3) As part of the Plan, we agreed to award Mr. Julius options to purchase
115,600 shares of common stock at $0.25 per share pursuant to our stock award
and long term incentive plan, which was adopted in December 1997, prior to
confirmation of the Plan. In addition, on December 18, 1998, the Board of
Directors awarded Mr. Julius 14,532 Class B Warrants with an exercise price of
$0.25 per share, as compensation for his services.
Stock Options Granted in 1998
The following table summarizes the stock options that we granted to Mr. Julius
during 1998 in compensation for his services. In addition to the options
listed here, during 1998 Mr. Julius received warrants to purchase 18,492
shares of our common stock in exchange for his claims against Mobile Limited
Liability Company, as part of the Plan.
Option/SAR Grants in Last Fiscal Year
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise of
Options/SARs Employees in Base Price Expiration
Granted (#) Fiscal Year ($/Sh) Date
Monte Julius,
President 130,132 100% $0.25 Jan. 9, 2000
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Year End Stock Option Value
Mr. Julius did not exercise any stock options in 1998. We have not granted
Mr. Julius any stock appreciation rights. At December 31, 1998, all of Mr.
Julius' options to purchase our stock listed above were exercisable,
including his warrants to purchase 18,492 shares of common stock that he
received as part of the Plan. The following table describes the options held
by Mr. Julius at year end, 1998.
Aggregated Option Exercises in 1998 and 23/31/98 Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
12/31/98 12/31/98
Shares
Acquired on Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
Monte Julius,
President 0 $0 130,132 $32,5331
/1 There was no market for our common stock at the end of 1998 on which to
base a valuation of Mr. Julius' shares at year end. We have valued the
options at $.25 per share, which is their exercise price and was, in the
opinion of the board of directors, their fair market value on the date of
grant.
Directors' Compensation
Directors are reimbursed for their travel and related expenses to attend Board
meetings. In 1998, we agreed to issue stock options to directors in
compensation for their services, pursuant to our stock award and long term
incentive plan. We paid no other compensation to our directors (other than
Mr. Julius, as described above) in 1998. The following table lists the stock
options granted to directors as compensation in 1998. All of these options
are exercisable at $0.25 per share and expire on January 9, 2000. In addition
to these options, each director also received warrants to purchase common
stock as part of the Plan, in exchange for their claims against Mobile Limited
Liability Company. See, Security Ownership of Certain Beneficial Owners and
Management.
Number of Shares
Underlying Directors'
Options
Monte Julius 115,600
Demetrios Tsoutsas 75,000
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Oscar Hayes 75,000
Miles Humphrey, Jr. 75,000
Terry L. Hopkins 50,000
Item 7 Certain Relationships and Related Transactions.
On May 21, 1997, Directors Oscar Hayes loaned $75,000 and Demetrios Tsoutsas
loaned $100,000 to Mobile LLC, with interest at 9% and secured by a lien on
all license agreements including our FCC licenses, contracts, accounts
receivable, equipment leases and other choses in action and all of its
equipment at its principal place of business in Mobile, Alabama. The Plan
provides that these loans remain outstanding in the amount of the total debt,
$175,000 secured by all of our property and equipment in Mobile, Alabama. The
Plan provided that two debts were to be paid in full, in cash plus interest at
the rate of 9% per annum, one month after confirmation of the plan. Mr. Hayes
and Mr. Tsoutsas agreed to extend the loans for one year, to May 21, 1999, on
the same terms. In addition, on March 31, 1998, Mr. Tsoutsas loaned us an
additional $75,000 on the same terms, for one year, again secured by all of
the Company's assets.
These loans in the principal amount of $250,000, plus accrued interest of
$44,472, became due and payable on March 31 and May 21, 1999. Accrued
interest on these loans amounted to $50,097 at June 30, 1999. On July 1,
1999, we repaid the $75,000 principal amount of Mr. Hayes' 1997 loan, but the
remaining $175,000 principal and all accrued interest remain due and unpaid.
The directors have not demanded repayment of the amounts owed, but neither
have they waived their rights to demand payment or declare a default. We are
attempting to settle or renegotiate these loans, but if we are unable to
settle or renegotiate them, we could not repay them from our cash reserves
without jeopardizing our capital reserves. The loans are secured by all of
our property including our FCC licenses, which are essential to our continued
operations.
Item 8 Legal Proceedings.
None.
Item 9 Market for Common Equity and Related Stockholder Matters.
There is no current market for our common shares. We have contacted market
makers regarding the possibility of making a market in our shares and of the
market makers' entering quotations for the purchase and sale of the stock on
the over-the-counter bulletin board, but to our knowledge, no quotations for
the purchase or sale of our shares are being made as of the date of this Form
10-SB.
- 36 -
<PAGE>
Item 10 Recent Sales of Unregistered Securities.
In 1997, the Bankruptcy Court authorized the sale of Certificates to raise new
capital for the reorganized debtor pursuant to Section 364 of the Code. The
Certificates were due two years from the Effective Date of the Plan and bore
interest at 10% annually. On May 27, 1998, the Bankruptcy Court Clerk
disbursed $242,043, representing proceeds from sales of the Certificates of
$239,000, and interest income of $3,043 to the disbursing agent, who in turn
wired the funds to our Company. A total of 120 individuals participated in
the program. The Plan of Reorganization provided that the Debtor Certificate
holders could, at their exclusive option, convert their debt at a conversion
rate of one unit of equity for each $1 lent. A unit of equity consists of two
shares of Common Stock and two Class A Warrants allowing the holder to
purchase additional shares at $0.75 each. 118 holders opted to convert their
certificates and two opted not to convert. On July 31, 1998, 466,000 shares
of Common Stock and 466,000 A Warrants were issued to the 118 Certificate
holders. Stock and Warrants issued to this group have no restrictions.
