SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB/A
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1994 Commission File Number 0-11412
AMERICAN WIRELESS SYSTEMS, INC.
(Name of small business issuer in its charter)
Delaware 41-1616965
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7426 E. Stetson Drive, Suite 220, Scottsdale, AZ 85251
------------------------------------------------------
(Address of principal executive offices)(Zip Code)
11811 N. Tatum Blvd., Suite 1060, Phoenix, AZ 85258
--------------------------------------------------------
(Former address of principal executive offices)(Zip Code)
Issuer telephone number, including area code:
(602)994-4301
-------------
Securities registered under Section 12(b) of the Act:
None
----
(Title of Class)
Securities registered under Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
--------------------------------------
(Title of Class)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ( ).
The issuer's revenues for the fiscal year ended December 31, 1994 were $83,333.
As of March 30, 1995, the aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the average bid and
asked prices of such stock as of such date in the over-the-counter market as
reported on the OTC Bulletin Board, was $13,274,021. Shares of Common Stock held
by each officer and director and by each person who owned 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily
conclusive.
As of March 30, 1995, there were 5,709,187 shares of the registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
Item 7. FINANCIAL STATEMENTS
As amended:
Reference is made to the Financial Statements, the Report of
Independent Public Accountants of the Company thereon and the Notes thereto
commencing at page F-1 of this report, which Financial Statements, Report and
Notes are incorporated by reference.
p.1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN WIRELESS SYSTEMS, INC.
By:/s/ Steven G. Johnson
-----------------------------------
Steven G. Johnson, Chief Executive Officer,
President, Chief Operating Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John R. Hardesty Chairman of the Board of December 20, 1995
- ------------------------ Directors -----------------
John R. Hardesty
/s/ Steven G. Johnson Chief Executive Officer, December 20, 1995
- ------------------------ President, Chief Operating -----------------
Steven G. Johnson Officer and Director
/s/ Daniel A. Cartwright Chief Financial Officer December 20, 1995
- ------------------------- -----------------
Daniel A. Cartwright
/s/ Robert A. Mayer Director December 20, 1995
- ------------------------- -----------------
Robert A. Mayer
/s/ James N. Orth Director December 20, 1995
- ------------------------- -----------------
James N. Orth
P.2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
American Wireless Systems, Inc.:
We have audited the accompanying balance sheets of American Wireless
Systems, Inc. (a Delaware corporation) as of December 31, 1993 and 1994, and the
related statements of operations, stockholders' equity and cash flows for the
years ended December 31, 1993 and 1994. 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 audits.
We conducted our audits 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 American Wireless
Systems, Inc. as of December 31, 1993 and 1994, and the results of its
operations and its cash flows for the years ended December 31, 1993 and 1994, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
October 19, 1995.
F-1
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
BALANCE SHEETS
December 31, 1993 and 1994
ASSETS
1993 1994
---- ----
Cash and cash equivalents (note 2)........... $3,244,275 $376,621
Marketable securities (note 2)............... 2,318,252 --
Income tax receivable (note 10).............. 401,316 --
Debt issuance costs (note 2)................. 591,957 --
Prepaid expenses and other current assets.... 227,180 186,242
----------- -----------
Total current assets............... 6,782,980 562,863
Property and equipment, at cost, net (note 2). 228,782 431,790
Investments in and advances to joint ventures
(note 4).................................. 1,208,709 3,436,048
Investments in wireless cable systems (notes 1
and 4).................................... 957,813 2,430,866
License deposits and other assets (note 2)... 123,009 88,333
----------- -----------
$9,301,293 $6,949,900
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $300,939 $482,342
Accrued liabilities........................ 389,779 345,063
Convertible subordinated notes payable (note 7). 7,707,000 --
----------- -----------
Total current liabilities.......... 8,397,718 827,405
----------- -----------
Deferred compensation (note 6)............... -- 354,636
----------- -----------
Commitments and contingencies (note 9)
Stockholders' equity (notes 1, 3, 7, 8, 9
and 10):
Common stock, $.01 par value, 40,000,000 shares
authorized, 3,346,841 shares outstanding in 1993
and 5,709,187 shares outstanding in 1994. 33,468 57,092
Additional paid-in capital................. 9,671,629 20,239,069
Accumulated deficit........................ (8,801,522) (14,528,302)
----------- -----------
Total stockholders' equity......... 903,575 5,767,859
----------- -----------
$9,301,293 $6,949,900
=========== ===========
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31, 1993 and 1994
1993 1994
---- ----
Revenue:
Management fees $ -- $ 83,333
----------- -----------
General and administrative expenses:
Compensation 1,502,006 1,920,002
Outside services 476,008 1,111,104
Other 780,920 1,127,356
----------- -----------
Total expenses 2,758,934 4,158,462
----------- -----------
Loss from operations (2,758,934) (4,075,129)
----------- -----------
Loss from operations of joint ventures (184,906) (200,436)
----------- -----------
Other income (expense), net
Interest expense (775,525) (976,867)
Other (note 7) 69,205 (474,348)
