SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
Amendment No. 3 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...................................2
Our Business Plan...........................................4
Regulation..................................................8
Markets....................................................14
Competition................................................15
Risks......................................................18
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................22
Recent Events............................................. 24
Results of Operations......................................26
Liquidity and Capital Resources............................28
Year 2000 Compliance.......................................31
Item 3 Description of Property....................................31
Item 4 Security Ownership of Certain Beneficial Owners and
Management................................................32
Item 5 Directors, Executive Officers, Promoters and Control
Persons...................................................33
Item 6 Executive Compensation....................................35
Summary Compensation Table................................35
Stock Options Granted in 1998.............................35
Year End Stock Option Value...............................36
Directors' Compensation...................................36
Item 7 Certain Relationships and Related Transactions............37
Item 8 Legal Proceedings.........................................37
Item 9 Market for Common Equity and Related Stockholder Matters..37
Item 10 Recent Sales of Unregistered Securities...................38
Item 11 Description of Securities.................................40
Item 12 Indemnification of Directors and Officers.................41
Item 13 Financial Statements and Supplementary Data...............41
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Item 14 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.......................41
Item 15 Financial Statements and Exhibits.........................42
Signatures...........................................................42
Financial Statements.................................................F-1
Advanced Wireless Systems, Inc. Financial Statements.................D-1
Pro Forma Financial Information......................................P-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 provide
internet service to approximately 1,000 customers in the Mobile area. We
are expanding 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.
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/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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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.
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 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 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 raised by sales of partnership units.
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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 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 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.
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.
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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 and Mobile Wireless Partners, 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
Marchand May 1999. In July 1999, we repaid the $75,000 principal amount of
Mr. Hayes' 1997 loan, but the remaining loan of $175,000, plus accrued
interest which totaled $54,034 on September 30, 1999, remains outstanding and
unpaid. These obligations are secured by all of our property, including our
FCC licenses which are essential to our operation. The lender has not
demanded payment nor declared a default in the loan, but neither has he waived
his right to do so. We are negotiating with the lender to settle or
renegotiate the terms of our debt to him. At present, we could not repay him
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.
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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. As of February
2000, we have about 70 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 plan to discontinue our wireless TV
service and focus on Internet 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
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.
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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 November 30, 1999, we were providing dial-in Internet service to
approximately 1,000 customers at the lower speeds of conventional telephone
connections, at monthly subscription charges from $14.95 to $19.95 each.
Also as of November 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
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.
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
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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
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.
In addition to expanding our wireless Internet services and customer base, we
are attempting to expand by acquiring other, similar Internet carriers and
wireless cable operators that can be converted to high speed Internet
carriers. In August 1999, we acquired a local, telephone connection Internet
company in Mobile, Alabama, Dibbs Internet Services, Inc., for $225,000 cash.
The Dibbs acquisition had the effect of immediately increasing our cash flow
and customer base. See, Management's Discussion and Analysis of Financial
Condition and Results of Operations. We are looking for other acquisition
or merger candidates in other markets outside of Mobile.
On November 30, 1999, we had six full time and two part time employees. We
do not presently have sufficient sales staff to develop our proposed Internet
business. As of November 30, 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.
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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.
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
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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 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, forth
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 four MDS and four ITSF
channels. See, Description of Property.
The licenses granted to us by the FCC required us to construct transmission
capabilities for a number of channels in our Mobile market. We have
fulfilled all of our construction commitments to the FCC for our 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
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 hardier 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 IMPS 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
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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
Webusers 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
every 100 days. Additionally, Forrester Research estimates that the number of
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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
("IMPS")connectivity to the Internet, the number of users downloading
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information at 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 IMPS, 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. It
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,
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.)
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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 1,000. 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.
We believe that there are attractive companies in businesses similar to ours
which we can acquire at reasonable prices and which will add to our net
revenues, including other wireless cable operations. We made our first such
acquisition, the cash purchase of Dibbs Internet Services, Inc., in the third
quarter of 1999. See, Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Events -- Acquisition of Dibbs
Internet. We have entered negotiations with other businesses to acquire them
or enter into a business combination with them, though these negotiations have
not been concluded. Acquisition of these businesses, possibly in exchange for
stock or through a merger, is one potential source of increased revenue for
us.
Since confirmation of the Mobile LLC Plan of Reorganization, our stockholders
who acquired stock as part of the Plan and who were investors in the earlier
partnership have exercised warrants that were distributed to those
stockholders as part of the Plan. We have depended on the funds from exercise
of these warrants for operating capital during the past year, and we expect
that we will continue to depend on additional stock sales pursuant to exercise
of warrants, for additional operating capital in the next year. Failure to
make successful and profitable acquisitions or to raise more capital from
warrant exercises or may jeopardize our continued operations.
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.
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Our senior secured indebtedness is due and unpaid.
In 1997 and 1998, our operations were partially financed by loans from two of
our directors. At November 30, 1999, $231,659 in principal and interest on
the loans remained outstanding and unpaid. The outstanding loan is secured
by essentially all of our assets, including our wireless frequency licenses.
This loan is now due and payable in full, together with accrued, unpaid
interest. The lender has not demanded payment nor declared the loan in
default, but he 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 lender 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
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.
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We are also at risk due to fundamental changes in the way that Internet
accessary 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.
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 customer 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 make 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 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. On February
22, 2000, our common stock was held by 1,224 shareholders of record. As a
general proposition, some of the following factors may affect the development
of a market for our stock and market prices:
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- - 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
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
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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
customers from a current customer list of approximately 1,000. 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. The Plan combined Mobile LLC with
its parent, Mobile Partners, to form the present Company. Because we are in
substance the same entity as our predecessor, our financial statements reflect
our combined assets and operations as of 1997, although Partners reported no
operating activity in prior years. Reporting our activities this way is
consistent with accounting rules for entities under common control. 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
$126,889 at December 31, 1997, and discharged prepetition liabilities of
$138,320 in fiscal 1998.
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<PAGE>
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.
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 provided 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
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<PAGE>
router, software, a backup power supply and other network accessories. Dibbs
serviced 730 subscribers, who use 56k, 64k or 128k ISDN telephone services
and e-mail dial-up services. The Dibbs basic service began at $19.95 per
month. The subscriber base included 58 domains and 47 commercial websites. In
the first six months of 1999, Dibbs had net income of $24,870 based on
revenues of $98,580.
The asset purchase agreement includes a two year non-competition clause in
which Dibbs and Ms. Summers agree not to compete with our Company improvising
Internet services within a 75 mile radius of Mobile for two years. Ms.
Summers provided consulting services to us, to help us take over and operate
the Dibbs business, for two months after the purchase, for $1,200 per week.
Audited financial statements for Dibbs for the six months ended June 30,
1999,and the years ended December 31, 1998 and 1997, and a pro forma
consolidated balance sheet and pro forma consolidated statement of operations
of Advanced Wireless, are included in this Form 10-SB, beginning at pages D-1
and P-1.
Impairment of Long-Lived Assets
After considering our history of operating losses and the uncertainty of a
continuation of future operating losses, changes in our strategic direction,
and certain industry factors, we determined to write down the carrying value
of our license acquisition costs in the 2nd Quarter of 1999, according to
the provisions of SFAS No. 121. We recorded an impairment loss and wrote
down the carrying value of such assets by $303,797 as of June 30, 1999, 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.