Under the Plan confirmed by the Bankruptcy Court in January 1988, we issued a
Debtor Certificate to Mobile Wireless Partners for $225,000, to purchase the
FCC license which we acquired in the reorganization. The Plan provided that
the Debtor Certificate could be converted into 3,192,518 shares of common
stock and 3,068,066 class B warrants. In the event of conversion of the
Debtor Certificates into the stock and warrants, Mobile Wireless Partners
agreed by contract not to assign, pledge, transfer or otherwise dispose of
the 3,192,518 shares of common stock and 3,068,066 warrants for one year from
the date of conversion. 126,000 shares of common stock held no such
restriction. When the Mobile Wireless Partners was dissolved in July 1998,
the shares and warrants were issued and distributed to its partners. These
shares and warrants were issued pursuant to Section 1145 of the Bankruptcy
Code.
Section 1145 of the Bankruptcy Code exempts the original issuance of
securities under a plan of reorganization from registration under the
Securities Act of 1933, as amended (Securities Act), and state law. For the
original issuance to be exempt, three principal requirements must be
satisfied: (i) the securities must be issued by the debtor or its successor
under a plan of reorganization, (ii) each recipient of the securities must
hold a claim against the debtor, equity interest in the debtor or a claim for
an administrative expense against the debtor, and (iii) the securities must be
issued entirely in exchange for the recipient's claim against or equity
interest in the debtor or principally in such exchange and partly for cash
or property. Our Plan called for the Company to issue common stock in
satisfaction of certain creditors' claims and certificates of indebtedness to
equity holders in Mobile LLC in exchange for their equity interests. The
certificates of indebtedness were convertible into 3,192,518 shares of common
stock and 3,068,066 warrants to purchase common stock. The Company believes
that the exemption from registration requirements provided by Section 1145 of
the Bankruptcy Code applies with respect to the issuance of common stock to
claimants and issuance of common stock upon conversion of the certificates of
indebtedness, as well as for the warrants and the underlying common stock to
be issued upon exercise of the warrants.
- 37 -
<PAGE>
Although we believe that the subsequent distribution of our common stock by
its recipients would be exempt from registration and not subject to a holding
period in most circumstances, certain recipients of the securities - i.e.
those recipients who may be deemed underwriters as defined under Section
1145(b) of the Bankruptcy Code - may be unable to resell such securities
absent registration of the securities under the Securities Act and applicable
state law, or absent exemption therefrom.
Section 1145(b) of the Bankruptcy Code defines four types of underwriters:
(i) a person who purchases a claim against, an equity interest in, or a claim
for administrative expenses against the debtor with a view to distributing any
security received in exchange for such a claim or equity interest; (ii) a
person who offers to sell securities authorized under a plan of
reorganization for the holders of such securities; (iii) a person who offers
to buy such securities from the holders of such securities, if the offer is
(a) with a view to distributing such securities, or (b) made under a
distribution agreement; and (iv) a person who is an issuer with respect to the
security, as the term issuer as defined in Section 2(11) of the Securities
Act. An issuer includes any person directly or indirectly controlling or
controlled by the debtor, or any person under direct or indirect common
control with the debtor.
Whether a person is an issuer, and therefore an underwriter for purposes
of Section 1145(b) of the Bankruptcy Code depends on a number of factors.
Such factors include (i) the person's equity interest in a company; (ii) the
distribution and concentration of other equity interests in a company; (iii)
whether the person is an officer or director of the company; (iv) whether the
person, either alone or acting in concert with others, has a contractual or
other relationship giving that person power over management policies and
decisions of the company; and (v) whether the person actually has such power
notwithstanding the absence of formal indicia of control. An officer or
director of the company may be deemed a controlling person, particularly if
his position is coupled with ownership of a significant percentage of voting
stock. In addition, the legislative history of Section 1145 of the
Bankruptcy Code suggests that a creditor with at least 20% of the securities
of the debtor could be deemed a controlling person.
The Company's common stock issued to claimants pursuant to the Plan, absent
underwriter status, should be freely transferable, although the Company
recommends that potential recipients consult their own counsel with respect
to their particular situation.
In addition to the issuance of actual common shares, warrants were issued to
holders of Certificates of Indebtedness who converted their shares. The
warrants carried an expiration date of May 31, 1999, which was subsequently
extended to October 31, 1999. Each warrant entitles the holder to purchase
one additional share of common stock per warrant at $1.00 per share. As with
shares of common stock, the Company believes that such warrants are be freely
transferable in the absence of a potential restriction as to underwriters.
From the effective date of the Plan through June 11, 1999, shareholders
exercised a total of 708,284 warrants pursuant to the Plan, including 193,682
- 38 -
<PAGE>
A warrants and 514,062 B warrants. We received total consideration of
$659,246 on the exercise of these warrants. Although these warrants are
transferrable, there is no market for the warrants, and we believe, based on
our warrant transfer records, that almost all of the shares of stock issued
pursuant to the exercise of warrants were issued to the warrant holders who
originally received the warrants in the reorganization.
Item 11 Description of Securities.
We are authorized to issued up to fifty million shares of one class of common
stock, par value $0.01 per share. On June 30, 1999, 4,559,263 shares of
common stock were issued and outstanding.
Each shareholder of the Common Stock is entitled to one vote for each share of
Common Stock held on all matters to be voted on by shareholders. In the
election of directors, shareholders may not cumulate votes (i.e., cast for any
one or more candidates a number of votes greater than the number of shares)
unless a shareholder has given notice of the intention to cumulate votes prior
to the commencement of voting. If any shareholder has given notice of the
intent to cumulate votes, then each shareholder has the right to give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of shares held by the shareholder, or distributing
such number of votes among as many candidates as the shareholder sees fit.
