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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000 Commission File No. 0-26533
ADVANCED WIRELESS SYSTEMS, INC.
Alabama 63-1205304
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
716 College Avenue, Suite A-2
Santa Rosa, California 95404
(Address of principal executive offices)
Issuer's telephone number: 707-576-1008
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant has been required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X
At Jun3 30, 2000, a total of 5,437,538 shares of registrant's Common Stock
were outstanding.
<PAGE> 2
CONTENTS
PART I - FINANCIAL INFORMATION ............................................ 1
ITEM 1. FINANCIAL STATEMENTS ..................................... 1
Basis of Presentation ..................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION ....................... 9
Results of Operation ..................................... 9
Subsequent Event - the DWSI Acquisition .................. 9
The DWSI Acquisition Resulted in Issuance of More than
10 Million Shares of Common Stock and Could be
Considered a Change of Control ......................... 11
Risks Involved in the DWSI Acquisition .................. 11
Possible Additional Acquisitions ......................... 14
Results of Operations for the Six Months Ended June 30,
2000, as Compared to the Six Months Ended June 30, 1999 .
15
Capital Resources and Liquidity .......................... 15
Operating Activities ..................................... 16
Investing Activities ..................................... 16
Financing Activities ..................................... 16
PART II ................................................................... 16
ITEM 1. LEGAL PROCEEDINGS ........................................ 16
ITEM 2. CHANGES IN SECURITIES .................................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ..........................17
SIGNATURES ................................................................ 17
ii
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ADVANCED WIRELESS SYSTEMS, INC.
CONDENSED BALANCE SHEETS
June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets
Cash $ 109,902
Accounts receivable, net of allowance
for doubtful accounts of $4,100 12,566
Accounts receivable, related parties 69,139
Inventories, net of reserve for
obsolescence of $57,374 12,606
Prepaid expenses 6,900
-----------
Total current assets 211,113
-----------
Fixed Assets, net of accumulated
depreciation of $570,041 94,076
-----------
Other assets
Deposits 300
License acquisition costs, net
of accumulated amortization of $405,702 115,501
Other intangibles, net of
accumulated amortization of $132,630 145,801
-----------
Total Other Assets 261,602
-----------
TOTAL ASSETS $ 566,791
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
1
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
CONDENSED BALANCE SHEETS (continued)
June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable $ 167,725
Debtor certificates 6,000
Notes payable 49,500
Notes payable, related parties 175,000
Warrants subscribed 21,267
Accrued payroll taxes 2,723
Accrued interest payable 66,304
-----------
Total Current Liabilities 488,249
-----------
Stockholders' Equity:
Common stock, $.01 par value, 50,000,000 shares
authorized; 5,437,638 shares issued
and outstanding 54,376
Additional paid in capital 2,484,029
Accumulated deficit (2,459,863)
-----------
Total Stockholders' Equity 78,542
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 566,791
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2000 and June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
2000 1999
---------------- -------------
<S> <C> <C>
REVENUES
Service and other $ 100,740 $ 42,490
---------------- -------------
COSTS AND EXPENSES
Operating 66,536 64,353
General and administrative 518,172 325,424
Depreciation and amortization 79,019 94,908
---------------- -------------
Total Costs and Expenses 663,727 484,685
---------------- -------------
Net Loss from Operations (562,987) (442,195)
OTHER EXPENSE
Interest expense (8,358) (11,250)
---------------- -------------
NET LOSS $ (571,345) $ (453,445)
================ =============
Net loss per share - basic and diluted $ (0.11) $ (0.11)
================ =============
Weighted Average Number
of Shares Outstanding -
basic and diluted 5,137,811 4,323,136
================ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Common Additional
Stock Par Paid-in Accumulated
Shares Value Capital Deficit Total
--------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance
December 31, 1999 4,989,342 $ 49,893 $2,139,176 $(1,888,518) $ 300,551
Exercise of
Class A Warrants
for Common Stock 44,600 446 33,004 - 33,450
Exercise of
Class B Warrants
for Common Stock 253,386 2,534 250,852 - 253,386
Adjust shares per
transfer agent 25,310 253 (253) - -
Stock issued for
services 125,000 1,250 61,250 - 62,500
Net Loss - - - (571,345)
(571,345)
--------- --------- --------- ---------- ---------
Balance
June 30, 2000 $5,437,638 $ 54,376 $2,484,029 $(2,459,863) $ 78,542