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
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<PAGE>
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 Nine Months Ended September 30, 1999, as
compared to the Nine Months Ended September 30, 1998
During the nine months 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 nine months ended September 30,
1999, we had a net loss from operations of $645,712, which was a $169,749
(36%) increase from our operating loss of $475,963 in the first nine months
of1998. Our basic loss per share was $.14 in the first nine months of 1999,
the same basic loss per share as in the first nine months of 1998.
The Dibbs acquisition increased the number of our Internet customers from
about 260 to about 1,000 (by February 2000 the number had decreased to about
885) and substantially increased our cash flow from operations, though it did
not increase cash flow enough to make us profitable overall. We acquired
Dibbs in August 1999. For the quarter ended September 30, 1999, our total
revenue was $48,199. This represents an increase of $27,915 (137%) from total
revenue of $20,284 in the quarter ended June 30, 1999 and an increase of
$12,860 (36%) from total revenues of $35,339 in the quarter ended September
30, 1998. Revenue from the Dibbs subscribers accounted for nearly all of this
increase.
In the first nine months of 1999, we ceased new cable TV installations and
improved our operating efficiency. We intend to cease offering wireless TV
service. 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 service. For financial
statement purposes, we consider operating expenses to be costs such as
entertainment programming expense, channel lease expense, wireless cable
equipment installation, maintenance and supply expense. Operating expenses
decreased by $18,564 (13%) to $123,548, down from $142,112 in the nine months
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).
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<PAGE>
Our loss in the first nine months of 1999 was mainly due to the $303,797
provision for impairment of license acquisition costs and to increased
general and administrative expenses, more than offset our slight increase in
total income. For financial statement purposes, we consider general and
administrative expenses to be indirect costs of running the company, such as
office rent, employee compensation, consulting and professional fees.
Through September 30, 1999, general and administrative expenses were
$476,376, a $255,672 (116%) increase from first nine months' 1998 G & A
Expenses of $220,704. We attribute the increase mainly to increased salaries
and professional fees in 1999 compared to 1998, as we incurred legal and
accounting expenses in preparation of this registration statement and in
negotiating for possible acquisitions of other businesses. Professional and
consulting fees totaled $140,807 for the first nine months of 1999, compared
to 29,786 in the same period in 1998. Salaries also increased in the first
nine months of 1999 to $147,613, compared to $99,599 for the same period in
1998. We were able to achieve economies of scale in employee expenses, but
an overall increase in staff size accounted for this increase, as we hired
additional technical employees to service the Internet operations.
Our new general manager and office manager, together with our president, 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 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 PROS
lines, saving $700 per month. These savings total about $4,840 monthly.
Depreciation and amortization expenses declined by $69,914 to $140,953 in the
first nine months of 1999, a 33% drop from depreciation and amortization
charges of $210,867 in the first nine months 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 was approximately the same the first nine months of 1999 as
in the same period in 1998 but decreased for the quarter ended September 30,
1999, compared to the quarter ended June 30, 1999. The interest charges are
from loans made to us by two of our directors during 1997 and 1998 to fund
our continued operations. On July 1, 1999, we repaid a $75,000 loan from one
of the directors. As a result, interest charges in the third quarter of 1999
were $3,938 compared to $5,625 in the second quarter. The remaining loan
from a director has matured, and the interest and principal is due and
payable in full. The lender has neither demanded repayment nor declared
default in the loan, but he also have not waived his right to do so. The
loan is secured by nearly all of our assets, including our wireless frequency
licenses. If we are unable to renegotiate or settle this debt, the lender
could demand repayment of the loan 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
$694,314, compared to an operating loss of $597,726 in 1997. 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
your wireless cable TV subscribers. At the same time, Operating expense
rosebay $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.
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 $712,531, a $420,673 (144%) increase from 1997
losses of $291,858. The total 1997 pre-recovery loss of $605,575 was offset
by the one time $313,717 gain for bankruptcy recoveries.
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 December 1999.
We believe that there are attractive companies in businesses similar to ours
which we can acquire at reasonable prices and which will add to our net
revenues, including other wireless cable operations. We made our first such
acquisition in the third quarter of 1999. See, -- Recent Events --
Acquisition of Dibbs Internet. We have entered negotiations with other
businesses to acquire them or enter into a business combination with them,
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<PAGE>
though these negotiations have not been concluded. Acquisition of these
businesses, possibly in exchange for stock or through a merger, is one
potential source of increased revenue for us.
Since confirmation of the Mobile LLC Plan of Reorganization, our stockholders
who acquired stock as part of the Plan and who were investors in the earlier
partnership have exercised warrants that were distributed to those
stockholders as part of the Plan. We have depended on the funds from
exercise of these warrants to purchase our common stock for operating capital
during the past year, and we expect that we will continue to depend on
additional stock sales pursuant to exercise of warrants, for additional
operating capital in the next year. In addition, we are exploring possible
acquisitions of similar businesses with positive cash flow to improve our
financial position. Failure to make successful and profitable acquisitions
or to raise more capital from warrant exercises or may jeopardize our
continued operations.
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. One of the loans was repaid in July 1999, but the second
loan of $175,000 remains due and unpaid. At September 30, 1999, accrued
interest on this loan was $54,034. The director has not demanded repayment
of the loan, but neither has he waived his rights to demand payment or
declare a default. We are attempting to settle or renegotiate the loan, but
if we are unable to settle or renegotiate, we could not repay it from our
cash reserves without jeopardizing our capital reserves. The loan is secured
by all of our property including our FCC licenses, which are essential to our
continued operations.
We had total assets of $625,240 at September 30, 1999, $794,892 at December
31, 1998, and $1,046,259 at December 31, 1997. At September 30, 1999,
license acquisition costs represented $138,602 (22% of our total
assets),compared to $532,000 (70% of our total assets) at December 31, 1998,
because of our write down of those assets in 1999. 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 $465,500 had been impaired at
June 30, 1999, according to the provisions of SFAS No. 121, recorded a prior
period adjustment and wrote down the carrying value of such assets by
$303,797 as of June 30, 1999, 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.
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<PAGE>
At September 30, 1999, license acquisition costs had decreased by $23.101 to
$138,602. This decrease represented amortization of these costs in the first
nine months of 1999.
Our inventory did not change materially from December 31, 1998 to September
30, 1999, because, after discontinuing new wireless cable TV service, we did
not use a material amount of our installation materials. In addition, growth
of our high speed Internet service has been slow, so we only used a few of
our high speed modems, the cost of which was not material to our statements.
Our prepaid expenses fell to $9,000 to at September 30, 1999, from $18,000
at December 31, 1998, (a 50% decrease), and deposits decreased to $11,400 at
September 30, 1999 from $15,900 at December 31, 1998, as we continued to
amortize our prepaid lease expenses and lease deposits. 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 $448,883, 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 nine months ended September 30, 1999, cash used in operating
activities was $495,907, compared to $336,382 for the first nine months of
1998. Our operating loss rose in the first nine months of 1999 compared to
1998 because we took a $303,797 charge for impairment of our license
acquisition costs and we increased operations and hired staff to ramp up our
Internet business.
