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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998
Commission file number 0-23598
NATIONAL WIRELESS HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3735316
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
249 Royal Palm Way, Suite 301, Palm Beach, Florida 33480
(Address of principal executive offices and zip code)
(561) 822-9933
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 Par Value.
Rights to Purchase Series A Junior Preferred Stock
Indicate by check mark whether the registrant (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-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statement incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. X
The aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $46,000,000 as of January 26,
1999 based upon the last sales price per share of the Registrant's Common Stock,
as reported on the Nasdaq Small Cap Market on such date. As of January 26, 1999,
3,283,000 shares of Common Stock, $.01 par value, of the Registrant were
outstanding.
Portions of Registrant's Proxy Statement for use in connection
with the Annual Meeting of Stockholders scheduled to be held in April, 1999 are
incorporated by reference into Part III of this report, to the extent set forth
therein, if such Proxy Statement is filed with the Securities and Exchange
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Commission or before February 28, 1999. If such Proxy Statement is not filed by
such date, the information required to be presented in Part III will be filed as
an amendment to this report. The exhibits for this Form 10-K are listed on Page
28.
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NATIONAL WIRELESS HOLDINGS INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business 4
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 8. Consolidated Financial Statements 27
Item 9. Changes in and Disagreements
on Accounting and Financial Disclosure 27
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management 27
Item 13. Certain Relations and Related Transactions 27
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 28
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PART I
ITEM 1. BUSINESS
THE COMPANY
National Wireless Holdings Inc. ("NWH" or the "Company"), a Delaware
corporation organized on August 31, 1993, is a communications company focussing
primarily on acquisition and operation of telecommunications and other high tech
businesses. The Company currently owns and operates an electronic data
interchange company, providing links between healthcare providers and third
party payors. In addition, the Company owns and operates a satellite programming
uplink facility, an educational programming distribution company and other early
stage businesses. In addition to these businesses, the Company continues its
business of acquiring controlling interests in telecommunications, media and
other high tech areas. In June 1997, the Company sold its wireless cable assets
in Miami Florida in exchange for common stock of BellSouth Corporation.
In July 1998, the Company acquired additional shares of Electronic Data
Submission Systems, Inc. ("EDSS"), which when combined with its existing share
ownership represents approximately 82% of the outstanding voting stock and
control of EDSS.
The Company's executive offices are located at 249 Royal Palm Way,
Suite 301, Palm Beach, Florida 33480, telephone: (561) 822-9933.
ELECTRONIC DATA SUBMISSION SYSTEMS, INC.
GENERAL
NWH manages EDSS and owns 82% of EDSS' outstanding voting stock and
58% of its equity. EDSS provides electronic data interchange ("EDI") services
and healthcare information management services to the healthcare market. The
market includes providers such as physicians, hospitals, clinics, and billing
services (collectively, "Providers"), and third party payors such as
commercial insurance companies, managed care organizations, preferred
provider organizations, state and federal governmental agencies and others
(collectively, "Payors"). EDSS provides healthcare EDI services on a
real-time and batch-processing basis by utilizing its proprietary software
HECET Systems-Registered Trademark- and WinHECET Systems-TM-. This software
allows Providers and Payors to electronically communicate the information
needed to process and expedite the payment of insurance claims, physician
referrals and payor authorizations. HECET Systems-Registered Trademark- and
WinHECET System-TM- will also check patient eligibility and provide
comprehensive reporting on those claims. The EDSS private transaction network
is directly connected to over 12,500 physicians and other Providers, and has
direct or gateway access to over 645 Payors.
EDSS currently markets the following products:
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o the DOS based HECET Systems-Registered Trademark- front end EDI program
for Provider offices;
o the Windows based WinHECET Systems-TM- front end EDI program for Provider
offices,
o EDSS Referral and Authorization Program for electronic management of
real-time transactions such as referrals and authorizations, encounter
reports and eligibility verification;
o ScanPower, which provides paper claims scanning services for Payors; and
o the EDSS Payor Hub software, for the effective automation of
Member/Provider matching required in claims processing.
With this menu of electronic commerce software, EDSS provides a
complete link between Payors and Providers in the processing of EDI and paper
claim transactions as well as real-time transactions such as eligibility,
determinations and referrals/authorizations.
EDSS generates a recurring revenue base from two primary sources:
physicians' and other Providers' sites for monthly EDI claims processing, and
back-end revenues from various national and regional healthcare Payors.
Additionally, EDSS receives revenues from the sale of its HECET
Systems-Registered Trademark- and WinHECET Systems-TM- products, paper claim
scanning services and early stage Payor Hub activity.
EDSS was incorporated in Colorado on January 7, 1991 and
re-incorporated in Delaware on September 9, 1997.