========== ========== ========== ============ =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For The Six Months Ended June 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (571,345) $ (453,445)
Adjustments to reconcile net loss to
net cash from operating activities:
Noncash items included in net loss:
Depreciation and amortization 79,019 94,908
Write off of cable TV premises
and other equipment 13,245 -
Notes issued for services 30,000 -
Stock issued for services 62,500 -
Changes in operating assets
and liabilities:
Accounts receivable (3,782) -
Accounts receivable, related parties (53,939) (375)
Inventories 450 (1,014)
Prepaid expenses 6,600 9,000
Accounts payable 146,929 -
Accrued interest 8,062 11,250
Accrued payroll taxes (1,677) 1,400
---------------- -------------
Net Cash Used in Operating Activities (283,938) (338,276)
---------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (25,724) (20,715)
---------------- -------------
Net cash used in investing activities (25,724) (20,715)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 25,000 -
Repayment of notes payable (5,500) -
Exercised stock warrants 286,836 677,421
---------------- -------------
Net cash provided by financing activities 306,336 677,421
---------------- -------------
Net Increase (Decrease) in Cash and
Cash Equivalents (3,326) 318,430
Cash and Cash Equivalents,
Beginning of Period 113,228 56,168
---------------- -------------
Cash and Cash Equivalents, End of Period $ 109,902 $ 374,598
================ =============
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ADVANCED WIRELESS SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2000
(unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation
---------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed,
or omitted, pursuant to the rules and regulations of the Securities and
Exchange Commission for interim financial statements. In the opinion of
management, the statements include all adjustments necessary for interim
financial statements (which are of a normal and recurring nature) for the fair
presentation of the results of the interim periods presented. The results of
operations for such periods are not necessarily indicative of results to be
expected for the entire current year or other future interim periods.
The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these condensed financial statements should be read in
conjunction with the audited financial statements and related notes thereto
included in the Company Annual Report on Form 10-K for the fiscal year ended
December 31, 1999. The results of operations for the six months ended June 30,
2000, are not necessarily indicative of the results to be expected for any
subsequent period or for the entire fiscal year ending December 31, 1999.
Nature of Operations
--------------------
Mobile Limited Liability Company, LLC (the "Debtor") was a Nevada limited
liability company formed on April 25, 1994 for purposes of acquiring and
operating certain FCC licenses in the Mobile, Alabama area. The majority
interest member of the LLC was a similarly named general partnership, Mobile
Wireless Partners ("Partners") comprised of 1,094 partners, with a 94.5%
interest in the Debtor. Pursuant to the Plan of Reorganization filed by
Mobile Wireless, LLC, Advanced Wireless Systems, Inc. was created and emerged
from Bankruptcy on January 8, 1998 as the Reorganized Debtor (collectively,
called the "Company"). Additionally, the Plan included the acquisition by the
Company of the Partners' FCC License in exchange for 3,192,518 shares of the
Company's common stock, 3,068,066 "B" Warrants exercisable on a 1 for 1 basis
for the Company's common stock, and the extinguishment of an intercompany loan
from Partners totaling $100,000, which 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 inter-company receivable, representing all
assets of the Partners, in exchange for all outstanding shares in the newly
formed corporation is deemed a transfer of assets 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.
6
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------
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.
Reclassifications
-----------------
Certain reclassifications have been made to the 1999 financial statements to
conform with the 2000 financial statement presentation. Such reclassifications
had no effect on net income as previously reported.
NOTE 2. EXPIRATION OF WARRANTS
----------------------
In 1998, the Company issued 466,000 Series A Warrants exercisable at $0.75
each and 3,068,066 Series B Warrants exercisable at $1.00 each, in conjunction
with the conversion of debt and the acquisition of FCC licenses, respectively,
occurring upon emergence of the Company from Chapter 11 Bankruptcy
Reorganization. During the six months ended June 30, 2000, a total of 44,600
Series A Warrants were exercised and 253,368 Series B Warrants were exercised
for cash in the aggregate amount of $286,836. Cumulative exercises from
inception through June 30, 2000, were 367,254 for the Series A Warrants and
1,208,288 for the Series B Warrants. Subsequent to June 30, 2000, an
additional 3,500 Series B Warrants were exercised. The remaining unexercised
balance of 98,746 Series A Warrants and 1,856,278 Series B Warrants expired on
July 15, 2000.