Investing Activities.
In the third quarter of 1999, we purchased Dibbs Internet Services, Inc., for
$225,000 cash. Of that amount, we recorded $208,005 as goodwill, to be
amortized over the next 3 years. This is the first such acquisition since we
emerged from bankruptcy.
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 $22,151 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 nine months ended September 30, 1999, we spent $31,941 to purchase
additional equipment for our Internet service operations in Mobile, compared
to $27,072 spent on equipment purchases in the same period in 1998. While
first nine months' spending on equipment was up for 1999 compared to 1998, we
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<PAGE>
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
in1998, 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 nine months of 1999, we raised another $872,624 from the
exercise of warrants issued as part of the Plan. These funds were again used
to meet operating expenses. In the first nine months of 1998, we raised
$156,986 from the sale of warrants and we received a $75,000 loan from one of
our directors. In July 1999, we repaid this loan.
Year 2000 Compliance
In general, Year 2000 issues relate to the way that many computer programs
refer to dates and their ability to recognize dates after the end of 1999.
In 1999, we reviewed our information systems and non-information based,
automated systems for Year 2000 compliance. We upgraded some software
systems to resolve Year 2000 concerns at a total cost of about $6,650. Neither
we nor our suppliers or customers have had any Year 2000 problems to date.
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 $2,800. 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
we are currently leasing the E Group from TVCN on a month to month basis for
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<PAGE>
$1,200 per month. We believe that we would be offered an equal opportunity
Tobin 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 November 30, 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 September 30, 1999, 4,761,228 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) 614,198 15.60%
(1) Includes shares which the listed shareholder has the right to acquire
within 60 days after September 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
exercisable, 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 2002
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.
Class of 2001
Name Position Biographic Information
- ---- -------- ----------------------
Monte Julius President, Mr. Julius, who is 65, became involved
Director with our 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 President
the Board of of Melstrom Manufacturing Corporation,
Directors engaged in military procurements as a
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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 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, Mr. Hayes, 69, has owned and operated
Director Hayes Appraisal in Albany, Georgia, since
1986.
Miles Humphrey Treasurer, Mr. Humphrey, 79, has been retired since
Director 1992. He owned and operated a chicken
farming and egg production company,
Beaver Valley Eggs, Inc., from 1971 until
his 1992 retirement.
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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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, 130,132 100% $0.25 Jan. 9, 2000
President
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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 12/31/98 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, 0 $0 130,132 $32,533 1
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
- 36 -
<PAGE>
Number of Shares
Underlying Directors'
Options
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 became due and payable on March 31 and May 21, 1999. Accrued
interest on these loans amounted to $54,034 at September 30, 1999. On July 1,
1999, we repaid the $75,000 principal of Mr. Hayes' loan, but $229,034 in
principal and interest remains due and unpaid at September 30, 1999. Mr.
Tsoutsas has not demanded repayment of the amount owed, but neither has heaved
his rights to demand payment or declare a default. We are attempting to
settle or renegotiate the loan, but if we are unable to settle or renegotiate,
we could not repay them from our cash reserves without jeopardizing our
capital reserves. The loan is 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
- 37 -
<PAGE>
the purchase or sale of our shares are being made as of the date of this Form
10-SB.
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
- 38 -
<PAGE>
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.
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
clamor 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 January 14, 2000. Each warrant entitles the holder to purchase
one additional share of common stock per warrant at either $.75 or $1.00 per
- 39 -
<PAGE>
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 February 22, 2000, shareholders
exercised a total of 1,275,734 warrants pursuant to the Plan, including
409,955 A warrants and 967,268 B warrants. We received total consideration
of $1,274,734 on the exercise of these warrants through that date. 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 issue up to fifty million shares of one class of common
stock, par value $0.01 per share. On September 30, 1999, 4,761,230 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
- 40 -
<PAGE>
issuance of instruments that are convertible into or redeemable for common
shares.
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
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, D-1, and P-1, et seq., of
this Form 10-SB.
Item 14 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
- 41 -
<PAGE>
Item 15 Financial Statements and Exhibits
Financial Statements
See, pages F-1, D-1, and P-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.
2.2 Agreement to Purchase Assets between Advanced Wireless Systems,
Inc.,and Dibbs Internet Services, Inc., incorporated by reference
to the Company's Form 8-K dated August 25, 1999.
2.3 Bill of Sale from Dibbs Internet Services, Inc., to Advanced
Wireless Systems, Inc., incorporated by reference to the Company's
Form 8-K dated August 25, 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/ Date: March 3, 2000
- ----------------------------------
Monte Julius, President
- 42 -
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
TABLE OF CONTENTS
Page
ADVANCED WIRELESS SYSTEMS, INC.
Report of Independent Auditors F-2
Financial Statements for the Nine Months Ended September 30, 1999,
- ------------------------------------------------------------------
and the Years Ended December 31, 1998 and 1997
- ----------------------------------------------
Balance Sheets F-4
Statements of Operations F-6
Statements of Capital F-7
Statements of Cash Flows F-8
Notes to Financial Statements F-10
FINANCIAL STATEMENTS OF THE ACQUIRED BUSINESS: DIBBS
INTERNET SERVICES, INC.
Report of Independent Auditors D-1
Financial Statements for the Six Months Ended June 30, 1999,
- ------------------------------------------------------------
and the Years Ended December 31, 1998 and 1997
- ----------------------------------------------
Balance Sheets D-3
Statements of Operations D-4
Statements of Stockholders' Equity D-5
Statements of Cash Flows D-6
Notes to Financial Statements D-7
PRO FORMA FINANCIAL INFORMATION
Pro Forma Consolidated Balance Sheet of Advanced
Wireless Systems, Inc. as of June 30, 1999 - Unaudited P-1
Pro Forma Consolidated Statements of Operations of
Advanced Wireless Systems, Inc. for the Year Ended
December 31, 1998 and for the six months ended
June 30, 1999 - Unaudited P-3
Notes to Consolidated Pro Forma Financial Statements P-4
- F-1 -
<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, capital 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.
- F-2 -
<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, 4
and 13, whose date is February 28, 2000
- F-3 -
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
BALANCE SHEETS
SEPTEMBER, 1999 (UNAUDITED)
DECEMBER 31, 1998 AND 1997 (AUDITED)
September 30, December 31,
--------------- ------------------
1999 1998 1997
(Unaudited) (Audited) (Audited)
----------- --------- ---------
ASSETS
Current Assets
Cash $ 100,944 $ 56,168 $ 247,686
Accounts receivable, net 2,608 2,608 1,933
Prepaid expenses 9,000 18,000 -
Employee Advances 50 - -
Inventories 44,763 44,949 58,307
-------- -------- ---------
Total Current Assets 157,365 121,725 307,926
-------- -------- ---------
Fixed Assets, net of depreciation 114,681 115,078 227,496
-------- -------- ---------
Other Assets
Deposits 11,400 15,900 34,850
License acquisition costs, net 150,153 532,000 665,000
Intangibles, net 204,623 10,189 23,774
-------- -------- ---------
Total Other Assets 366,176 558,089 723,624
-------- -------- ---------
Total Assets $638,222 $794,892 $1,259,046
-------- -------- ---------
-------- -------- ---------
(Continued)
The accompanying notes are an integral part of these financial statements.