Shareholders have no conversion rights, redemption rights, or sinking fund
provisions. Shareholders are entitled to receive dividends, when declared by
its board of directors, out of funds legally available therefore, subject to
the restrictions set forth in the Alabama Statutes. If the Company were to
liquidate, dissolve, or wind up, the holders of the Common Stock would be
entitled to receive, pro rata, the net assets of the Company remaining after
the Company satisfies its obligations with its creditors. Under Bylaw Section
3.17, the Company has eliminated the potential liability of directors to it,
and is also required to indemnify its directors against any liability for
monetary damages, to the extent allowed by Alabama law. See, Indemnification
of Directors and Officers. All outstanding shares of Common Stock are fully
paid and not subject to further calls or assessments.
If we decide to issue additional shares of common stock from authorized,
unissued shares, each shareholder has the preemptive right to purchase an
amount of the shares to be issued equal to his pro rata number of shares, as
a proportion of the total common shares outstanding. Our board of directors
must provide a reasonable means to exercise each shareholder's preemptive
rights as part of any decision to issue additional common shares.
Shareholder preemptive rights apply not only to issuance of common shares but
also to issuance of instruments that are convertible into or redeemable for
common shares.
- 39 -
<PAGE>
Item 12 Indemnification of Directors and Officers
Alabama law requires us to indemnify our directors, officers, agents, and
employees against expenses when that person is successful in a legal
proceeding which was brought by reason of the fact of their position with the
Company. Alabama law authorizes us to indemnify a person if the person has
acted in good faith and in a manner that the person believes to be in or not
opposed to our best interests. In the case of a criminal proceeding, the
person must also have had no reasonable cause to believe his or her conduct
was unlawful. Our bylaws require that we must indemnify officers and
directors where permitted by Alabama law, except that directors and officers
may not be indemnified for negligence or misconduct in office.
Indemnification may be made only if ordered by a court or if authorized in a
specific case upon a determination that the applicable standard of conduct
has been met. Such a determination may be made by a majority of our
disinterested directors, by independent legal counsel, or by our
shareholders. To obtain reimbursement for expenses in advance of the final
disposition of any action, the person must agree to repay the amount if it
is ultimately determined that the person is not entitled to be indemnified.
Our bylaws also provide that the directors may extend indemnification, where
it is permitted under the standards in the preceding paragraph, to cover a
good faith settlement of a legal proceeding, whether it has been formally
instituted or not.
Our bylaws also permit us to purchase insurance to indemnify directors,
officers, agents, and employees wherever indemnification is permitted by
Alabama law. To date we have not purchased any such insurance.
Item 13 Financial Statements and Supplementary Data
Our financial statements are set forth on pages F-1, et seq., of this Form 10-
SB.
Item 14 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
- 40 -
<PAGE>
Item 15 Financial Statements and Exhibits
Financial Statements
See, pages F-1, et seq., included herein.
Exhibits Description
2.1 Plan of Reorganization and Disclosure Statement, In Re: Mobile
Limited Liability Company d/b/a Mobile Wireless TV, Debtor, Case No. 397-
37735-HCA-11, In Proceedings Under Chapter 11, U.S. Bankruptcy Court, Northern
District of Texas, Dallas Division (November 6, 1997), incorporated by
reference to the Company's Form 10-SB filed on June 29, 1999.
3.1 Articles of Incorporation of Advanced Wireless Systems, Inc.,
incorporated by reference to the Company's Form 10-SB filed on June 29, 1999.
3.2 Bylaws of Advanced Wireless Systems, Inc., incorporated by
reference to the Company's Form 10-SB filed on June 29, 1999.
27.1 Financial Data Schedule
Signatures
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
Advanced Wireless Systems, Inc.
/s/ Monte Julius Date:
Monte Julius, President
- 41 -
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
TABLE OF CONTENTS
Page
Report of Independent Auditors F-2
Financial Statements
Balance Sheets F-4
Statements of Operations F-6
Statements of Stockholders' Equity F-7
Statements of Cash Flows F-8
Notes to Financial Statements F-10
- F1 -
<PAGE>
REPORT OF INDEPENDENT AUDITOR'S
To the Board of Directors and Shareholders
Advanced Wireless Systems, Inc.
We have audited the accompanying balance sheets of Advanced Wireless
Systems, Inc. as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly in all material respects, the financial position of Advanced
Wireless Systems, Inc., as of December 31, 1998 and 1997, and the
results of its operations and cash flows for the years then ended,
in conformity with generally accepted accounting principles.
- F2 -
<PAGE>
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 9 to
the financial statements, the Company has suffered recurring losses from
operations. This factor raises substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 9. The financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
BROWN ARMSTRONG RANDALL
REYES PAULDEN & McCOWN
ACCOUNTANCY CORPORATION
Bakersfield, California
April 3, 1999, except for notes 1 and
10, whose date is September 7, 1999
- F3 -
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED)
DECEMBER 31, 1998 AND 1997 (AUDITED)
June 30, December 31,
1999 1998 1997
(Unaudited) (Audited) (Audited)
ASSETS
Current Assets
Cash $ $ $
Accounts receivable, net 374,598 56,168 247,686
Prepaid expenses 2,608 2,608 1,933
Employee Advances 24,600 18,000 -
Inventories 375 - -
Total Current Assets 45,964 44,949 58,307
Fixed Assets, net of depreciation
Other Assets
Deposits 300 15,900 34,850
License acquisition costs, net 204,842 256,962 361,203
Organization costs, net of
amortization of $61,133 at
June 30, 1999,
and $57,737 and $44,152
at December 31, 1998 and 1997,
respectively 5,094 10,189 23,774
Total Other Assets 201,236 283,051 419,827
Total Assets $ 756,479 $ 519,854 $ 955,249
-------------- ------------- ------------
-------------- ------------- ------------
(Continued)
The accompanying notes are an integral part of these financial statements.