NOTE 3. PURCHASE AGREEMENTS
-------------------
On February 15, 2000, the Company executed an asset purchase agreement with an
unrelated entity (the "Seller") owning the rights to certain MMDS and ITFS
licenses in Baton Rouge Louisiana, Clarksville Tennessee, Reading
Pennsylvania, and Shreveport Louisiana. The Seller was operating as a Debtor-
in-Possession under Chapter 11 of the US Bankruptcy Code. The agreement
called for the Company to acquire all of the assets of the Seller and to
assume and agree to pay substantially all of the Seller's indebtedness to
others, all as part of the Seller's plan of reorganization under the
Bankruptcy Code. In addition, the purchase agreement provided for a purchase
price adjustment of additional shares of the Company's common stock if certain
conditions relative to the trading of the Company's stock were not met.
The Seller's plan of reorganization was confirmed by the U.S. Bankruptcy Court
on May 23, 2000, and the asset purchase transaction was consummated on August
6, 2000. The stock trading purchase price adjustment, plus other price
adjustments agreed at closing, resulted in a purchase price to the Seller
(after purchase price adjustments of 3,762,102 as to shares and to all classes
of warrants, respectively) of 11,763,102 shares of the Company's $0.01 par
value common stock, plus 11,763,102 Series C One-Year Warrants, 11,763,102
Series D Eighteen-Month Warrants, 11,763,102 Series E Two-Year Warrants, and
11,763,102 Series F Three-Year Warrants. The exercise prices range from $1 to
$6.
The Company also signed Letters of Intent with several unrelated entities to
purchase the assets and assume the liabilities of each of the businesses.
Definitive purchase agreements have not yet been finalized, but it is expected
that the combined purchase prices will include the issuance of additional
shares of the Company's common stock.
NOTE 4. GOING CONCERN
-------------
As discussed in Note 1 to the audited financial statement on Form 10-KSB for
7
<PAGE>
the year ended December 31, 1999, 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.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following information should be read in conjunction with our financial
statements and notes appearing elsewhere in this registration statement. This
registration statement contains forward-looking statements. The words,
"anticipate," "believe," "expect," "plan," "intend," "estimate," "project,"
"could," "may," "foresee," and similar expressions are intended to identify
forward-looking statements. These statements include information regarding
expected development of our business and development of the wireless cable TV
and Internet access service business where we will focus our marketing
efforts. These statements reflect our current views about future events and
financial performance and involve risks and uncertainties, including without
limitation the risks described in "Risk Factors". Should one or more of these
risks or uncertainties occur, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated.
Among the factors that could cause actual results to differ materially are the
following: a lack of sufficient capital to finance our business strategy on
terms satisfactory to us; pricing pressures which could affect demand for our
services; changes in labor, equipment and capital costs; our inability to
develop and implement new services such as wireless broadband access and
high-speed Internet access; our inability to obtain the necessary
authorizations from the FCC for such new services; competitive factors, such
as the introduction of new technologies and competitors into the wireless
communications business; or our Company's failure to attract strategic
partners; general business and economic conditions; inexperience of management
in deploying a wireless broadband access business.
We have not yet substantially developed our high speed Internet access
services or any other business services. In the second quarter of 2000, most
of our revenue came from Internet services that we offered over traditional
telephone lines. Unless we are able to find a new source of revenue, such as
our Internet access service or new income from possible future acquisitions,
we will be unable to continue as a going concern. Our auditors' report
contains a going concern qualification.
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 875. Accordingly, we
cannot expect to operate at a profit in the foreseeable future.
Subsequent Event - the DWSI Acquisition
After the end of the second quarter, on August 6, 2000, we purchased all of
the assets of Digital Wireless Systems, Inc. ("DWSI"), pursuant to DWSI's
confirmed plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Prior to the purchase, DWSI operated as debtor-in-possession under Chapter 11
of the U.S. Bankruptcy Code (Case No. 398-10899, U.S. Bankruptcy Court,
Middle District of Tennessee). DWSI was created in 1997 to take over the
businesses of two partnerships, one limited liability company and one
corporation that were created in 1993 and 1994 in the same sort of promotion
as Mobile LLC, AWSS's predecessor. It operates wireless cable and direct
broadcast satellite TV services in Baton Rouge Louisiana, Clarksville
Tennessee, Reading Pennsylvania, and Shreveport Louisiana. We purchased the
assets for 10,381,103 equity units consisting of a total of 10,381,103 shares
of our common stock and warrants to purchase 41,524,412 shares of our common
stock, and we assumed the outstanding liabilities of DWSI as of the closing
date. The asset purchase and the business of DWSI are described in detail in
our report on Form 8-K dated as of August 6, 2000, and this report on Form 10-
QSB should be read in conjunction with the description of the DWSI acquisition
in that Form 8-K.