- F-4 -
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1999 (UNAUDITED)
DECEMBER 31, 1998 AND 1997 (AUDITED)
September 30, December 31,
--------------- ------------------
1999 1998 1997
(Unaudited) (Audited) (Audited)
----------- --------- ---------
LIABILITIES AND CAPITAL
Liabilities
Current Liabilities
Debtor certificates $ 6,000 $ 6,000 $ 53,150
Notes payable, related parties 175,000 250,000 175,000
Postpetition liabilities - - 61,500
Prepetition liabilities subject
to compromise - - 138,320
Accrued payroll taxes 4,924 5,231 4,518
Accrued interest payable 54,034 38,847 9,200
--------- ------- -------
Total Current Liabilities 239,958 300,078 441,688
--------- ------- -------
Commitments and Contingencies - - -
Total Liabilites 239,958 300,078 441,688
--------- ------- -------
Capital
Partners' Capital - - 817,358
Common stock, $.01 par value,
50,000,000 shares authorized,
4,761,230 and 3,832,009 shares
issued and outstanding at
September 30, 1999 and December
31,1998, respectively 47,612 38,320 -
Additional paid in capital 2,032,356 1,169,024 -
Accumulated deficit (1,681,704) ( 712,531) -
--------- -------- -------
Total capital 398,264 494,814 817,358
--------- -------- -------
Total Liabilities and Capital $ 638,222 $ 794,892 $1,259,046
--------- -------- ---------
--------- -------- ---------
The accompanying notes are an integral part of these financial statements.
- F-5 -
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (AUDITED)
September 30, December 31,
--------------------- --------------------
1999 1998 1998 1997
(Unaudited) (Unaudited) (Audited) (Audited)
----------- ----------- ---------- ----------
REVENUES
Service and other $ 90,689 $ 76,150 $ 104,496 $ 135,379
Installation - - 2,106 -
----------- ----------- ---------- ----------
Total Revenues 90,689 76,150 106,602 135,379
----------- ----------- ---------- ----------
COSTS AND EXPENSES
Operating 123,548 142,112 159,840 136,073
General and
administrative 476,376 220,704 359,921 381,966
Depreciation and
amortization 140,953 210,867 281,155 215,066
Provision for impairment
of license acquisition
costs 303,797 - - -
----------- ----------- ---------- ----------
Total Costs and Expenses 1,044,674 573,683 800,916 733,105
Net Loss from Operations (953,985) (497,533) (694,314) (597,726)
OTHER INCOME (EXPENSE)
Interest income - 2,230 2,230 2,800
Interest expense (15,188) (15,335) (20,447) (10,649)
Recovered funds,
bankruptcy - - - 313,717
----------- ----------- ---------- ----------
Total Other Income (Expense) (15,188) (13,085) (18,217) 305,868
----------- ----------- ---------- ----------
Net Loss $ (969,173) $ (510,638) $ (712,531) $ (291,858)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Basic Loss Per Share $ (.23) $ (.15) $ (.21) $ (.09)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Weighted Average Number
of Shares Outstanding 4,305,000 3,433,518 3,359,207 3,192,518
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
- F-6 -
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
STATEMENTS OF CAPITAL
FOR SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (AUDITED)
Common Additional Accumu
Partners' Stock Par Paid-In lated
Capital Shares Value Capital Deficit Total
---------- ------- ------ --------- --------- ------
Balance,
December 31, 1996 $1,109,216 - - - - $1,109,216
Net Loss (291,858) - - - - (291,858)
---------- ------- ------ --------- --------- -------
Balance,
December 31, 1997 817,358 - - - - 817,358
Recapitalization and
conversion of Partnership
Debtor Certificates to
Common Stock (817,350)3,192,518 31,925 785,433 - -
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 - - - - (712,531) (712,531)
---------- ------- ------ --------- --------- -------
Balance,
December 31, 1998 - 3,832,009 38,320 1,169,024 (712,531) 494,814
---------- ------- ------ --------- --------- -------
Exercise of Class A
Warrants for Common
Stock - 226,379 2,264 167,520 - 169,784
Exercise of Class B
Warrants for Common
Stock - 702,840 7,028 695,812 - 702,840
Net Loss - - - - (969,173) (969,173)
---------- ------- ------ --------- --------- -------
Balance, September 30,
1999 (unaudited) $ - 4,761,228$47,612 $2,032,356 $(1,681,704)$398,264
========== ========= ====== ========== ============ =======
The accompanying notes are an integral part of these financial statements.
- F-7 -
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (AUDITED)
September 30, December 31,
--------------------- --------------------
1999 1998 1998 1997
(Unaudited) (Unaudited) (Audited) (Audited)
----------- ----------- ---------- ----------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $ (969,173) $ (510,638) $ (712,531) $(291,858)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization 140,953 210,867 281,155 215,066
Provision for impairment
of license acquisition
costs 303,797 - - -
Changes in operating
assets and liabilities:
Employee advances (50) - - -
Trade accounts
receivable - - (675) (533)
Prepaid expenses 9,000 - (18,000) 2,363
Inventory 186 - 13,358 (24,197)
Deposits 4,500 - 18,950 3,750
Postpetition liabilities - (61,500) (61,500) 61,500
Accrued interest 15,187 24,535 29,647 9,200
Accrued payroll taxes 307 354 713 4,518
------- --------- --------- ---------
Net Cash Used in
Operating Activities (495,907) (336,382) (448,883) (20,191)
------- --------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of Dibbs Internet
Services, Inc. (225,000) - - -
Purchases of property and
equipment (31,941) (21,072) (21,151) (111,009)
------- --------- --------- ---------
Net Cash Used in Investing
Activities (256,941) (27,072) (22,151) (111,009)
The accompanying notes are an integral part of these financial statements.
- F-8 -
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (AUDITED)
September 30, December 31,
--------------------- --------------------
1999 1998 1998 1997
(Unaudited) (Unaudited) (Audited) (Audited)
----------- ----------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from exercise of
Common Stock Warrants 872,624 12,000 156,986 -
Proceeds from sale of
debtor certificates - 185,850 185,850 53,150
Payments of Note Principal (75,000) - - -
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 797,624 (134,530) 279,516 355,039
--------- --------- ---------- ---------
Net Increase (Decrease) in
Cash and Cash Equivalents 44,776 (228,924) (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 $ 100,944 $ 18,762 $ 56,168 $ 247,686
--------- --------- ---------- ---------
--------- --------- ---------- ---------
NONCASH TRANSACTIONS:
Conversion of Debtor
Certificates to Common
Stock - - $1,050,358 $ -
--------- --------- ---------- ---------
--------- --------- ---------- ---------
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)
SEPTEMBER 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).
The Company succeeded to the LLC's assets, liabilities, and operations.
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 was accounted for as a conversion to common stock.