- F-4 -
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED)
DECEMBER 31, 1998 AND 1997 (AUDITED)
June 30, December 31,
1999 1998 1997
(Unaudited) (Audited) (Audited)
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities
Current Liabilities
Debtor certificates $ 6,000 $ 6,000 $ 53,150
Notes payable, related parties 250,000 250,000 175,000
Postpetition liabilities - - 61,500
Prepetition liabilities subject
to compromise - - 138,320
Accrued payroll taxes 6,629 5,231 4,518
Accrued interest payable 50,097 38,847 9,200
---------- --------- ---------
Total Current Liabilities 312,726 300,078 441,688
---------- --------- ---------
Commitments and Contingencies (Note 11)
Stockholders' Equity
Common stock, $.01 par value, 50,000,000
shares authorized, 4,559,263, 3,832,009
and 3,192,518 shares issued and
outstanding at June 30, 1999 and
December 31, 1998 and 1997,
respectively 45,593 38,320 31,925
Additional paid in capital 2,729,433 2,059,284 1,675,693
Accumulated deficit (2,331,273) (1,877,828) (1,194,057)
----------- ----------- -----------
Total Stockholders' Equity 443,753 219,776 513,561
Total Liabilities and Stockholders'
Equity $ 756,479 $ 519,854 $ 955,249
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
- F5 -
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (AUDITED)
June 30, December 31,
1999 1998 1998 1997
(Unaudited) (Unaudited) (Audited) (Audited)
REVENUES
Service and other $ 42,490 $ 40,811 $ 104,496 $ 135,379
Installation - - 2,106 -
------------ ----------- ---------- ---------
Total Revenues 42,490 40,811 106,602 135,379
COSTS AND EXPENSES
Operating 63,353 76,097 159,840 136,073
General and
administrative 325,424 165,243 359,920 381,966
Depreciation and
amortization 94,908 138,120 252,396 215,066
Impairment of
license
acquisition costs - - - 303,797
--------- ---------- --------- ---------
Total Costs and
Expenses 484,685 379,460 772,156 1,036,902
Net Loss from
Operations (442,195) (338,649) (665,554) (901,523)
----------- ----------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income - 2,800 2,230 2,800
Interest expense (11,250) (10,223) (20,447) (10,649)
Recovered funds,
bankruptcy - - - 313,717
Total Other
Income (Expense) (11,250) (7,423) (18,217) 305,868
Net Loss $ (453,445) $ (346,072) $ (683,771) $ (595,655)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic Loss Per Share (.11) (.11) (.20) (.19)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted Average
Number of Shares
Outstanding 4,323,136 3,192,518 3,359,207 3,192,518
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
The accompanying notes are an integral part of these financial statements.
- F6 -
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (AUDITED)
Common Additional
Stock Par Paid-in Accumulated
Shares Value Capital Deficit Total
--------- ------- ----------- ------------ --------
Balance, December 31,
1996 (restated) 3,192,518 $31,925 $ 1,675,693 $ (598,402) 1,109,216
Net Loss - - - (595,655) (595,655)
--------- ------- ----------- ------------ ---------
Balance, December 31, 3,192,518 31,925 1,675,693 (1,194,057) 513,561
1997
Conversion of Debtor
Certificates to
Common Stock 466,000 4,660 228,340 - 233,000
Exercise of Class A
Warrants for
Common Stock 66,020 660 48,855 - 49,515
Exercise of Class B
Warrants for Common
Stock 107,471 1,075 106,396 - 107,471
Net Loss - - - (683,771) (683,771)
--------- ------- ----------- ------------ ---------
Balance, December 31, 3,832,009 $38,320 $ 2,059,284 $(1,877,828) $219,776
1998
Exercise of Class A
Warrants for Common
Stock 199,331 1,994 147,505 - 149,499
Exercise of Class B
Warrants for Common
Stock 527,923 5,279 522,644 - 527,923
Net Loss - - - (453,445) (453,445)
--------- ------- ----------- ------------ ---------
Balance, June 30,
1999 (unaudited) 4,559,263 $45,593 $ 2,729,433 $(2,331,273) $443,753
========= ======= =========== ============ =========
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (AUDITED)
June 30, December 31,
1999 1998 1998 1997
(Unaudited) (Unaudited) (Audited) (Audited)
CASH FLOWS FROM
OPERATING
ACTIVITIES
Net loss $ (453,445) $ (346,072) $ (683,771) $(595,655)
Adjustments to
reconcile net
loss to net
cash used in
operating activities:
Depreciation and
amortization 94,908 138,120 252,396 215,066
Impairment of license
acquisition costs - - - 303,797
Changes in operating
assets and liabilities:
Employee advances (375) - - -
Trade accounts
receivable - - (675) (533)
Prepaid expenses 9,000 - (18,000) 2,363
Inventory (1,014) - 13,358 (24,197)
Deposits - - 18,950 3,750
Postpetition
liabilities - (61,500) (61,500) 61,500
Accrued interest 11,250 19,423 29,647 9,200
Accrued payroll
taxes 1,400 (1,573) 713 4,518
----------- ----------- ----------- -----------
Net Cash Used in
Operating Activities (338,276) (251,602) (448,882) (20,191)
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of property
and equipment (20,715) (5,775) (22,152) (111,009)
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (AUDITED)
June 30, December 31,
1999 1998 1998 1997
(Unaudited) (Unaudited) (Audited) (Audited)
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from exercise
of Common Stock
Warrants 677,421 - 156,986 -
Proceeds from sale of
debtor certificates - 185,850 185,850 53,150
Proceeds from issuance
of Notes - 75,000 75,000 175,000
Increase (decrease) in
Prepetition Liabilities - (138,320) (138,320) 126,889
----------- ----------- ----------- -----------
Net Cash Provided by
Financing Activities 677,421 122,530 279,516 355,039
----------- ----------- ----------- -----------
Net Increase (Decrease)
in Cash and Cash
Equivalents 318,430 (134,847) (191,518) 223,839
Cash and Cash
Equivalents, beginning
of period 56,168 247,686 247,686 23,847
----------- ----------- ----------- -----------
Cash and Cash
Equivalents, end of
period $ 374,598 $ 112,839 $ 56,168 $ 247,686
=========== =========== =========== ===========
NONCASH TRANSACTIONS:
Conversion of Debtor
Certificates to
Common Stock $ - $ - $ 233,000 $ -
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENT
DECEMBER 31, 1998 (AUDITED)
JUNE 30, 1999 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Mobile Limited Liability Company (the Debtor) was a Nevada limited liability
company formed on April 25, 1994 for purposes of acquiring and operating certain
FCC licenses in the Mobile, Alabama area. The majority interest member of the
LLC was a similarly named general partnership, Mobile Wireless Partners
(Partners) comprised of 1,094 partners, with a 94.5% interest in the Debtor.