9
<PAGE>
We purchased the assets of DWSI, as part of the confirmed plan of
reorganization, for over 10.2 million shares of our common stock, plus 10.2
million One-Year Warrants, 10.2 million Eighteen-Month Warrants, 10.2 million
Two-Year Warrants, and 10.2 million Three-Year Warrants. The exercise prices
of the warrants range from $1 to $6. In addition, the Asset Purchase
Agreement and Spectrum Lease Agreement provide for purchase price adjustments
of the equity units if certain conditions are not met. We also agreed to
assume and pay substantially all of DWSI's indebtedness to others and costs of
the DWSI bankruptcy, including payment of administrative claims, costs to
audit DWSI's financial statements, and closing costs of the proposed purchase.
These claims include professional fees, loans, and tax claims. The
professionals and court-approved lenders have the option to be paid either in
cash or in our securities. The unsecured claimants and DWSI's equity security
holders will receive our securities in satisfaction of their claims.
Our shares and warrants are being issued to DWSI's claimants and equity
security holders in exchange for their claims and interest, as part of that
company's plan of reorganization. These shares and warrants are being issued
pursuant to the exemption from the registration provisions of the Securities
Act of 1933 contained in Section 1145 of the U.S. Bankruptcy Code, and, as
such, they have not been registered with the Securities and Exchange
Commission.
DWSI has not prepared audited financial statements of its operations through
December 31, 1999, as contemplated by our purchase agreement. We have
advanced substantial funds to DWSI to keep them afloat pending the completion
of the purchase transaction, which remains to be completely consummated.
The disclosure statement that DWSI filed on February 15, 2000, discloses that
DWSI had total tangible assets of $189,000, and total intangible assets of
approximately $1.54 million, of which $1.5 million was listed as the current
market value of DWSI's FCC licenses. The disclosure statement lists the
liquidation value of those assets, prior to disposition costs and costs of
administration, of $813,828. The disclosure statement lists total claims of
approximately $1.26 million, plus administrative expenses and a lien on the
FCC licenses. The lien on the FCC licenses secures certificates of
indebtedness and junior secured notes issued during the Chapter 11 case for a
total of $653,953. Holders of certificates and notes who do not convert are
entitled to be paid the full amount of their principal and interest. All of
the holders of the certificates of indebtedness and junior secured notes have
elected, under the plan of reorganization, to convert their certificates and
notes to AWSS equity units at the rate of two equity units for each one dollar
of indebtedness, except for one certificate holder owning $5,000 principal
amount certificate, who still holds an unpaid certificate.
DWSI has operated at a loss since inception and has reported operating losses
every month since the Chapter 11 case was filed. Immediately prior to our
purchase, DWSI's operating losses were running at $40,000 to $50,000 per
month.
The purchase transaction was originally negotiated in 1999, but the asset
purchase agreement between DWSI and us was not entered until February 15,
2000, and the DWSI plan of reorganization was not confirmed until May 23,
2000. In the meantime, the financial condition of DWSI continued to
deteriorate due to its mounting operating loss. As a result, by the closing
of the transaction on August 6, 2000, DWSI was in dire straits. It had
basically run out of money to continue operations. Nevertheless, we believe
that the value that can be realized from the assets we acquired are worth the
high risks involved in completing the DWSI acquisition.
DWSI's main value lies in its FCC licenses in the four markets where it
operates. These licenses can only be transferred with FCC approval. We have
engaged legal counsel to file the necessary applications and information with
the FCC to transfer DWSI's licenses to us. These applications have now been
filed with the FCC, but FCC approval of the license transfer applications
could take 60 to 90 days from the date of this report. In the meantime, we
have leased all of DWSI's licenses from DWSI and have taken over their
operation from DWSI.
10
<PAGE>
The DWSI Acquisition Resulted in Issuance of More than 10 Million Shares of
Our Stock and Could Be Considered a Change of Control
Prior to the DWSI acquisition we had about 5.44 million shares of stock issued
and outstanding. Upon completion of the DWSI acquisition, the claimants and
interest holders under the DWSI bankruptcy will own more than 10.38
million shares of our stock and have the right to purchase more than an
additional 41.52 million shares, out of a total of nearly 57.34 million shares
(fully diluted). Thus, the recipients of the shares from the DWSI purchase
(which will be distributed to DWSI interest holders under its Plan of
Reorganization) will own a majority of the shares of our outstanding stock and
be able to control future shareholder votes, including election of all
directors.