The License has been recorded by the Company at the Partners' historical cost
basis which was $225,000. In substance, the reorganization and asset
transfer and resulting combination between Partners and the Company is a
change in legal organization, but not a change in entity. The transfer of
the license and elimination of intercompany receivable, representing all
assets of the Partners, in exchange for all outstanding shares in the newly
formed corporation is deemed a transfer of net assets between entities under
common control. Accordingly, the assets transferred have been accounted for
at historical cost in a manner similar to that in a pooling of interest.
The Partnership had no prior results of operations. As such, results of
operations on a combined basis represent the activities of Mobile LLC during
those periods.
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
- F-10 -
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 November6,
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
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 - 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 note
holders. 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. Revenues from Internet services are recognized
monthly upon billing.
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.
- F-11 -
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Provision has been made for overstocked, slow moving, and obsolete inventory.
Depreciation
Property and equipment are carried at cost and depreciated on a straight-
linear 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 subscriber. The costs of subsequently disconnecting
and reconnecting are charged to expense in the period incurred.
Amortization of Intangibles
Amortization of intangibles is calculated using the straight-line method.
Amortization lives are as follows:
Goodwill 3 years
Organization costs 5 years
Non-compete agreement 2 years
Amortization expense related to these assets totaled $16,071 and
$7,642(unaudited), and $13,585 and $13,585 (audited) at September 30, 1999 and
1998, and December 31, 1998 and 1997, respectively.
License Acquisition Costs
License acquisition costs include costs incurred to lease wireless cable
licenses issued by the Federal Communications Commission (FCC), including
channel lease acquisition costs. In past years, these costs were deferred and
amortized ratably over 15 years. In 1997, the Company 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 $78,000 and $.02 per share, respectively. In the second quarter
of 1999, the Company determined that assets with a carrying value of $465,500
were impaired according to the provisions of SFAS No. 121, Accounting for the
Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. Fair value
was determined based on recent transactions in the wireless cable industry,
including changes in the Company's use of these assets as indicated by the
decision to discontinue new installations for wireless cable television
service in early 1999, as well as estimates made in the second quarter of the
future earnings from alternative uses for these assets such as high-speed
Internet access. Accumulated amortization related to these costs was $371,050
and $259,750 at September 30, 1999 and 1998 (unaudited) and $293,000 and
$160,000 at December 31, 1998 and 1997, respectively (audited).
- F-12 -
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
and 1998 (unaudited), and $293,000 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 $23,279 and $7,035 at September 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. In management's
opinion, the carrying value of notes payable and other short-term debt also
approximates fair value.
The fair value of the Company's notes payable and other short-term debt
is estimated based on the rate of return, adjusted for risk, received by
purchaser's of the Company's debtor certificates, as the certificates
represented the best estimate of the Company's cost to borrow on an
arms-length, unsecured basis. The adjustment to the rate of return for the
secured, related party notes payable as derived by comparing secured and
unsecured US government obligations, was not material.
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.
As discussed in Note 12, the Company has recorded a prior period adjustment
to reflect impairment of its license acquisition costs at December 31,
1997,which had not been properly reported in the Company's financial
statements at that date. The Company has reviewed all long-term assets for
impairment and the current carrying values of those assets properly reflect
the impairment valuations, if any, as of September 30, 1999.
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.
- F-13 -
<PAGE>
Warrants
Warrants to purchase up to 2,226,029 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 November 30, 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 January 14,
2000.
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.
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
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.
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
- F-14 -
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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 September 30, 1999 and 1998
The accompanying financial statements include unaudited financial information
for the nine month periods ended September 30, 1999 and 1998. In the opinion
of management, the accompanying unaudited financial statements include all
- F-15 -
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform with the 1999 financial statement presentation. Such
reclassifications had no effect on net income as previously reported.
NOTE 2 - INVENTORIES
Inventories consist of the following:
September 30, December 31,
------------ ------------
1999 1998 1997
(Unaudited) (Audited) (Audited)
----------------- ---------- ---------
Inventory held for resale $ 24,195 $ 24,195 $ 30,875
Installation materials 20,568 20,754 27,432
----------------- ---------- ---------
$ 44,763 $ 44,949 $ 58,307
----------------- ---------- ---------
----------------- ---------- ---------
NOTE 3 - FIXED ASSETS
Furniture and equipment are summarized as follows:
September 30, December 31,
------------ -----------
1999 1998 1997
(Unaudited) (Audited) (Audited)
----------------- ---------- ---------
Cost:
Machinery and equipment $ 612,622 $ 566,486 $ 561,210
Furniture and fixtures 21,801 21,801 21,301
Auto and trucks 5,325 5,325 5,325
Subscriber installation
costs 38,160 47,700 72,504
Accumulated depreciation (563,227) (526,234) (432,844)
----------------- ---------- ---------
$ 114,681 $ 115,078 $ 227,496
----------------- ---------- ---------
----------------- ---------- ---------
- F-16 -
<PAGE>
NOTE 4 - INTANGIBLES
Intangibles consist of the following:
September 30, December 31,
1999 1998 1997
(Unaudited) (Audited) (Audited)
----------------- ---------- ---------
Purchased goodwill $ 208,005 $ - $ -
Organization costs 67,926 67,926 67,926
Non-compete agreement 2,500 - -
Accumulated amortization (73,808) (57,737) (44,152)
----------------- ---------- ---------
$ 204,623 $ 10,189 $ 23,774
----------------- ---------- ---------
----------------- ---------- ---------
NOTE 5 - 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 allow the Company to apply its security deposit toward the monthly rent
at the rate of $1,500 per month, while only requiring the Company to make
monthly cash payments of the remaining $1,300. Accordingly, the prepaid
portion of the deposit has been reclassified to a prepaid asset at the
balance sheet date, and will be amortized to expense over the next 12 months.
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 Instructional Television Fixed Service (ITFS)
programming 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 Multipoint Distribution Service (MDS) programming
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.
- F-17 -
<PAGE>
NOTE 5 - OPERATING LEASES (Continued)
As discussed in Note 1, amounts paid by the Company to acquire the channel
leases have been capitalized as license acquisition costs and are being
amortized over 5 years. Amortization expense related to these assets totaled
$78,181 and $41,250 for the nine months ended September 30, 1999 and 1998,
and $68,585 and $104,241 for the years ended December 31, 1997 and
1998,respectively. The monthly lease payments are expensed, and totaled
$26,000 and $30,000 at September 30, 1999 and 1998, respectively (unaudited)
and $33,000 and $36,000 at December 31, 1998 and 1997, respectively
(audited).Other rents totaled $25,225 and $26,815 at September 30, 1999 and
1998, respectively (unaudited), and $44,498 and $45,600 at December 31, 1998
and 1997, respectively (audited).
Future minimum lease payments under the Company's operating leases are as
follows:
1999 $ 74,400
2000 37,800
2001 17,400
2002 14,400
2003 14,400
Thereafter 3,600
---------
$162,000
---------
---------
NOTE 6 - 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
September 30, 1999, and December 31, 1998 and 1997, reflect accrued interest
payable on these notes of $54,034, $38,847 and $9,200, respectively.
NOTE 7 - 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
- F-18 -
<PAGE>
NOTE 7 - DEBTOR CERTIFICATES (Continued)
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.
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.
NOTE 8 - 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.