Pursuant to the Plan of Reorganization filed by Mobile Wireless, LLC, Advanced
Wireless Systems, Inc. was created and emerged from Bankruptcy on January 8,
1998 as the Reorganized Debtor (collectively, called the Company)
Additionally, the Plan included the acquisition by the Company of the Partners'
FCC License in exchange for 3,192,518 shares of the Company's common stock,
3,068,066 B Warrants exercisable on a 1 for 1 basis for the Company's common
stock, and the extinguishment of an intercompany loan from Partners totaling
$100,000. The License has been recorded by the Company at the Partners'
historical cost basis which was $225,000. This treatment is consistent with
requirements for exchanges between entities under common control. The financial
statements of the Company have been retroactively restated to present the
reorganization and license acquisition as if the Company had emerged from
bankruptcy as of the earliest period presented.
The Company is an established provider of wireless television service in the
Mobile, Alabama market, primarily serving rural and outlying areas where the
delivery of traditional land-based cable television service is impractical. The
Company recently acquired the technology to provide high speed Internet access
through its existing broadcast frequencies and is beginning to develop a base of
service for these users, as well as continuing to provide wireless television
service to the existing market.
Reorganization
On August 23, 1997, the Debtor filed a Petition with the United States
Bankruptcy Court in the Northern District of Texas, for relief under Chapter 11
of the U.S. Bankruptcy Code, Case Number 397-37735-HCA-11. Under Chapter 11,
certain claims against the Company in existence prior to the filing of the
petition for relief under the Federal bankruptcy laws were stayed while the
Company continued business operations as Debtor-in-Possession. On October 18,
1997, the Bankruptcy Court further authorized the issuance and sales of up to
$1,000,000 in Certificates of Indebtedness to raise new capital for the Company
pursuant to Section 364(c) of the Code. On November 6, 1997, the Company filed
a proposed Plan of Reorganization (the Plan). Under the Plan, a new
corporation would be formed such that, upon confirmation of the Plan, all
assets and liabilities of the Debtor would be assumed by the corporation, and
all equity interests in the Debtor would be extinguished. The resulting
reorganized debtor, Advanced Wireless Systems, Inc., would
F-10
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
carry on the business activities of the Debtor. On January 8, 1998, the
Bankruptcy Court confirmed the Company's Plan, which provided for the following:
Prepetition liabilities subject to compromise - As discussed in Note 9, these
unsecured claimants may have portions of their claims rejected. Pursuant to the
Plan, creditors with claims less than $1,000 will be paid in full by the Company
following confirmation. Creditors with claims in excess of $1,000 will either
be paid an amount agreed to by the parties in interest, or may elect to receive
shares of the Company's common stock in lieu of payment. All liabilities within
this category have been discharged as of December 31, 1998.
Postpetition liabilities - These amounts include professional fees, costs of
administration, wage and tax claims, and certificate of indebtedness
noteholders. Claimants for professional fees and certificate holders may elect
to receive shares of the Company's common stock in lieu of payment. All
liabilities within this category have been discharged as of December 31, 1998.
Management Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Revenues from wireless subscription services are recognized monthly upon
billing. Initial hookup revenue is recognized to the extent of direct selling
costs incurred. To date, direct selling costs have exceeded installation
revenues.
Inventory
Inventories consist of high speed modems held for resale and installation
materials, including antennas, cabling, and various other hardware and parts.
Inventory is stated at the lower of cost (first in, first out) or market.
Provision has been made for overstocked, slow moving, and obsolete inventory.
Depreciation
Property and equipment are carried at cost and depreciated on a straight-line
basis over their estimated useful lives, ranging from 2.5 to 15 years.
Maintenance and repair costs are charged to expense as incurred; major renewals
and betterments are capitalized. Subscriber installation costs are capitalized
and amortized over a 2.5 year period, the approximate average subscription term
of a
F-11
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
subscriber. The costs of subsequently disconnecting and reconnecting are charged
to expense in the period incurred.
License Acquisition Costs
License acquisition costs include costs incurred to develop or acquire wireless
cable licenses. Costs incurred to acquire or lease licenses issued by the
Federal Communications Commission (FCC) are deferred and are amortized ratably
over 15 years. In 1997 the Company recorded an impairment loss of $303,797 and
simultaneously revised the deferral period from 15 years to 5 years. The
revision decreased net income and increased net loss per share for the year
ended December 31, 1998 by approximately $49,000 and $.02 per share,
respectively. Accumulated amortization related to these costs was $316,361 at
June 30, 1999 (unaudited), and $264,241 and $160,000 at December 31, 1998 and
1997, respectively (audited).