DWSI had more than 4,000 creditors and equity security holders who will
receive our shares and warrants as a result of this purchase. We believe that
no individual creditor, security holder, or group of creditors and security
holders, will receive more than 1,892,680 shares (3.30%) of our stock, fully
diluted, including shares issuable on exercise of all warrants to be issued in
the DWSI acquisition. No group of DWSI shareholders has gotten together
for the purpose of exercising control over us or electing members to our board
of directors. One individual, Mr. David Schlueter, who has been elected
chairman of our board of directors, would, upon exercise of all of warrants,
own 3.30% of our common stock, and upon release of the audit escrow and upon
exercise of all warrants, would own 4.38% of our common stock.
Because the DWSI claimants and interest holders, like our own shareholders
prior to the DWSI acquisition, are mainly small investors, we believe that the
issuance of shares amounting to more than 65.6% of our outstanding
common stock (90.5%, if all outstanding warrants are exercised) will not cause
a change of control of our company or our board directors, because no person
or group will own enough shares to exercise control over AWSS or elect
members of the board of directors. We are including this description of the
issuance of shares in the DWSI acquisition in the interest of clarity, but we
do not agree or acknowledge that a "change of control" has taken place
under Securities and Exchange Commission rules.
Risks Involved in the DWSI Acquisition
Because of the lack of audited financial information on DWSI as well as its
precarious financial condition, and our own poor financial condition,
substantial risks are involved in this asset purchase and in any investment in
our company. The following discussion summarizes the most important of those
risks. Because of the high risks involved, investors should not invest in our
securities unless they can afford a complete loss of their investment.
We Need an Infusion of Capital to Continue Operations at Current Levels
-----------------------------------------------------------------------
Both DWSI's and our own businesses are operating at a loss. We have a
critical need for operating capital in order to continue operating our
business and the newly acquired DWSI businesses at current levels. DWSI in
particular has unpaid bills and no funds with which to pay them. Its current
unpaid liabilities exceed $300,000, according to unaudited information
provided to us as of June 21, 2000. We do not have enough cash to pay off
these debts and we continue to operate our existing business at a loss. We
must have an infusion of capital in the immediate future or we will be forced
to curtail or close some operations.
We are issuing more than 41 million warrants to purchase our common stock in
the DWSI acquisition, as part of DWSI's confirmed plan of reorganization. We
hope that the DWSI equity holders will exercise warrants for our stock, to
provide operating capital. All of the warrants are exercisable at prices
(from $1 to $6 higher than the current price of our stock ($0.81 on August 8,
2000). We cannot be sure that any DWSI equity holders will exercise any
warrants, and we do not have other funding sources ready to generate revenue
to sustain our operations.
11
<PAGE>
Risks Due to Lack of DWSI Financial Statements
----------------------------------------------
We do not have audited financial statements on DWSI and cannot be sure of the
current financial condition of the property we have bought.
Although the asset purchase agreement required DWSI to provide audited
financial statements for the year ended December 31, 1999, prior to closing,
they do not have audited statements and cannot afford the cost of an audit.
We elected to waive the audit requirement, and amended the asset purchase
agreement to provide that the purchase price will be reduced if we cannot
obtain audited financial statements within 70 days of closing. We based our
decision to proceed on our familiarity with DWSI's assets and business and of
their current liabilities that we are assuming.
An audit provides independent assurance of the financial condition of the
enterprise being bought. Without these statements, we run the risk that the
financial condition of DWSI is not what its management has told us it is, that
assets are overstated, that liabilities are understated, and that the
operating losses at DWSI are much larger than what we now believe. The audit,
when it is completed, may show that we paid substantially more (or less) than
what the assets are worth.
Without an audit of DWSI, we cannot comply with SEC reporting requirements,
and AWSS could be delisted from the OTC Bulletin Board.
SEC rules require that we must furnish audited, historic financial statements
of substantial businesses that we acquire and unaudited pro forma financial
statements for the combined businesses within 60 days of when we file this
report. If we are unable to complete the audit and file the required
financial statements, we will become delinquent in our reporting obligations
to the SEC. If we remain delinquent, the Over-the-Counter Bulletin Board,
where our stock is now quoted, may decide to suspend quotation of our stock.
If quotations were not given on the OTC Bulletin Board, it might become much
more difficult to buy or sell our stock at prices reasonably related to fair
market value.