----------- -----------
(706,320) (1,451,215)
----------- -----------
Net loss $(3,650,160) $(5,726,780)
=========== ===========
Net loss per share (note 2) $ (1.16) $ (1.26)
=========== ===========
Weighted average shares outstanding 3,159,397 4,540,362
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<TABLE>
AMERICAN WIRELESS SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1993 and 1994
<CAPTION>
Additional
Common stock paid-in
Shares Par value capital Deficit Total
------ --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 ............... 3,118,666 31,187 7,766,470 (5,151,362) 2,646,295
Private placements of common stock, net of
offering costs of $361,123 (note 1) .... 346,666 3,466 2,547,411 -- 2,550,877
Redemption of common stock owned by
Wireless California (note 3) ........... (258,333) (2,583) (2,167,417) -- (2,170,000)
Contribution of income tax receivable
(note 10) .............................. -- -- 401,316 -- 401,316
Conversion of notes ...................... 126,509 1,265 973,982 -- 975,247
Common stock issued ...................... 13,333 133 149,867 -- 150,000
Net loss ................................. -- -- -- (3,650,160) (3,650,160)
---------- ------- ----------- ----------- ----------
Balance, December 31, 1993 ............... 3,346,841 33,468 9,671,629 (8,801,522) 903,575
Private placements of common stock, net of
offering costs of $48,990 (note 1) ..... 240,000 2,400 1,964,610 -- 1,967,010
Conversion of notes ...................... 2,105,679 21,057 8,542,356 -- 8,563,413
Exercise of common stock warrants at
$ 3.75 667 7 2,493 -- 2,500
Exercise of common stock warrants at
$ 3.00 13,333 133 39,867 -- 40,000
Common stock to be issued ................ 2,667 27 29,973 -- 30,000
Contribution of income tax receivable
(note 10) .............................. -- -- (11,859) -- (11,859)
Net loss ................................. -- -- -- (5,726,780) (5,726,780)
---------- ------- ----------- ----------- ----------
Balance, December 31, 1994 ............... 5,709,187 57,092 20,239,069 (14,528,302) 5,767,859
========== ========= =========== ========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
F-4
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1993 and 1994
1993 1994
---- ----
Cash flows from operating activities:
Net loss ..................................... $(3,650,160) $(5,726,780)
Adjustments to reconcile net loss to cash used
for operating activities:
Depreciation and amortization .............. 442,933 637,049
Loss on disposal of assets ................. 16,136 55,043
Loss from operations of joint ventures ..... 184,906 200,436
Repricing of common stock warrants (note 7) -- 425,000
Deferred compensation (note 6) ............. -- 529,462
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses
and other assets ...................... (198,332) 438,793
Decrease (increase) in accounts payable
and accrued liabilities ............... 530,142 232,831
----------- -----------
Net cash used for operating
activities .......................... (2,674,375) (3,208,166)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment ........ (77,055) (287,291)
Investment in wireless cable systems ......... (755,271) (3,820,312)
Purchases of marketable securities ........... (2,318,252) --
Proceeds from sales of marketable
securities ................................. -- 2,438,604
Deposits made on license acquisitions ........ (69,122) --
----------- -----------
Net cash used for investing
activities .......................... (3,219,700) (1,668,999)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of convertible notes
payable .................................... 8,736,000 --
Net proceeds from sale of common
stock ...................................... 2,550,877 2,009,511
Redemption of common stock.............. (2,170,000) --
Deferred debt issuance costs............ (1,083,371) --
Cash received from affiliates........... 525,000 --
----------- -----------
Net cash provided by financing
activities..................... 8,558,506 2,009,511
----------- -----------
Net (decrease) increase in cash and cash
equivalents............................. 2,664,431 (2,867,654)
Cash and cash equivalents, beginning of
year.................................... 579,844 3,244,275
----------- -----------
Cash and cash equivalents, end of year. $3,244,275 $ 376,621
=========== ===========
Supplemental disclosure of cash flow
information -- cash paid during the
year for interest....................... $ -- $ 351,510
=========== ===========
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1993
(1) Background, Organization and Operations
(a) Background and Organization
American Wireless Systems, Inc. (the Company) was originally
incorporated in Minnesota in 1988 as Short Takes, Inc. The Company ceased its
prior business activities in April 1991, at which time the Company began
searching for a suitable business for acquisition or merger. Its sole asset was
cash of $669,000 on December 17, 1992, when it acquired certain operating assets
and liabilities of AWS, Inc. (formerly American Wireless Systems, Inc.), a
California corporation (Wireless California) in exchange for 2,572,000 shares of
common stock which represented 82.5% of the outstanding common stock of the
Company. For accounting purposes, this transaction has been treated as an
issuance of common stock for cash by Wireless California (the reverse
acquisition). See Note 3 for additional discussion of this transaction.
In April 1993, the stockholders approved changing the Company's name
from Short Takes, Inc. to American Wireless Systems, Inc. In addition, the
Company was reincorporated in the state of Delaware and declared a reverse stock
split of 1-for- 2.5. On October 18, 1994, the stockholders of the Company
approved a reverse stock split of 1-for-3. The accompanying financial statements
have been retroactively restated to reflect these reverse stock splits.