- F-19 -
<PAGE>
NOTE 9 - SUBSEQUENT EVENTS
As of November 30, 1999, shareholders had exercised a total of 1,308,036
Warrants issued pursuant to the Plan of Reorganization. The exercised
warrants included 409,955 A Warrants, and 898,082 B Warrants for a total of
$1,205,548.
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 revenues. This suspension will remain in effect until management
can evaluate alternatives for performing the installations in a more cost-
effective manner.
NOTE 10 - 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 11 - 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 $683,771 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:
Net operating losses $ 266,670
Deferred tax assets
valuation allowances (266,670)
---------
Net deferred tax assets $ -
---------
---------
A deferred asset of $266,670 has been provided for the $683,771 loss
carryforward that expires primarily in 2013. A valuation allowance of
$266,670 has been provided to reduce the asset to the amount of tax benefit
management believes it will more likely than not realize. As time passes,
- F-20 -
<PAGE>
NOTE 11 - INCOME TAXES (continued)
management will be able to better assess the amount of tax benefit it will
realize from using the carryforward.
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%
-----
-----
Income tax benefit not recognized 39%
-----
-
-----
-----
NOTE 12 - PURCHASE COMMITMENTS
The Company has entered into a series of noncancellable 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 $39,130 and $48,862 for the nine months ended September 30,
1999 and 1998, respectively (unaudited), and $65,149 and $85,737 for the
years ended December 31, 1998 and 1997, respectively (audited).
The Company does not expect future costs of entertainment programming to be
consistent with prior costs as these costs are based on the number of monthly
subscribers, which has been declining. The Company expects its future
entertainment programming costs to decrease, consistent with the decline in
its cable subscriptions.
NOTE 13 - BUSINESS ACQUISITIONS
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 provided Internet services to approximately 730
Internet customers in the Mobile metropolitan area via dial-in telephone line
access. The Company will continue offering Dibbs customers the telephonic
Internet service that they have now, and will also offer them the opportunity
to convert to use of high speed wireless Internet service. The statement of
operations at September 30, 1999, includes the results of operations of Dibbs
after August 25, 1999.
The Company 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
- F-21 -
<PAGE>
NOTE 14 - BUSINESS ACQUISITIONS (Continued)
its sole shareholder and president, Diane Summers. The Company did not
assume any liabilities of Dibbs in the transaction. The purchase price has
been allocated as follows:
Property and Equipment $ 14,495
Non-compete agreement 2,500
Goodwill 208,005
----------
Total $ 225,000
----------
----------
Purchased Goodwill will be amortized on the straight-line basis over
3 years.
The following unaudited pro forma information presents a summary of results
of operations of the Company and Dibbs as if the acquisition occurred at the
beginning of the fiscal year for each of the periods presented:
Nine Months Ended (Unaudited)
-----------------------------
September 30, December 31,
1999 1998
------------ ------------
Total revenues $ 233,025 $ 223,284
Net Loss $ (967,614) $(532,465)
Basic earnings per share $ (.22) $ (.16)
In management's opinion, the unaudited pro forma information is not
necessarily indicative of actual results that would have occurred had the
acquisition been consummated at the beginning of the fiscal periods or of
future operations of the combined activities.
- F-22-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Advanced Wireless Systems, Inc.
We have audited the accompanying balance sheets of Dibbs Internet Services,
Inc. (the acquired business) as of December 31, 1998 and 1997, and for the
six months ended June 30, 1999, and the related statements of operations,
stockholder's equity and cash flows for the years and six months then ended,
acquired by Advanced Wireless Systems, Inc. These financial statements are
the responsibility of 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 audit provides a
reasonable basis for our opinion.
The accompanying financial statements were prepared as described in Note 1
for the purpose of complying with certain rules and regulations of the
Securities and Exchange Commission (SEC) for inclusion in certain SEC
regulatory reports and filings.
- D-1 -
<PAGE>
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the acquired business
described in Note 1 as of December 31, 1998 and 1997, and June 30, 1999 and
the results of its operations and cash flows for the periods then ended, in
conformity with generally accepted accounting principles.
BROWN ARMSTRONG RANDALL
REYES PAULDEN & McCOWN
ACCOUNTANCY CORPORATION
Bakersfield, California
January 25, 2000
- D-2 -
<PAGE>
DIBBS INTERNET SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
AND JUNE 30, 1999
June 30, December 31, December 31,
1999 1998 1997
--------- ----------- -----------
ASSETS
Current Assets
Cash $ - $ 896 $ 3,648
--------- ----------- -----------
Fixed Assets
Property and equipment 122,629 122,629 105,201
Accumulated depreciation (52,154) (41,202) (21,152)
Total Fixed Assets 70,475 81,427 84,049
--------- ----------- -----------
TOTAL ASSETS $ 70,475 $ 82,323 $ 87,697
--------- ----------- -----------
--------- ----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Bank overdraft $ 282 $ - $ -
Operating advance - related party 2,301 11,964 22,528
--------- ----------- -----------
Total Current Liabilities 2,583 11,964 22,528
--------- ----------- -----------
Stockholder's Equity
Common stock 1,000 1,000 1,000
Retained earnings 66,892 69,359 64,169
--------- ----------- -----------
Total Stockholder's Equity 67,892 70,359 65,169
--------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 70,475 $ 82,323 $ 87,697
--------- ----------- -----------
--------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
- D-3 -
<PAGE>
DIBBS INTERNET SERVICES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1999
Six Months
Ended Year Ended Year Ended
June 30, December 31, December 31,
1999 1998 1997
----------- ------------ ------------
Internet Revenues $ 98,580 $ 183,164 $ 139,943
----------- ------------ ------------
Costs and Expenses
Phone lines 35,792 65,486 41,507
Port charges 14,566 29,155 26,273
Technical support and labor 5,902 9,718 2,931
Depreciation 10,952 20,050 15,433
General and administrative 6,498 12,630 6,568
Total Costs and Expenses 73,710 137,039 92,712
Net Income from Operations 24,870 46,125 47,231
Other Expense
Interest expense 337 1,436 2,663
----------- ------------ ------------
Net Income $ 24,533 $ 44,689 $ 44,568
----------- ------------ ------------
----------- ------------ ------------
Basic Earnings per Share $ 24.53 $ 44.70 $ 44.57
----------- ------------ ------------
----------- ------------ ------------
Weighted Average Shares
Outstanding 1,000 1,000 1,000
----------- ------------ ------------
----------- ------------ ------------
The accompanying notes are an integral part of these financial statements.
- D-4 -
<PAGE>
DIBBS INTERNET SERVICES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1999
Common Stock Retained
Shares Par Value Earnings Total
------- --------- -------- -------
Balance at
January 1, 1997 1,000 $ 1,000 $ 32,201 $ 33,201
Distributions - - (12,600) (12,600)
Net income (loss) - - 44,568 44,568
Balance at
December 31, 1997 1,000 1,000 64,169 65,169
Distributions - - (39,500) (39,500)
Net income (loss) - - 44,690 44,690
------- --------- -------- -------
Balance at
December 31, 1998 1,000 1,000 69,359 70,359
Distributions - - (27,000) (27,000)
Net income (loss) - - 24,533 24,533
------- --------- -------- -------
Balance at
December 31, 1999 1,000 $ 1,000 $ 66,892 $ 67,892
------- --------- -------- -------
------- --------- -------- -------
The accompanying notes are an integral part of these financial statements.