If we were delisted from the Bulletin Board, we would likely try to have our
stock quoted on another trading vehicle, such as the non-Nasdaq, pink sheets.
These markets are thinly traded and price quotations on pink sheet stocks
often do not reflect the prices at which any substantial amounts of stock can
be bought or sold.
Risks Because of DWSI's Poor Financial Condition
------------------------------------------------
DWSI has run out of operating capital and risks closure or loss of some
operations and assets.
On the closing date, DWSI lacked funds to pay its ongoing expenses and was in
danger of having essential business services discontinued by its vendors and
suppliers. AWSS has also been operating at a loss, and our operating capital
reserves are also nearing depletion. We expect that some recipients of our
warrants being issued in the DWSI purchase will exercise their warrants to
provide operating capital until we can consolidate and stabilize operations,
but we have no commitments to do so and cannot be sure that any warrants will
be exercised. If we do not locate a financing source to help finance current
operations within the next thirty days, we may be forced to close some
operations, at least temporarily. Once they are closed, we cannot be sure we
will be able to restart them or salvage any value from them.
We are seeking alternate sources of capital to temporarily fund our
operations. We have entered into discussions with one financing group but, at
this time, there can be no assurances that the necessary capital will be
forthcoming. Therefore, we risk being forced to close at least some of the
operations we are buying because of lack of funds to continue. We then risk
the permanent loss of these assets and any revenue we could get from operating
or selling them.
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DWSI has always operated at a loss and will continue to do so unless we make
dramatic changes.
As of June 2000, DWSI's management has informed us that they are operating at
a loss of $40,000 to $50,000 monthly. We have no reason to believe that their
estimates are inaccurate, but DWSI's financial statements have not been
audited or reviewed by an independent public accountant, and their losses
according to generally accepted accounting principals could well be greater
than DWSI's management believes. Unless we dramatically change DWSI's
operations by consolidating them with our own and offering viable services
over the FCC license frequencies we are acquiring, we will continue to operate
at a loss until we are forced to sell or close the business.
We continue to believe that our FCC licenses, especially with the addition of
the DWSI licenses, have value as providers of high-speed Internet and other
wireless services. However, neither we nor DWSI have had operating capital to
adequately develop such services. In order to make our operations viable, we
believe we must develop a marketing plan to become a national Internet
provider.
DWSI's FCC licenses are not held in the proper party's name; we may be unable
to transfer the licenses to us.
After DWSI filed its chapter 11 case, DWSI continued to operate its radio
frequencies during its bankruptcy without asking the FCC to formally transfer
the license to DWSI as "debtor in possession" under the Bankruptcy Code, as
required by the FCC. Now that DWSI has sold all its assets to us, we must,
with DWSI, have the licenses transferred first to DWSI as debtor in
possession, and then to our name. Our FCC counsel advises us that this
transfer process should not be opposed by the FCC, assuming they agree that we
are suitable owners for the licenses. We are already an approved holder of
similar licenses in the Mobile, Alabama, area, and we believe the FCC will not
oppose the ultimate transfers to our name. However, these we must obtain
consent from the FCC to make these transfers. We have engaged counsel to
complete the license transfer process on behalf of us and DWSI.
The FCC legal counsel we engaged believes that there are no insurmountable
impediments to transferring the licenses to us, but if we cannot get one or
more the licenses and have the use of them, we will fail to obtain the most
valuable asset that we are buying in this transaction. If we are unable to
obtain government approval and have the licenses transferred, the value of our
bargain to buy these assets would be lost.
We have made an assignment of the DWSI licenses as collateral to secure
payment of DWSI's legal fees.
Prior to closing, we executed promissory notes to cover fees owed to four law
firms that represented DWSI in its bankruptcy proceedings, to cover their
outstanding bills through May 25, 2000, totaling approximately $134,000.
Both notes are secured by an assignment of the FCC licenses, which are the
main asset we are acquiring in the purchase. Both notes bear interest at 9%
per annum and require monthly payments, with the entire amounts becoming due
December 31, 2000. If we are unable to pay off these notes as they become
due, we could lose the FCC licenses that we have just purchased.
Risks of Our Own Business and Operations
----------------------------------------
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. Its situation and history
were very similar to that of DWSI. 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
believed our limited channel capacity made it impossible to compete with the
hard-wire cable and direct broadcast satellite television providers. 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.
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Due to the uncertainties regarding the availability of capital, 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 in Mobile, we must
expand our Internet customer base to at least 3,000 customers from a current
customer list of approximately 1,000. We do not have estimates, as yet, of
the number of customers it will take to become profitable at the newly
acquired locations in Shreveport, Baton Rouge, Reading, and Clarksville.