Marketing and Direct Selling Costs
Marketing and direct selling costs are expensed as incurred. These costs
totaled $17,834and $6,307 at June 30, 1999 and 1998, respectively (unaudited)
and $12,612 and $4,961 at December 31, 1998 and 1997, respectively (audited).
Fair Value of Financial Instruments
The carrying value of cash, receivables, and accounts payable approximates fair
value due to the short maturity of these instruments.
Impairment of long-lived assets (SFAS 121)
In March 1995, the FASB issued SFAS No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, which requires
that long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The new
standard is effective for fiscal years beginning after December 15, 1995.
After considering the Company's history of operating losses and the uncertainty
of a continuation of future operating losses, changes in the Company's strategic
direction, and certain industry factors, the Company determined that assets with
a carrying value of $620,848 were impaired according to the provisions of SFAS
No. 121, and wrote down the carrying value of such assets by $303,797 as of
December 31, 1997, to their estimated fair value. Fair value was based on
recent transactions in the wireless cable industry, including changes in the
Company's use of these assets, and estimates of the future earnings from
alternative uses for these assets.
F-12
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Common Stock
The Company has authorized 50,000,000 shares of $.01 par value common stock.
Each share entitles the holder to one vote. There are no dividend or
liquidation preferences, participation rights, call prices or dates, conversion
prices or rates, sinking fund requirements, or unusual voting rights associated
with these shares.
Warrants
Warrants to purchase up to 2,652,291 shares of Common Stock of the company,
issued pursuant to the Plan of Reorganization and in conjunction with the
conversion of Debtor Certificates, were outstanding at June 11, 1999. The
warrants issued by the Company include A and B warrants having an exercise
price of $.75 and $1, respectively. All outstanding warrants had original
expirations of May 31, 1999, but were subsequently extended until October 31,
1999.
Income Taxes
Deferred income taxes reflect the impact of temporary differences between the
assets and liabilities recognized for financial reporting purposes and amounts
recognized for tax purposes. There are no provisions for income taxes for the
years ended December 31, 1998 and 1997, as the Company experienced losses.
Management has established a complete allowance for the deferred tax asset
arising from possible future utilization of operating losses. 1998 was the first
year in which the Company would report taxes as a corporation. Information
concerning the Company's net operating loss for 1998 was not available at the
time of these financial statements.
Earnings Per Share (SFAS 128)
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per
Share, which was adopted by the Company for the year ended December 31, 1997.
SFAS 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share based upon the weighted average number
of common shares for the period. It also requires dual presentation of basic
and diluted earnings per share for companies with complex capital structures.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Warrants to purchase shares of common stock were
not included in the computation of loss per share as the effect would be
antidilutive. As a result, the basic and diluted earnings per share amounts are
identical.
F-13
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-based Compensation (SFAS 123)
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation. This statement applies to the
financial statements for fiscal years beginning after December 15, 1995. It
defines a fair value based method of accounting for an employee stock option or
similar equity instrument.
However, it also allows an entity to continue to measure compensation costs for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, Accounting for Stock Issued to Employees. Under the fair
value based method, compensation costs is measured at the grant date based on
the value of the award and is recognized over the service period, which is
usually the vesting period. Under the intrinsic value based method,
compensation costs are the excess, if any, of the quoted market price of the
stock at grant date or other measurement date over the amount an employee must
pay to acquire the stock.
The Company has elected to account for stock-based compensation under APB
Opinion No. 25. The provisions of this statement have been implemented for the
year ended December 31, 1998.
New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 (SFAS 130), Reporting Comprehensive Income. This statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 has
been adopted by the Company for the period ended December 31, 1997, which had no
material effect on the accompanying financial statements.
In June 1997, the FASB issued Statements of Financial Accounting Standards No.
131 (SFAS 131), Disclosures about Segments of an Enterprise and Related
Information. The statement requires the Company to report income/loss, revenue,
expense and assets by business segment including information regarding the
revenues derived from specific products and services and about the countries in
which the Company is operating. The Statement also requires that the Company
report descriptive information about the way that operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the Company's general-purpose financial statements, and changes in
the measurement of segment amounts from period to period. SFAS 131 has been
adopted by the Company for the period ended December 31, 1997, which had no
material effect on the accompanying financial statements or required
disclosures.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AcSEC) issued Statement of Position
(SOP) 98-5, Reporting on the Costs of Start-up Activities. SOP 98-5 establishes
standards for the reporting and disclosure of
F-14
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
start-up costs, including organization costs. The Company adopted SOP 98-5 on
January 1, 1999. The Company believes that the adoption of this statement will
not have a material effect on the Company's financial position or results of
operations.
Unaudited Interim Periods Ended June 30, 1999 and 1998
The accompanying financial statements include unaudited financial information
for the six month periods ended June 30, 1999 and 1998. In the opinion of
management, the accompanying unaudited financial statements include all
adjustments, consisting only of normally recurring adjustments, necessary to
present fairly the Company's financial position and the results of its
operations and cash flows for the periods presented. The results of operations
for the three month period is not, in management's opinion, indicative of the
results to be expected for a full year of operations.