(b) Operations
The Company currently owns an interest in and manages the operations of
wireless cable television systems in Minneapolis and Fort Worth, and holds an
interest in or owns the rights to certain wireless cable television channels in
Los Angeles, Dallas, Memphis and formerly Pittsburgh. Wireless cable is an
emerging business that provides television programming to subscribers by
transmitting a signal via microwave frequencies licensed by the Federal
Communications Commission (FCC) to antennae located at the subscriber's
premises.
The Company's wireless cable systems are all in either the initial
development stage or in the early operating stage; therefore, significant
additional investment will be required to develop those systems to a level which
will provide positive cash flow.
During 1993 and 1994, the Company raised an aggregate of approximately
$13,664,000, including $8,736,000 of convertible subordinated notes (the
"Notes") through three private placements of common stock and notes. The Notes
matured July 15, 1994, and have been converted into shares of the Company's
common stock (see Note 7).
In April 1994, the Company filed a Registration Statement on Form SB-2
in connection with a proposed public offering, which was amended to include the
offer and sale of 2,500,000 units, each unit consisting of two shares of common
stock and one warrant to purchase one share of common stock. For a variety of
reasons, the Company elected not to proceed with the proposed offering.
F-7
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Since January 1995, the Company has been pursuing various financing
options which culminated in signing of an Agreement Of Merger with Heartland
Wireless Communications, Inc. (Heartland) on September 11, 1995 (the "Merger
Agreement"). The Merger Agreement provides for the Company's stockholders to
exchange their stock in the Company for stock in Heartland. The Merger with
Heartland will give the Company's stockholders $34,000,000 in Heartland common
stock, of which $30,750,000 will be distributed immediately and $3,250,000 will
be held in escrow for one year to indemnify Heartland for potential liabilities
(Note 9). The conversion ratio into Heartland common stock will be the trading
price of Heartland stock based on the average closing price for the 10 trading
days ending on the fifth day before consummation of the Merger, provided
Heartland's trading price is at least $20 per share and not greater than $26 per
share. If Heartland's trading price is below $20 per share, the exchange price
will be $20 per share; if the trading price is above $26 per share, the exchange
price will be $26 per share.
In February and April 1995, the Company obtained loans totalling
$1,000,000 from a shareholder of the Company. These loans carried an interest
rate of 15% per annum, were secured by various assets of the Company and were
paid off in September 1995.
In connection with the Merger Agreement, the Company received a
$200,000 nonrefundable deposit and a loan for $1,800,000. The promissory note,
dated May 26, 1995 and amended August 17, 1995, is due 12 months after the
Heartland Merger Agreement is consummated or abandoned, carries an interest rate
of 2% above the prime rate with interest payable quarterly, and is secured by a
security interest in the Company's wireless channel rights in the Dallas market.
On September 29, 1995, the Company sold its assets in the Pittsburgh
market for $1,250,000 in cash.
The Company is currently negotiating to sell its assets in the Memphis
market for $3,900,000. The Company is currently involved in litigation with the
same company that has offered to purchase this market. According to the proposed
agreement, at the time of closing of this transaction, all litigation between
the two parties will be withdrawn and all claims will be waived (note 9).
(2) Significant Accounting Policies
The accompanying financial statements reflect the application of the following
accounting policies:
(a) Cash Equivalents
The Company considers all highly liquid investments and time deposits
with an initial maturity of three months or less to be cash equivalents.
(b) Marketable Securities
Marketable securities are carried at the lower of cost or market. The
Company primarily invests in treasury securities.
F-8
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(c) Debt Issuance Costs
The costs associated with the issuance of debt are deferred and
amortized over the life of the debt using the effective interest rate method.
Amortization of debt issuance costs for the years ended December 31, 1994 and
1993, was approximately $592,000 and $405,000, respectively.
(d) Property and Equipment
Property and equipment represent corporate furniture and equipment
unrelated to the wireless cable television systems. Property and equipment are
recorded at cost and are depreciated using the straight-line method over the
estimated useful lives of the related assets.
Property and equipment consists of the following:
Depreciable December 31,
Life (Years) 1993 1994
----------- ---- ----
Computer equipment .......... 5 $ 86,074 $ 112,083
Furniture and fixtures ...... 7 60,645 58,093
Office and other equipment .. 5-7 135,461 384,782
Autos ....................... 5 4,700 --
--------- ---------
286,880 554,958
Less accumulated depreciation (58,098) (123,168)
--------- ---------
$ 228,782 $ 431,790
========= =========
(e) Investment in Joint Ventures
The Company accounts for its investments in joint ventures under the
equity method of accounting.
(f) Investment in Wireless Cable Systems
Investment in wireless cable systems consists principally of payments
for channel rights which are amortized over their estimated useful life once
placed in service.
(g) License Deposits
License deposits represent deposits made under agreements to acquire
FCC frequency rights.
(h) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS No.
109). Under SFAS No. 109, deferred taxes are provided based on the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities, using enacted tax rates in the years in which
the differences are expected to reverse. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-9
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(i) Net Loss Per Share
The calculation of net loss per share is based on the weighted average
number of shares outstanding. Common stock equivalents are not considered as
their effect would be anti-dilutive.