- D-5 -
<PAGE>
DIBBS INTERNET SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1999
Six Months
Ended Year Ended Year Ended
June 30, December 31, December 31,
1999 1998 1997
------------ ------------ -----------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 24,533 $ 44,690 $ 44,568
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 10,952 20,050 15,433
---------- ----------- -----------
Net Cash Provided by Operating
Activities 35,485 64,740 60,001
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - (17,428) (65,317)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party loan - - 55,515
Repayments of related party loan (9,663) (10,564) (38,987)
Cash distributions (27,000) (39,500) (12,600)
---------- --------- ---------
Net Cash Provided (Used) by
Financing Activities (36,663) (50,064) 3,928
---------- --------- ---------
Net Decrease in Cash ( 1,178) (2,752) (1,388)
Cash, beginning of period 896 3,648 5,036
---------- --------- ---------
Cash, end of period $ (282) $ 896 $ 3,648
----------- --------- ---------
----------- --------- ---------
The accompanying notes are an integral part of these financial statements.
D-6
<PAGE>
DIBBS INTERNET SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
AND JUNE 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Dibbs Internet Services, Inc. (Dibbs), an Alabama S-corporation, is an Internet
service provider in Mobile, Alabama. Dibbs was originally incorporated on April
19, 1994 under the name Diane Summers' Online Services, Inc. but subsequently
changed its name to its current title on May 23, 1996.
On August 25, 1999, Advanced Wireless Systems, Inc. (the Company)
purchased substantially all of the assets of Dibbs for a purchase price of
$225,000. Dibbs provided Internet services to approximately 730 Internet
customers in the Mobile metropolitan area via dial-in telephone line access.
The Company acquired from Dibbs most of the 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' sole shareholder and president, Diane Summers.
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 Internet services are recognized monthly upon billing.
D-7
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Depreciation
Property and equipment are carried at cost and depreciated on a straight-line
basis over their estimated useful lives, ranging from 5 to 7 years. Maintenance
and repair costs are charged to expense as incurred; major renewals and
betterments are capitalized.
Income Taxes
Dibbs' stockholder has elected S corporation status under the Internal Revenue
Code, thereby consenting to include the income in her individual tax return.
Accordingly, there is no provision for income taxes in these financial
statements.
NOTE 2 - OPERATING ADVANCE - RELATED PARTY
The spouse of the sole shareholder of Dibbs advanced funds to the company to
cover operating requirements. The initial advance totaled $55,515 and is
considered due on demand. No written agreement exists between the related
party and Dibbs concerning the timing and extent of repayment. Dibbs has
repaid portions of the advance as funds are available. Interest has been
repaid at the rate of 8% on the outstanding balance, compounded monthly.
D-8
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
PRO FORMA BALANCE SHEET
(UNAUDITED)
AS OF JUNE 30, 1999
Historical Pro Forma
-------------------------- -----------------------
Advanced Dibbs
Wireless Internet
Systems, Inc. Services, Inc. Adjustments Consolidated
------------- -------------- ----------- ------------
ASSETS
Current assets
Cash and cash
equivalents $ 374,598 $ - $(225,000)(a) $ 149,598
Accounts receivable,
net 2,608 - - 2,608
Inventory 45,964 - - 45,964
Employee Advances 375 - - 375
Prepaid expenses 24,600 - - 24,600
----------- ------------- ------------- -----------
Total current assets 448,145 - (225,000) 223,145
----------- ------------- ------------- -----------
(30,755)(b)
Fixed Assets, net of
depreciation 98,098 70,475 (25,225)(c) 112,593
----------- ------------- ------------- ----------
Other assets
Deposits 300 - - 300
License Acquisition
Costs, net 161,703 - - 161,703
Organization costs, net 5,094 - - 5,094
Goodwill - - 208,005(b) 208,005
Other intangible - - 2,500(c) 2,500
----------- ------------- ------------- ----------
Total Other Assets 167,097 - 210,505 377,602
---------- ------------ ------------ ----------
TOTAL ASSETS $ 713,340 $ 70,475 $ (70,475) 713,340
------------ -------------- ------------- -----------
------------ -------------- ------------- -----------
(See Notes to Pro Forma Financial Statements)
P-1
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
PRO FORMA BALANCE SHEET
(UNAUDITED)
AS OF JUNE 30, 1999
Historical Pro Forma
------------------------- -------------------------
Advanced Dibbs
Wireless Internet
Systems, Inc, Services,Inc. Adjustments Consolidated
------------- ------------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank overdraft $ - $ 282 $ (282)(c) $ -
Operating advance
- related party - 2,301 (2,301)(c) -
Debtor certificates 6,000 - - 6,000
Notes payable, related
parties 250,000 - - 250,000
Accrued payroll taxes 6,629 - - 6,629
Accrued interest payable 50,097 - - 50,097
------------- ------------ ----------- ------------
Total Liabilities 312,726 2,583 (2,583) 312,726
------------- ------------ ----------- ------------
Stockholders' Equity:
Common stock, $.01 par
value, 50,000,000 shares
authorized; 4,559,263
shares issued and
outstanding 45,593 1,000 1,000(b) 45,593
Additional paid in
capital 1,839,173 - - 1,839,173
Accumulated earnings
(deficit) (1,484,152) 66,892 (66,892)(b) (1,484,152)
------------- ------------ ----------- ------------
Total Stockholders'
equity 400,614 67,892 (67,892) 400,614
------------- ------------ ----------- ------------
Total Liabilities and
Stockholders' Equity $ 713,340 $ 70,475 $(70,475) $ 713,340
------------- ------------ ----------- ------------
------------- ------------ ----------- ------------
(See Notes to Pro Forma Financial Statements)
P-2
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
Historical
--------------------------
For the Six Months Ended
June 30, 1999 Pro Forma
-------------------------- ----------------------------
Advanced Dibbs
Wireless Internet
Systems, Inc, Services, Inc. Adjustments Consolidated
------------- -------------- ------------- --------------
Revenues
Service and other $ 42,490 $ 98,580 $ - $ 141,070
------------- -------------- ------------- --------------
Costs and Expenses
Operating 64,353 56,260 - 120,613
General and
administrative 325,424 6,498 9,600(g) 331,922
35,293(d)
Depreciation and
amortization 109,287 10,952 (9,502)(e) 146,030
Provision for
impairment of license
acquisition costs 303,797 - - 303,797
------------- ------------- ------------- --------------
Total Costs and
Expenses 802,861 73,710 35,931 911,962
------------- ------------- ------------- --------------
Income (Loss) from
Operations (760,371) 24,870 (35,7931) (770,892)
------------- ------------- ------------- --------------
Other Expense
Interest Expense 11,250 337 (337)(f) 11,250
------------- ------------- ------------- --------------
Net Income (Loss) $ (771,621) $ 24,533 $ (35,054) $ (782,142)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Basic Loss per
Share $ (.18) $ (.18)
------------- --------------