NOTE 2 - INVENTORIES
Inventories consist of the following:
June 30, December 31,
1999 1998 1997
(Unaudited) (Audited) (Audited)
Inventory held for resale $ 24,195 $ 24,195 $ 30,875
Installation materials 21,769 20,754 27,432
$ 45,964 $ 44,949 $ 58,307
----------- --------- ---------
----------- --------- ---------
NOTE 3 - FIXED ASSETS (Continued)
Furniture and equipment are summarized as follows:
June 30, December 31,
1999 1998 1997
(Unaudited) (Audited) (Audited)
Cost:
Machinery and equipment $ 587,201 $ 566,486 $561,210
Furniture and fixtures 21,801 21,801 21,301
Auto and trucks $ 5,325 $ 5,325 $ 5,325
Subscribed installation costs 38,160 47,700 72,504
Accumulated depreciation (554,389) (526,234) (432,844)
$ 98,098 115,078 227,844
----------- --------- ---------
----------- --------- ---------
NOTE 4 - OPERATING LEASES
The Company leases office and warehouse space subject to a six year lease,
expiring March 29, 2000. The lease provides for monthly lease payments of
$2,800, and extends the option to renew the lease for three successive three-
year terms. Upon execution of the lease, the Company delivered $33,600 to the
Lessor as deposit for the sixth year's base payments, or as security in the
event of default. In late 1998, the Company negotiated with the Lessor to
release the security deposit to the Lessor in exchange for reduced lease
payments. Beginning January 1999, the lease payments are $1,300 per month for
the remaining 15 months of the lease. Accordingly, the prepaid portion of the
deposit has been reclassified to a prepaid asset.
F-15
<PAGE>
The Company leases the site for its transmitter subject to a five-year lease
expiring March 13, 2000. The lease provides for monthly payments of $1,000.
The Company leases four ITFS channels, referred to as the E Block, subject to
a five-year lease term expiring May 9, 1999. The base provides for monthly base
payments of $2,000, and extends the option to renew the lease for successive
five-year terms. In May 1999, the Company renewed the lease at a reduced lease
rate of $1,200 per month for an additional five years.
The Company leases four MDS channels, referred to as the G Block subject to an
initial five-year term, with an automatic five year renewal term, having been
renewed on March 22, 1996, and expiring on March 22, 2001. The base provides
for monthly lease payments of $1,000. At lease expiration, the Company has the
first right of refusal to negotiate a new lease agreement for the channels.
NOTE 4 - OPERATING LEASES (Continued)
Amounts paid by the Company to acquire the channel leases and licenses
agreements have been capitalized and are being depreciated over 5 years. The
monthly lease payments are expensed.
Future minimum lease payments under the Company's operating leases are as
follows:
F-16
<PAGE>
1999 $
2000 $ 74,400
2001 $ 37,800
2002 $ 17,400
2003 $ 14,400
Thereafter $ 14,400
3,600
$ 162,000
----------
----------
Channel lease expense totaled $9,000 and $9,000 at June 30, 1999 and 1998,
respectively (unaudited) and $33,000 and $36,000 at December 31, 1998 and 1997,
respectively (audited). Other rents totaled $17,818 and $23,670 at June 30, 1999
and 1998, respectively (unaudited), and $44,498 and $45,600 at December 31, 1998
and 1997, respectively (audited).
NOTE 5 - NOTES PAYABLE, RELATED PARTIES
Notes payable consist of two notes from two individuals who are officers and
directors of the Company. The notes are secured by liens on all license
agreements, channel leases, contracts, accounts receivable, equipment leases,
and all additions replacements, machinery, parts and goods used by the Company
in the operations of its business. The original notes bore interest at 12%,
however, the Plan of Reorganization subsequently amended the terms of repayment
providing for interest to accrue at 9%. The balance sheets at June 30, 1999,
and December 31, 1998 and 1997, reflect accrued interest payable on these notes
of $50,097, $38,847 and $9,200, respectively.
NOTE 6 - DEBTOR CERTIFICATES
As discussed in Note 1, on October 18, 1997, the Bankruptcy Court authorized the
issuance and sales of up to $1 million in Certificates of Indebtedness to raise
new capital for the reorganized debtor pursuant to Section 364 of the Code. The
Certificates were due two years from the Effective Date of the Plan, and bore
interest at 10% annually. On May 27, 1998, the Bankruptcy Court Clerk disbursed
$242,043, representing proceeds from sales of the Certificates of $239,000, and
interest income of $3,043 to Sid Diamond, Esq. (The disbursing agent) who in
turn wired the funds to the Company. A total of 120 individuals participated in
the program. The Plan of Reorganization provided that the Debtor Certificate
holders could, at their exclusive option, convert their debt at a conversion
rate of one unit of equity for each $1 lent. A unit of equity consists of two
shares of
NOTE 6 - DEBTOR CERTIFICATES (Continued)
Common Stock and two Class A Warrants allowing the holder to purchase
additional shares at $0.75 each. 118 holders opted to convert their
certificates and two opted not to convert. On July 31, 1998, 466,000 shares of
Common Stock and 466,000 A Warrants were issued to the 118 Certificate
holders. Stock and Warrants issued to this group have no restrictions.
As discussed in Note 1, The Plan of Reorganization also provided that the Debtor
would purchase from Mobile Wireless Partners certain MDS licenses issued by the
FCC and owned by the Partnership. The Company agreed to purchase these
licenses, referred to as the H Block for $225,000. This transaction was
effective the date of confirmation. The Plan of Reorganization also provided
that the Company would issue a Debtor Certificate to Mobile Partners in a like
amount of the purchase price pursuant to Section 364 of the Bankruptcy Code.
The plan further provided that the Debtor Certificate could be converted into
3,192,518 shares of Common shares at a stated value of $1 each, and 3,068,066
Class B Warrants allowing the holder to purchase additional shares at $1.00
each for a period of 1 year. In the event of conversion of the Debtor
Certificate into the stock and warrants, the Partnership agreed by contract not
to assign, pledge, transfer or otherwise dispose of the 3,192,518 shares of
Common Stock and 3,068,066 warrants for one year from the date of conversion.