(3) The Reverse Acquisition
Wireless California, the predecessor to certain of the Company's
wireless cable operations, was incorporated in April 1991 to acquire and
subsequently sell or develop wireless cable systems in various markets in the
United States. In accordance with the terms of the asset purchase agreement
between Wireless California and the Company, only the assets and liabilities
related solely to the Wireless California wireless cable systems development and
operations were acquired by the Company. The transaction specifically excluded
any assets or liabilities related to Wireless California's activities in selling
its interests in the wireless cable systems (see Note 9).
Subsequent to the reverse acquisition, Wireless California began to
wind down its affairs until, on August 30, 1993, its remaining net assets
(consisting primarily of common stock of the Company) were distributed to its
shareholders who then contributed such assets, except for the common stock of
the Company, to a limited liability corporation, AWS Liquidating, L.L.C. (AWS
LLC).
In connection with its private placements in 1993, the Company redeemed
138,333 shares of common stock owned by Wireless California and 120,000 shares
of common stock of the Company owned by the shareholders of Wireless California.
The redemption price of $8.40 per share was equal to the offering price in the
private placements. A substantial amount of the proceeds were used to discharge
the remaining obligations of Wireless California.
(4) Investments In And Advances To Joint Ventures and Wireless Cable Systems
Investments in and advances to joint ventures and wireless cable
systems represent the historical costs incurred to develop the wireless cable
systems, including the acquisition of the FCC frequency rights and the head-end
transmission equipment and consists of the following:
F-10
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
December 31,
Market 1993 1994
------ ---- ----
Jointly Owned Systems:
Minneapolis/St. Paul, Minnesota........ $ 545,655 $ 436,446
Advances to Minneapolis/St. Paul, Minnesota. -- 2,050,882
Ft. Worth, Texas....................... 261,720 243,054
Advances to Ft. Worth, Texas........... -- 253,177
Pittsburgh, Pennsylvania............... 401,334 452,489
---------- ----------
$1,208,709 $3,436,048
========== ==========
Wholly Owned Systems:
Los Angeles, California................ $ -- $ 972,653
Memphis, Tennessee..................... 571,462 733,153
Dallas, Texas.......................... 386,351 725,060
---------- ----------
$ 957,813 $2,430,866
========== ==========
(a) Jointly Owned Systems
The Company currently owns an equity interest in operating wireless
cable systems in Minneapolis, Minnesota (AWS-Minneapolis) (25% interest) and Ft.
Worth, Texas (AWS-Ft. Worth) (20% interest) and formerly owned an equity
interest in a wireless cable system under development in Pittsburgh,
Pennsylvania (25% interest).
The Minneapolis system has been in operation since March 1993. The
Company's joint venture partner is a general partnership which was formed to
acquire an interest in and jointly develop and operate the Minneapolis wireless
cable system. In accordance with the terms of the joint venture agreement,
losses are to be allocated in accordance with contributed capital and profits
are to be allocated (i) in accordance with contributed capital to the extent of
previously allocated losses and then (ii) 25% to the Company and 75% to the
general partnership.
In April 1994, the Company loaned the Minneapolis general partnership
$2,000,000 to fund additional development of the system. The loan bears interest
at 8% per annum and was originally payable in full in 18 months. Prior to the
due date, the Company agreed to extend the maturity of the loan until the
earlier of (i) February 28, 1996 or (ii) the abandonment of the Heartland Merger
Agreement. In the event that the loan is not repaid by the due date, the Company
will receive an additional equity interest in the Minneapolis joint venture of
approximately 10%.
AWS-Minneapolis received additional funding in May 1995 of $550,000
from Tsunami Capital Corporation (Tsunami). The loan was made by Tsunami in
anticipation of a reverse merger between AWS-Minneapolis and Tsunami. The loan
is due December 31, 1995, and carries an interest rate of 12% per annum.
On October 4, 1995, the Company's joint venture partner signed a
contract to sell its 75% interest in AWS-Minneapolis to Heartland. As part of
this agreement Heartland agreed to loan AWS-Minneapolis up to $1,575,000, of
which $575,000 will be used to repay Tsunami and the remainder to fund
subscriber growth.
F-11
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
The Ft. Worth system has been in operation since November 1992. The
Company's joint venture partner is a general partnership which was formed to
acquire an interest in and jointly develop and operate the Ft. Worth wireless
cable system. The Ft. Worth system has been operated through an informal joint
venture agreement. The accompanying financial statements include an estimate of
the Company's pro rata losses in this system.
AWS-Ft. Worth does not have sufficient funds to continue development of
the system. The Company's joint venture partner also does not have funds to
contribute to the joint venture and has expressed its belief that either
Wireless California or the Company is obligated to provide additional funds to
develop the system to a positive cash flow position. Neither Wireless California
nor the Company believes it has such an obligation; however, the Company is
negotiating the terms of additional funding to continue development of the
system in conjunction with definitive joint venture and management agreements.
In order to protect the Company's interest in the assets of AWS-Ft. Worth, the
Company has advanced $253,177 through December 31, 1994 and an additional
$93,347 during 1995 to fund negative cash flow of the system and maintain the
current subscriber base.
On October 4, 1995, the Company's joint venture partner in AWS-Ft.