------------- --------------
Weighted Average
Number of Common
Shares Outstanding 4,323,136 4,323,136
------------- --------------
------------- --------------
(See Notes to Pro Forma Financial Statements)
P-3
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
Historical
----------------------------
For the Year Ended
December 31, 1998 Pro Forma
---------------------------- ---------------------------
Advanced Dibbs
Wireless Internet
Systems, Inc, Services, Inc. Adjustments Consolidated
-------------- -------------- ------------- -------------
Revenues
Service and other $ 106,602 $ 183,164 $ - $ 289,766
-------------- -------------- ------------- -------------
Costs and Expenses
Operating 159,840 104,359 - 264,199
General and
administrative 359,920 12,630 9,600(g) 372,550
70,586(d)
Depreciation and
amortization 252,396 20,050 (17,150)(e) 325,882
-------------- -------------- ------------- -------------
Total Costs
and Expenses 772,156 137,039 (63,036) 972,231
-------------- -------------- ------------- -------------
Income (Loss)
from Operations (665,554) 46,125 (63,036) (682,465)
-------------- -------------- ------------- -------------
Other Income (Expense)
Interest income 2,230 - - 2,230
Interest Expense (20,447) (1,436) 1,436(f) (20,447)
-------------- -------------- -------------- ------------
Total Other Income
(Loss) (18,217) (1,436) 1,436 (18,217)
-------------- -------------- -------------- ------------
Net Income (Loss) $ (683,771) $ 44,689 $ (61,600) $ (700,682)
-------------- -------------- -------------- ------------
-------------- -------------- -------------- ------------
Basic Loss per
Share $ (.20) $ (.21)
-------------- ------------
-------------- ------------
Weighted Average
Number of Common
Shares Outstanding 3,359,207 3,359,207
-------------- ------------
-------------- ------------
(See Notes to Pro Forma Financial Statements)
P-4
<PAGE>
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND FOR THE SIX MONTHS ENDED JUNE 30, 1999
NOTE 1 - BASIS OF PRESENTATION
On August 25 ,1999, Advanced Wireless Systems, Inc. (the Company) purchased
substantially 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 provided Internet services to approxi-
mately 730 Internet customers in the Mobile metropolitan area via dial-in
telephone line access. The Company will continue offering Dibbs customers
the telephonic Internet service that they have now, and will also offer them
the opportunity to convert to use of high speed wireless Internet service.
The Company 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'
sole shareholder and president, Diane Summers. The Company 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.
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 pro-
viding Internet services within a 75 mile radius of Mobile for two years.
Ms. Summers also agreed to provide consulting services to the Company, to
help it take over and operate the Dibbs business, for up to 60 days after
the purchase, for $1,200 per week.
The pro forma balance sheet at June 30, 1999, has been prepared assuming that
the business acquisition was consummated on June 30, 1999. The pro forma
statements of operations for the year and six months ended December 31, 1998,
and June 30, 1999, respectively, have been prepared assuming that the
Business Acquisition was consummated on January 1, 1998, and January 1, 1999,
respectively.
P-5
<PAGE>
NOTE 1 - BASIS OF PRESENTATION (Continued)
The preparation of the pro forma financial statements is based on certain
adjustments to the historical financial statements of the Company and Dibbs
and are not necessarily indicative of the financial position or results of
operations had the above-described business acquisition occurred on the
assumed date. These pro forma financial statements should be read in
conjunction with the financial statements of the acquired business and of
the Company contained in this registration statement.
NOTE 2 - PRO FORMA ADJUSTMENTS
Pro forma entries necessary to adjust the historical financial statements
are as follows:
(a) Reflects cash paid to sole shareholder of Dibbs Internet Services, Inc.,
for the acquisition purchase price.
(b) Goodwill related to the Dibbs Internet Services, Inc., acquisition has
been determined as follows:
Purchase price $ 225,000
Less stockholder's equity (67,892)
Purchase accounting adjustments appropriate to reflect
acquisition facts and circumstances 28,255
Elimination of certain net assets not acquired by the
Company (see Note (c)) 22,642
----------
Total $ 208,005
----------
----------
(c) Reflects the elimination of certain assets and liabilities not acquired
or assumed in connection with the acquisition of Dibbs Internet Services,
Inc.:
Fixed assets $ (25,225)
Bank overdraft 282
Operating advance - related party 2,301
----------
Total $ (22,642)
----------
----------
(d) The acquisition of Dibbs Internet Services, Inc., has been accounted for
using the purchase method of accounting. The purchase price has been
allocated to the tangible and intangible assets acquired based upon
their fair values at the time the acquisition was consummated.
P-6
<PAGE>
NOTE 2- PRO FORMA ADJUSTMENTS (Continued)
The following summarizes the additional amortization expense to be incurred
in connection with the Dibbs acquisition:
Six Months Year Ended
Estimated Ended June 30, December 31,
Useful Life 1999 1998
----------- ------------ -----------
Goodwill $208,005 3 years $ 34,668 $ 69,336
Non-compete
agreement 2,500 2 years 625 250
-------- ----------- ----------
$210,505 35,293 70,586
--------
--------
Less historical recorded predecessor amounts - -
----------- ----------
Adjustment $ 35,293 $ 70,586
----------- ----------
----------- ----------
(e) Reflects additional depreciation expense in connection with the Dibbs
acquisition:
Six Months Year Ended
Estimated Ended June 30, December 31,
Useful Life 1999 1998
----------- ----------- ----------
Recorded fair
value of property
and equipment acquired $ 14,495 5 years $ 1,450 $ 2,900
--------
--------
Less historical recorded
amounts 10,952 20,050
------------ ----------
Adjustment $ (9,502) $ (17,150)
------------ ----------
------------ ----------
(f) Reflects the decrease of Dibbs related party interest expense which would
not have been incurred had the Company purchased Dibbs at the beginning
of the period.
(g) Reflects the increase of consulting expense attributed to the agreement
with Diane Summers for 60 days' consulting at $1,200 per week, which
would have been incurred had the Company purchased Dibbs at the beginning
of the period.
- P-7 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> $ 100,944
<SECURITIES> $ 0
<RECEIVABLES> $ 2,608
<ALLOWANCES> $ 0
<INVENTORY> $ 44,763
<CURRENT-ASSETS> $ 157,365
<PP&E> $ 667,908
<DEPRECIATION> $ 563,227
<TOTAL-ASSETS> $ 625,240
<CURRENT-LIABILITIES> $ 239,958
<BONDS> $ 0
$ 0
$ 0
<COMMON> $ 47,612
<OTHER-SE> $ 350,652
<TOTAL-LIABILITY-AND-EQUITY> $ 638,222
<SALES> $ 0
<TOTAL-REVENUES> $ 90,689
<CGS> $ 123,548
<TOTAL-COSTS> $ 1,044,674
<OTHER-EXPENSES> $ 0
<LOSS-PROVISION> $ 0
<INTEREST-EXPENSE> $ 15,188
<INCOME-PRETAX> $ (969,173)
<INCOME-TAX> $ 0
<INCOME-CONTINUING> $ (969,173)
<DISCONTINUED> $ 0
<EXTRAORDINARY> $ 0
<CHANGES> $ 0
<NET-INCOME> $ (969,173)
<EPS-BASIC> $ (0.23)
<EPS-DILUTED> $ (0.23)
</TABLE>