Accordingly, we cannot expect to operate at a profit in the foreseeable
future.
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 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.
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, all of which
warrants have either been exercised or have expired. We are issuing more than
41 million more warrants to DWSI claimants and equity security holders as part
of this acquisition, and we expect to use proceeds from exercise of these
warrants to finance our operations for the foreseeable future. If the warrant
holders do not exercise the warrants, we may have insufficient capital to
continue operations at their current levels for the newly acquired businesses
in Shreveport, Baton Rouge, Clarksville and Reading, or to continue our
present operations in Mobile.
Our senior secured indebtedness is due and unpaid.
At June 30, 2000, $175,000 in principal amount plus accrued interest was due
and unpaid on a loan made to us by a director who assisted in financing our
operations while we were still in bankruptcy. 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. In addition, we owe a former director accrued and unpaid interest
on a similar secured loan, whose principal amount we repaid last year. These
lenders have not demanded payment nor declared the loans in default, but they
also have not waived any provisions of the loan agreement. We are negotiating
an extension or settlement of this indebtedness, but if we are unable to
renegotiate the terms of this debt, the lenders could demand payment and
foreclose on assets which are important to continuing our business.
Possible Additional Acquisitions
In January 2000, we signed letters of intent with several unrelated entities
to purchase the assets and assume the liabilities of each of the businesses.
Definitive purchase agreements have not yet been finalized, but it is expected
that the purchase prices will include the issuance of additional shares of the
Company's common stock. These letters of intent were described in our report
on Form 10-KSB for the year ended December 31, 1999, under the title, Possible
Future Acquisitions.
All of these possible future acquisitions are subject to material
contingencies and events which may prevent the consummation of each
acquisition. We now think it is unlikely that all of these acquisitions will
be made on terms similar to the ones described in our Form 10-KSB dated
December 31, 1999, but we do believe that one or more of these acquisitions
may be made in the near future.
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Results of Operations for the Six Months Ended June 30, 2000, as Compared to
the Six Months Ended June 30, 1999
We ceased providing cable programming services in our Mobile, Alabama, market
at the end of the first quarter of 2000. We now offer Direct TV(TM) . We
charge for purchase of the digital satellite equipment needed to receive
Direct TV(TM), and we also receive a percentage of monthly subscription
charges for the service. We believe that we could develop the Direct TV(TM)
business in Mobile and other markets by offering it to multiple users, such as
hotels and apartment complexes, if we had sufficient capital to make the
expenditures needed to install equipment in these locations. At present, we
do not have sufficient capital to develop this business.
Our revenues more than doubled in the first six months of 2000, over the same
period in 1999, to $100,740 from $42,490. In the first half of 2000, we
derived our revenue from Internet services, while in the first half of last
year about half of our revenue came from Internet services and half from
wireless cable services. Our Internet service revenues were dramatically
higher than this time last year mainly because of services provided to
customers of Dibbs Internet, which we purchased in the third quarter of 1999
and which did not contribute to our earnings in the first quarter of 1999.
Operating expenses increased only slightly in the first half of 2000, to
$66,536 from $64,353 in the half quarter of 1999. For financial statement
purposes, we consider operating expenses to be costs such as installation,
channel fees. Internet telephone costs, maintenance and supplies. These
operating expenses are much lower per revenue dollar than our operating
expenses when we operated wireless cable TV and paid for programming expenses
and channel lease expense. In the first half of 2000, operating expenses were
66% of revenues, but in the first half of 1999, operating expenses equaled
151% of revenues.
Administrative expenses continue to more than equal revenues. In the first
half of 2000, operating expenses were $518,172, a $192,748 (55%) increase over
the same period in 1999. These expenses reflect continuing audit and legal
costs to complete our financial reporting requirements and to prepare for the
acquisition of DWSI. Because of our high administrative expense, compared to
our revenues, our operating loss for the first quarter of 2000 was $571,345,
which represents an increase of $117,900 (26%) from the first half loss in
1999 of $453,445.
Capital Resources And Liquidity:
Our financial statements for the years ended December 31, 1999, 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.
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. All of the warrants issued in the Mobile LLC reorganization
either have been exercised or have expired, so those warrants are no longer a
potential source of capital. We issued warrants to the DWSI claimants and
equity security holders in the DWSI acquisition, but the exercise price of
those warrants exceeds the recent trading range of our common stock.