Worth signed a contract with Heartland to sell its 80% interest in AWS-Ft.
Worth. Pursuant to the agreement, Heartland has agreed to assume up to $570,000
of amounts due to the Company. Additionally, Heartland has agreed to loan the
Ft. Worth partnership $500,000 secured by its interest in AWS-Ft. Worth.
The Pittsburgh system is still in its initial development stage. On
September 29, 1995, the Company sold all of its interest in the assets of the
Pittsburgh market for $1,250,000 in cash.
Selected combined balance sheet data related to the Company's jointly
owned operating systems is as follows (in 000's):
December 31,
1993 1994
---- ----
Current assets.............. $ 461 $402
Total assets................ 12,001 10,846
Total liabilities........... 296 790
Members equity.............. 11,705 10,056
AWS' interest............... 725 525
Selected combined operating data related to the Company's jointly owned
operating systems is as follows (in 000's):
December 31,
------------
1993 1994
---- ----
Revenues.......... $ 1,064 $ 1,187
Operating expenses. (3,814) (4,363)
------- -------
Net loss.......... $(2,750) $(3,176)
======= =======
AWS' interest..... $ (185) $ (200)
======= =======
F-12
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(b) Wholly Owned Systems
The Company's investment in wholly owned systems consists primarily of
the costs to acquire the rights to FCC licenses in Dallas (16), Los Angeles (9)
and Memphis (22). The lease agreements provide for the Company to pay for the
excess airtime use, new transmission equipment and all other operating expenses
of the channels including co-location costs.
The Company is currently negotiating a contract to sell its assets in
the Memphis market for $3,900,000 to TruVision Cable, Inc. (TruVision) (Note 9).
(5) Related Parties
(a) Wireless California
Since the reverse acquisition on December 17, 1992, the Company has
entered into certain transactions with Wireless California, including the
redemption of 258,333 shares of common stock owned by Wireless California and
the shareholders of Wireless California (see Note 3), certain transactions
related to income taxes (see Note 10), the purchase of additional FCC licenses
not covered by the original acquisition agreement for $80,000 and the payment of
certain lease expenses related to the Pittsburgh wireless cable system. In 1994,
the Company advanced $35,000 to pay administrative penalties assessed Wireless
California by the State of Arizona (see Note 9). The members of AWS L.L.C. have
agreed to reimburse the Company upon sale of the previously escrowed shares (see
Note 8). All transactions with Wireless California subsequent to August 1993
have been approved by a majority of the independent directors of the Company.
(b) AWS-Ft. Worth and AWS-Minneapolis
The Company serves as the manager and operator of the Minneapolis joint
venture. The terms of the Management Agreement, which was signed in April 1994,
provide for annual management service fees equal to the greater of 5% of
collected gross revenues or $100,000.
The Company also serves as the manager to the Ft. Worth joint venture
although no formal management agreement exists. No management service fees have
been accrued relative to the Ft. Worth system.
In its capacity as manager, the Company contracted for subscriber
installation services and subscriber equipment on behalf of AWS-Ft. Worth and
AWS-Minneapolis to Wireless Technologies, Inc. (WTI), a Texas corporation
engaged in the business of providing subscriber installation services and
distributing subscriber equipment with respect to traditional and wireless cable
systems. WTI is a wholly owned subsidiary of North American Cable Corporation
(NACC), a Texas corporation engaged in the engineering, construction and
maintenance of cable television systems, local area networks, fiber optic
networks and wireless cable television systems, with operations and business
experience in the United States, England and several other countries around the
world. A former officer and director of the Company beneficially owns 50% of the
stock of North American Cable Corporation.
F-13
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
WTI purchased certain of the subscriber equipment that it sold to
AWS-Ft. Worth and AWS-Minneapolis from Micom Products, Ltd., a Delaware limited
liability company engaged in the distribution of subscriber equipment for
wireless cable systems. Micom is owned by the beneficial owners of approximately
36% of the Company's common stock.
In 1993 and 1994, payments were made by the Company, Wireless
California and the joint ventures to WTI of $924,054 and $74,449, respectively,
for installation services and related subscriber equipment. In 1993 and 1994,
payments were made by WTI to Micom of $114,644 and $2,766, respectively, for
subscriber equipment.
(c) American Wireless Systems, Inc.
In connection with the acquisition of the rights to utilize the FCC
licenses in Los Angeles (Note 4), the Company agreed to pay a finder's fee of
$75,000 to the president of NACC as consideration for the introduction of the
Company to the license holder of the eight channels.
In February and April 1995, the Company obtained loans totalling
$1,000,000 from a shareholder of the Company who is a principal in the firm
which served as the placement agent for the Company's private offerings in 1993
and 1994 (Note 1). In addition, this individual and certain other related
entities are shareholders of the Company's common stock.
(6) Severance Agreement
Effective August 1994, an individual who held the position of Chairman
of the Board, President and Chief Financial Officer resigned. In connection with
such resignation, this individual entered into a severance agreement with the
Company, whereby the Company agreed to pay this individual his annual base
salary, as provided by the terms of his employment agreement, a bonus, if any,
consistent with the bonuses awarded to certain other officers and certain other
expenses for a period of three years. As a result, the Company recognized
approximately $566,000 of expense in the third quarter of 1994, of which
approximately $355,000 is a long-term liability. Upon the consummation of the
merger with Heartland (Note 1), the unpaid portion becomes due and payable in
full.