126,000 shares of Common Stock held no such restriction. Further the shares and
warrants to be issued could only be issued to the partners upon dissolution of
the Partnership. The Partnership was dissolved on July 15, 1998 and pursuant to
the winding up of the partnership, the shares and warrants were issued and
distributed to the Partners. The financial statements have been retroactively
restated to reflect the acquisition of the licenses, issuance of Common Stock,
and discharge of an intercompany loan as of the earliest period presented.
NOTE 7 - STOCK OPTION PLANS
On December 11, 1997, the Company's Board of Directors approved an Incentive
Stock Option Plan for employees, officers, and directors. The plan provides for
the issuance of a maximum of 1,000,000 shares of the Company's common stock,
issuable at the discretion of the Board of Directors, as indicated in the Plan.
As of December 31, 1998, no common stock had been issued under the Company's
stock option plan.
Also on December 11, 1997, the Board of Directors authorized the issuance of
365,600 options to officers and directors of the Company, exercisable at $.25
per share for an option term of two years. At December 31, 1998, none of these
options had been issued or exercised.
The Plan further reserved 350,000 shares of common stock to be granted in the
future at an exercise price of $.25 per share.
NOTE 8 - SUBSEQUENT EVENTS
As of June 11, 1999, shareholders had exercised a total of 708,284 Warrants
issued pursuant to the Plan of Reorganization. The exercised warrants included
193,682 A Warrants, and 514,602 B Warrants for a total of $659,246.
NOTE 8 - SUBSEQUENT EVENTS (Continued)
In the first quarter of 1999, management made the decision to suspend new
installations of wireless cable television service based on the current costs of
these installations, which management believes exceed the anticipated subscriber
F-17
<PAGE>
revenues. This suspension will remain in effect until management can evaluate
alternatives for performing the installations in a more cost effective manner.
NOTE 9 - GOING CONCERN
As discussed in Note 1, the Company has emerged from Chapter 11 Bankruptcy. The
Company's ability to continue as a going concern depends, in part, on its
ability to develop new markets for its MDS frequencies including, but not
limited to, high speed Internet access, and to raise new capital through public
offerings of the Company's stock. There can be no assurance that the Company
will successfully develop new markets for its services, or that sales of the
Company's stock will generate sufficient working capital to offset operating
losses.
NOTE 10 - INCOME TAXES
Under SFAS 109, deferred tax assets or liabilities are computed based on the
temporary differences between financial statements and income tax bases of
assets and liabilities using the enacted marginal income tax rate in effect for
the year in which the differences are expected to reverse. Deferred income tax
expenses or credits are based on the changes in the deferred income tax assets
or liabilities from period to period. At December 31, 1998, the Company had
federal and state net operating loss carryforwards available of approximately
$266,670 which will expire in year 2013.
The approximate tax effect of temporary differences which gave rise to
significant deferred tax assets at December 31, 1998, are as follows:
NOTE 10 - INCOME TAXES
Net operating losses $ 266,670
Deferred tax assets
Valuation allowances (266,670)
Net deferred tax assets $ -
----------
----------
At December 31, 1998, a valuation allowance has been provided against the
deferred tax asset generated by net operating loss carryforwards due to the
uncertainty of the future utilization.
F-18
<PAGE>
NOTE 10 - INCOME TAXES (Continued)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax benefit for the year ended December 31, 1998, is as follows:
Tax at U.S. statutory rates 34%
State income taxes, net of federal tax benefits 5%
39%
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company has entered into a series of noncancelable agreements to purchase
entertainment programming for rebroadcast which expire through 2000. The
agreements generally require monthly payments based upon the number of
subscribers to the Company's systems, subject to certain minimums. Such expenses
totaled $30,939 and$11,055 for the six months ended June 30, 1999 and 1998,
respectively (unaudited), and $65,149 and $85,737 for the years ended December
31, 1998 and 1997, respectively (audited).
F-19
<TABLE> <S> <C>
<ARTICLE>5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> DEC-31-1999 JUN-30-1999
<CASH> $ 56,168 $ 374,598
<SECURITIES> $ 0 $ 0
<RECEIVABLES> $ 2,608 $ 2,608
<ALLOWANCES> $ 0 $ 0
<INVENTORY> $ 44,949 $ 45,964
<CURRENT-ASSETS> $ 121,725 $ 448,145
<PP&E> $ 641,312 $ 652,487
<DEPRECIATION> $ 526,234 $ 554,389
<TOTAL-ASSETS> $ 519,584 $ 756,479
<CURRENT-LIABILITIES> $ 300,078 $ 312,726
<BONDS> $ 0 $ 0
$ 0 $ 0
$ 0 $ 0
<COMMON> $ 38,320 $ 45,593
<OTHER-SE> $ 181,456 $ 398,160
<TOTAL-LIABILITY-AND-EQUITY> $ 519,854 $ 519,854
<SALES> $ 0 $ 0
<TOTAL-REVENUES> $ 106,602 $ 42,490
<CGS> $ 159,840 $ 64,353
<TOTAL-COSTS> $ 772,156 $ 484,685
<OTHER-EXPENSES> $ 0 $ 0
<LOSS-PROVISION> $ 0 $ 0
<INTEREST-EXPENSE> $ 2,230 $ (11,250)
<INCOME-PRETAX> $ (665,554) $ (453,445)
<INCOME-TAX> $ 0 $ 0
<INCOME-CONTINUING> $ (683,771) $ (453,445)
<DISCONTINUED> $ 0 $ 0
<EXTRAORDINARY> $ 0 $ 0
<CHANGES> $ 0 $ 0
<NET-INCOME> $ (683,771) $ (453,445)
<EPS-BASIC> $ (0.20) $ (0.20)
<EPS-DILUTED> $ (0.20) $ (0.11)
</TABLE>