We are exploring possible acquisitions of similar businesses with positive
cash flow to improve our financial position. These include reductions in our
operations and selling some of the assets we bought in the DWSI acquisition.
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Operating Activities
For the six months ended June 30, 2000, cash used in operating activities was
$283,938, compared to $338,276 used in operating activities in the first six
months of 1999. This includes a $146,929 increase in our accounts payable.
We issued stock for services in the amount of $62,500 during the second
quarter. We are not paying some bills on a current basis. We expect our
accounts payable to continue to increase, with a significant increase in past
due accounts payable, as a result of the DWSI acquisition and our assumption
of DWSI's liabilities, as well as the costs we incurred in connection with the
DWSI acquisition.
Investing Activities
We paid $25,724 to purchase equipment in the first six months of 2000. Most
of this amount was attributable to the purchase of a new transmitter during
the first quarter. The total represents a $5,009 (24%) increase from $20,715
spent for equipment purchases in the first half of 1999.
Financing Activities
In the first half of 2000, we raised $286,836 from the exercise of warrants to
purchase common stock, compared to $677,421 raised from the exercise of
warrants in the first quarter of 1999. In both cases, we used the proceeds to
pay operating expenses. In the second quarter of 2000, we also issued $30,000
in notes payable to pay for accounting services of which $5,500 was repaid.
In the second quarter of 2000, we issued stock for services which we valued at
$62,500.
PART II
ITEM 1. LEGAL PROCEEDINGS
We were not involved in any legal proceedings in the second quarter of 2000.
When we acquired DWSI in August 2000, we also acquired DWSI's interest in a
lawsuit against Decathlon Communications, Inc. ("Decathlon"). That suit,
first filed in 1998, alleged that Decathlon owed DWSI $210,745 for digital
compression equipment that was paid for but not delivered and asserting
damages in the amount of $582,280. On February 23, 2000, the U.S. Bankruptcy
Court heard Decathlon's motion for a change of venue and ruled that Colorado
was the proper venue. DWSI subsequently filed its lawsuit in Denver, Colorado
and, under the terms of the DWSI asset purchase agreement, we have asserted
our rights as plaintiff.
Decathlon subsequently filed lawsuits against the Baton Rouge Wireless Cable
Television LLC and the Shreveport Wireless Cable Television Partnership
alleging that each entity failed to make final payments on digital compression
equipment ordered from Decathlon. In August 2000, we assumed the defense for
these cases in accordance with the terms of their respective asset purchase
agreements.
All three cases are in their early stages and we cannot now predict the
outcome of these suits.
ITEM 2. CHANGES IN SECURITIES
During the three months ended June 30, 2000, the Company issued 234,481 shares
of common stock to existing shareholders pursuant to the exercise of warrants.
The Company received total consideration of $286,836 upon exercise of the
warrants. These warrants were originally issued in 1998 pursuant to the
confirmed Plan of Reorganization of Mobile Wireless L.L.C., the Company's
predecessor. Both the warrants and the stock issued pursuant to their
exercise were issued under an exemption from the registration requirements of
the Securities Act of 1933 pursuant to Section 1145 of the U.S. Bankruptcy
Code.
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Also during the second quarter of 2000, the Company issued 25,000 restricted
shares of its common stock to two consultants for investor relations services
and 100,000 restricted shares of common stock to Monte Julius, for his
services as our former president. These shares were issued in an exempt,
private, negotiated transaction pursuant to Section 4(2) of the Securities Act
of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
We filed no reports on Form 8-K during the second quarter of 2000.
We filed an 8-K report dated July 6, 2000, to report that Thomas M. Howard has
been named president of our Company, replacing Monte Julius, who retired as
president but who remains on our board of directors.
We filed an 8-K report dated August 6, 2000, to report:
- the completion of our acquisition of the assets of Digital Wireless
Systems, Inc., pursuant to that company's plan of reorganization under
Chapter 11 of the U.S. Bankruptcy Code. We acquired the assets in
exchange for our common stock, our common stock purchase warrants, and our
assumption of all of the acquired company's liabilities.
- a change in our independent accountants, from Brown Armstrong Randall
Reyes Paulden & McCown Accountancy Corporation to Hurley & Company.
- an increase in the number of authorized shares of common stock from
50,000,000 to 150,000,000 shares.
- eliminate shareholders' preemptive rights to purchase shares.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Advanced Wireless Systems, Inc.
/s/
Date: ____________________________________
Thomas M. Howard, President
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