In September 1994, this individual resigned as a director of the
Company. In connection with such resignation, the Company granted this
individual a warrant to acquire 33,333 shares of common stock at $8.40 per
share. This warrant was granted on October 1, 1994, has a ten-year term and
became fully exercisable on April 1, 1994.
(7) Convertible Subordinated Notes Payable
At December 31, 1993, the Company had $7,707,000 in convertible
subordinated notes ("Notes") outstanding. Through May 1994, $462,000 in
principal amount of the Notes had been converted into shares of the Company's
common stock. The remaining $7,245,000 in Notes were called for prepayment by
the Company in May 1994. Holders of $4,232,000 in principal amount of the Notes
elected to receive cash payment for their investment as opposed to converting
their Notes into shares of the Company's common stock. Because the Company did
not anticipate the relatively high level of repayment, the Company did not have
adequate funds available to pay all of the Noteholders who elected repayment. In
accordance with the terms of the Notes, the conversion price of the Notes was
F-14
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
adjusted from $8.40 per share to $3.75 per share. Following the redemption date,
the Company agreed to permit all of the Noteholders, including the Noteholders
that had elected repayment, to elect repayment or to convert their Notes into
shares of the Company's common stock at the adjusted conversion price of $3.75
per share. Holders of all but $703,500 in principal amount of the Notes agreed
to convert their Notes into shares of the Company's common stock at $3.75 per
share. The placement agent for the Notes arranged for the holders of the
remaining $703,500 in principal amount of the Notes to sell their Notes to
certain accredited investors who converted such Notes into shares of common
stock at $3.75 per share by September 30, 1994.
As consideration for services rendered in connection with the
conversion of the Notes, the Company agreed to adjust the exercise price of
existing warrants held by the placement agent to acquire 169,333 shares of
common stock held by certain affiliates of the placement agent. As a result, the
Company recognized other expense of approximately $425,000 in the third quarter
of 1994.
In connection with the issuance of the Notes in 1993, the Company also
granted contingent warrants (see Note 8).
F-15
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(8) Stockholders' Equity
(a) Outstanding Warrants and Options
As of December 31, 1994, the Company had outstanding warrants and
options as follows:
Warrants to acquire common stock assumed in the reverse acquisition;
exercisable at $10.08 through November 1996................... $27,066
Warrants to acquire common stock assumed in the reverse acquisition;
exercisable at $3.75 through April 1995....................... 19,333
Warrants to acquire common stock issued to the placement agent in
connection with the 1993 private placements; exercisable at $3.75
through August and November 1998.............................. 138,666
Contingent warrants to acquire common stock issued to the Noteholders in
connection with the 1993 private placements; exercisable at $12.00
through July 1995............................................. 15,833
Contingent warrants to acquire common stock issued to the Noteholders in
connection with the 1993 private placements; exercisable at $12.00
through July 1996............................................. 330,833
Warrants to acquire common stock issued to a third party for services
provided to the Company; exercisable at $6.75 through August 2004. 8,333
Warrants to acquire common stock issued to a private investor; exercisable
at $12.00 through July 1996................................... 60,000
Warrants to acquire common stock issued to a former officer and director
of the Company in connection with a severance agreement; exercisable at
$8.40 through September 2004.................................. 33,333
(b) Escrowed Shares
Approximately 1.88 million shares of the Company's outstanding common
stock, which were owned by the former owners of Wireless California, were
released from escrow in February 1995. The shares were pledged by the former
shareholders to secure the indemnification of the Company by Wireless California
for potential losses incurred from claims arising out of the prior offerings of
general partnership interests by Wireless California (see Note 9). In December
1994, the Company made a $35,000 claim on the escrowed shares for an advance to
Wireless California (see Note 5). All but 50,000 shares were released from
escrow and distributed to the members of AWS L.L.C. in February 1995. The
remaining 50,000 shares have been retained to potentially fund a claim made by
the Company which is currently being disputed by AWS L.L.C. The shares will
remain in escrow until the dispute is resolved. No other claims were made on the
escrowed shares.
(c) Stock Option Plan
In April 1993, the Company adopted the 1993 Stock Option Plan (the
Plan) which reserved 416,666 shares of common stock to be issued to officers,
directors, key employees and independent consultants who provide valuable
services to the Company. The terms of the options are to be established by the
Board of Directors on the date of grant.
F-16
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Activity in the Plan is as follows:
Number Option Price
of Shares Per Share
Options outstanding at December 31, 1992........ -- --
Granted......................................... 151,666 $6.75-$15.75
Canceled........................................ -- --
Exercised....................................... -- --
-------
Options outstanding at December 31, 1993........ 151,666 $6.75-$15.75
Granted......................................... 25,000 $15.75
Canceled........................................ (13,333) $6.75-$15.75
Exercised....................................... -- --
-------
Options outstanding at December 31, 1994........ 163,333 $6.75-$15.75
=======
Options available for grant .................... 253,333
=======
Exercisable at end of year ..................... 91,249 $6.75-$15.75
=======
Prior to the completion of the merger with Heartland, the Company
intends to terminate the Plan.
(9) Commitments and Contingencies
(a) Commitments
The Company leases office space, equipment and licenses under various
operating leases. Future obligations under these leases are as follows for years
ending December 31:
Amount
1995.................................... $ 568,000
1996.................................... 265,000
1997.................................... 255,000
1998.................................... 170,000
1999.................................... 48,000
Thereafter.............................. 72,000
----------
$1,378,000
==========
(b) Prior Offerings of General Partnership Interests by Wireless California
Prior to the sale of certain assets by Wireless California to the
Company, approximately $29,000,000 was raised in connection with the offering of
general partnership interests in three general partnerships, each of which was
formed for the purpose of acquiring an interest in the rights to develop and
operate a wireless cable television system in Ft. Worth, Minneapolis and
Pittsburgh. Through an affiliate, Wireless California participated in the offer
and sale of the general partnership interests without registration under any
federal or state securities laws based on the belief that the general
partnership interests did not constitute securities under federal and applicable
state laws. Certain current and former officers and directors of the Company
were formerly officers and directors of Wireless California.
F-17
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Following an investigation by the Securities and Exchange Commission
(the Commission) involving the activities of Wireless California in connection
with the offer and sale of the general partnership interests as described above,
the Company and certain of its current and former officers, without admitting or
denying any wrongdoing, agreed to consent to an order of the Commission to cease
and desist from committing or causing any violation and any future violations of
the securities registration provisions of the 1933 Act and the broker-dealer
registration provisions of the Exchange Act.
Securities administrators in 22 states also have conducted or are
presently conducting investigations of the activities related to the
unregistered sale of the general partnership interests described above. The
actions taken by the various state securities administrators range from no
action taken to the issuance of 15 cease and desist orders and consent orders
pursuant to which Wireless California, the issuing general partnerships, and
certain officers of Wireless California were required to cease selling general
partnership interests without registration, to offer rescission to individuals
who purchased general partnership interests and, in certain cases, to pay
administrative penalties. In addition, AWS L.L.C. has entered into a consent
order with the State of Illinois pursuant to which AWS L.L.C. agreed to cease
and desist from selling general partnership interests without registration, to
pay an administrative penalty, and to cause a rescission offer to be made to
Illinois residents. Following an investigation by the State of Arizona, AWS
L.L.C. and current and former officers of the Company consented to an order of
the Arizona Corporation Commission to cease and desist from selling securities
unless the sale is registered or exempt from registration and to the imposition
of an administrative penalty against AWS L.L.C. The Company also consented to a
separate order that requires the Company to make an offer of rescission to all
general partners who are Arizona residents or who were offered and sold their
interests from Arizona. To the knowledge of the Company, there are no other
active federal or state regulatory proceedings or investigations.
The Company is currently attempting to amend the Arizona order to
provide for alternatives to rescission, although there can be no assurance that
the Company will be successful in this regard. The Arizona order currently
provides that if the rescission offers are not made, the Company will be
required to pay to the Arizona Corporation Commission an amount equal to the
amount of the investment made by all general partners who are Arizona residents,
or approximately $566,000, plus interest from the time of investment. There can
be no assurance that the Company will be able to satisfy the Arizona rescission
order.
Since October 31, 1992, Wireless California, the general partnerships
and the current and former officers of the Company have ceased all activities
involving the offer and sale of general partnership interests, although one of
the general partnerships continued to raise funds through capital calls to
existing general partners after such date. In addition to the rescission offer
described above, Wireless California and the general partnership issuers
voluntarily elected to offer to purchase the general partnership interests of
certain general partners in exchange for cash in an amount equal to the funds
contributed by such general partners. As of October 19, 1995, approximately
1,170 of the approximately 1,930 purchasers of general partnership interests had
been offered rescission or a return of their investment by Wireless California
or the general partnership issuers and approximately 80 had accepted the offer,
F-18
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
all of which have been paid. None of such offers, however, were necessarily
conducted in accordance with the statutory requirements of the various states.
To the extent such requirements were not met, potential securities liability
arising from the offer and sale of the general partnership interests will not be
statutorily eliminated until the statutes of limitation with respect to such
claims have expired or an offer is made in accordance with the statutory
rescission requirements of any state.
In September 1995, AWS and the Pittsburgh general partnership sold all
of their wireless cable assets in the Pittsburgh market to a publicly held
wireless cable company. As consideration for the sale of its assets in the
Pittsburgh market, the Pittsburgh general partnership received approximately
$11,250,000 in cash and short-term notes, which amount exceeded the aggregate
amount that would have been required if all Pittsburgh general partners were
offered and accepted rescission.
There can be no assurance that current general partners or any
governmental agency will not institute proceedings against Wireless California
or the Company as the successor to Wireless California based on a failure to
register the general partnership interests in connection with a public offering
or for damages based on alleged omissions or misrepresentations of material
information in connection with the sale of such interests. In connection with
the acquisition of certain assets of Wireless California, the Company expressly
disclaimed any liabilities of Wireless California arising out of the offer and
sale of the general partnership interests described above. There is a
possibility, however, that a successful claim against Wireless California could
be asserted against the Company based on a number of theories involving
successor liability. The institution of legal action against the Company arising
out of the offer and sale of general partnership interests by Wireless
California could result in substantial defense costs to the Company and the
diversion of efforts by the Company's management, and the imposition of
liabilities which could have a material adverse effect on the Company. Based on
its experience to date, however, taking into account the status of
investigations by various state securities administrators, the absence of any
asserted claim for rescission having been instituted by any of the general
partners against any of the general partnerships, Wireless California or the
Company, the Company's assessment of the current value of the general
partnership interests, the relatively small number of general partners who have
accepted previous offers by Wireless California or its shareholders to purchase
general partnership interests, the existence of a number of possible defenses to
any claims asserted against it, the existence and terms of the agreements
between the Fort Worth and Minneapolis general partnerships and Heartland (Note
4) and other factors, the Company does not believe the ultimate resolution of
this matter will have a material impact on its financial condition or its
results of operations.
(c) Other Contingencies
The Company is currently named as a defendant in two separate lawsuits.
On May 16, 1995, William R. Jenkins, the former Chief Executive Officer of the
Company, filed a lawsuit in Arizona state court alleging breach of his
employment contract and requesting as damages all amounts due under the
employment contract, treble damages under the Arizona statute, attorney's fees
and costs. On June 2, 1995, the Company filed a Petition to Compel Arbitration
and an Answer including counterclaims. The Company estimates that the amount due
under Mr. Jenkins' employment contract, if he were successful, is approximately
$167,000. The Company maintains that no amounts are due to Mr. Jenkins as he was
terminated for cause and breached his employment contract. The Company believes
it has adequate grounds to successfully defend this lawsuit.
F-19
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
On June 21, 1995, TruVision, with whom the Company had entered into a
letter of intent relating to the sale of the Company's Memphis assets, filed a
lawsuit, as amended on June 29, 1995, in the state of Mississippi alleging that
the Company breached the letter of intent, that the parties entered into a
binding agreement which was breached, and that the Company committed fraud and
negligent misrepresentation. The Company disputes these claims based on the
position that it lawfully terminated the letter of intent. The Amended Complaint
requests damages in the amount of $28,196,642 and punitive damages in the amount
of $20,000,000, together with interest and all costs of court. The Company
believes it has adequate grounds to successfully defend this lawsuit. The
Company is currently negotiating with TruVision to sell its assets in the
Memphis market under a new contract. According to the terms of the contract, at
the time of closing, each party will sign a release of all claims against the
other.
The Company is also the subject of two threatened lawsuits. American
Telecasting, Inc. ("ATI") has sent letters to the Company claiming that the
Company breached a term sheet and has requested payment of $1,800,000 as the
alleged termination fee owed to ATI under the term sheet, plus expenses. The
Company has responded to ATI and disputes all of ATI's claims. The Company
believes that ATI's claims are without merit and would vigorously defend any
lawsuit filed.
By letter dated January 31, 1995, Laidlaw Holdings, Inc. ("Laidlaw"),
the underwriter of the Company's proposed public offering, claims that the
Company owes Laidlaw $182,165 as accountable expenses under a Letter Agreement
between the parties dated November 20, 1994. A follow-up letter was sent to the
Company on July 13, 1995. By letter dated February 3, 1995, from the Company to
Laidlaw, the Company asserted that Laidlaw terminated the Letter Agreement and
believes that if a claim is filed by Laidlaw, the Company has adequate grounds
to successfully defend the claim.
(10) Income Taxes
In connection with the reverse acquisition, the basis in the assets
acquired and liabilities assumed by the Company were substantially the same for
book and tax purposes.
For income tax reporting purposes, the Company was included in the
consolidated tax returns of Wireless California through August 13, 1993, the
date that Wireless California's ownership interest in the Company dropped below
80%. As a result, the net operating losses generated by the Company from
December 18, 1992 (the date subsequent to the reverse acquisition) through
August 13, 1993, of approximately $1,000,000 were utilized by Wireless
California to reduce its tax obligations and to recapture approximately $300,000
of previously paid taxes. In exchange, Wireless California agreed to contribute
this refund to the capital of the Company.
Since December 18, 1992, the Company has generated $8,199,000 in net
operating losses of which $890,000 was utilized by Wireless California through
August 13, 1993, and an additional $310,000 has been recognized for financial
reporting purposes to recapture taxes previously paid by Wireless California as
described above. Approximately $517,000 in net operating losses were utilized to
offset taxable income in prior year consolidated tax returns filed with Wireless
California. As of December 31, 1994, therefore, the Company has approximately
$6,482,000 in net operating loss carryforwards available for financial reporting
and income tax purposes which expire in 2009.
F-20
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
In 1994, there were no material temporary differences between financial
reporting and income tax reporting. As a result, at December 31, 1994 the
Company has a net deferred tax asset of approximately $2,593,000 which relates
primarily to its available net operating loss carryforwards. As the
realizability of this tax asset is solely dependent on the Company's ability to
generate future taxable income, this asset has been fully reserved.
F-21