INDUSTRY BACKGROUND
The rapid expansion of the healthcare industry over the last decade has
led to a significant increase in the complexity of processing claims for
reimbursement by Payors, as well as an increase in the number of claims. The
majority of these claims are still manually processed from paper, a cumbersome,
costly and inaccurate method. Recent advances in computer software,
telecommunications and microprocessor technology have facilitated the
development of on-line, real-time systems that electronically capture and
transmit information, replacing the recording and processing of transaction
information on paper. In addition to offering greater convenience, these
electronic systems reduce processing costs, decrease settlement delays and
prevent losses from fraudulent transactions.
Healthcare Providers initiate electronic transaction processing through
dedicated point-of-service terminals, stand-alone software or software
integrated with Providers' practice management systems. Providers aggregate and
edit claims, in real-time mode, throughout the day at the Provider's office and
submit them electronically to EDSS (or its competitors) in batch. Claims are
sorted, formatted and edited a second time by EDSS and are then forwarded
electronically to the Payor. Each claim is processed by the Payor and the
response, which includes an explanation of benefits, is transmitted,
electronically or by mail, back to the Provider. To the extent required, the
Payor sends payment to the Provider or, in certain circumstances, initiates an
electronic funds transfer to the Provider's account.
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The Company believes EDI transaction processing offers a number of
benefits to Payors and Providers. The elimination or reduction of paper-based
transactions significantly lowers claim processing costs for Payors, and on-line
encounter and referral information provides more efficient medical cost
management for managed care organizations. In addition, Payors are able to
detect fraudulent procedures and screen for unusual utilization trends. Errors
in transcriptions by Payor examiners are virtually eliminated. From the
healthcare Providers' standpoint, information pertaining to authorization and
reimbursement can be more easily accessed and transmitted. By processing claims
electronically, Providers reduce overhead costs and staff time and improve
accounts receivable management.
The recent growth of managed care and governmental healthcare cost
containment efforts have increased the use of EDI real-time transaction
processing by hospitals and physicians. The majority of state Medicaid programs
permit Providers to verify Medicaid eligibility electronically on a real-time
basis, and certain managed care companies have encouraged their Provider
networks to utilize real-time EDI for authorizations, encounter reports (for
capitation plans), and referrals. EDSS believes that there are still significant
opportunities for further expansion of EDI transactions in the healthcare
market, including claims processing for managed care client identification and
for other purposes.
BUSINESS STRATEGY
EDSS' strategy is to continue to grow as a provider of EDI services in
the healthcare market by expanding the number of markets it serves and
broadening the EDI services provided. The key elements of this strategy include:
o CONTINUE DEVELOPMENT IN MARKETING AT THE PROVIDER LEVEL. EDSS
intends to expand business through aggressive marketing at the
Provider level with its user-friendly HECET Systems-Registered
Trademark- and WinHECET Systems-TM-. By installing these
proprietary software products, EDSS maintains a competitive
advantage via direct relationships with each individual physician
or other healthcare Provider's office. The vast majority of the
present market connectivity emanates from systems vendors that
forward the transactions to a clearinghouse. The direct site
connectivity created by HECET Systems-Registered Trademark- and
WinHECET Systems-TM- affords EDSS a quick and reliable way to add
EDI functionality to its client's office while also providing
technical interface to its system environment. With a broader base
of Providers, EDSS expects to expand its network of Payors that it
services.
o EXPANSION INTO ADDITIONAL GEOGRAPHIC MARKETS. In pursuit of
greater market share, EDSS plans to continue to expand beyond its
current operations in Colorado, Florida, Texas, and Illinois by
opening offices in the tri-state areas of New York/New
Jersey/Connecticut, New Mexico/Nevada/California and other densely
populated areas throughout the country.
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o EXPANSION OF MARKETING TO POTENTIAL CLIENT GROUPS. EDSS will
pursue an aggressive program to capture high transaction volume
systems vendors, billing services and the new breed of internet
claims aggregators. EDSS will also help Providers ensure that they
are submitting their claims electronically to all available Payors.
o PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. EDSS will continue to
seek acquisitions of, or alliances with other EDI businesses in
order to achieve greater economies of scale and to remain a
cost-effective provider of transaction processing services. EDSS
will target for acquisition or ally itself with companies having
profitable transaction volumes and revenue-producing technologies.
o INCREASE THE SERVICES PROVIDED ELECTRONICALLY TO HEALTHCARE
INDUSTRY PARTICIPANTS. The Company believes that much of the
information that flows from and among each of the various
participants in the healthcare market can be transmitted
electronically with greater efficiency and cost-effectiveness.
EDSS plans to expand its services to include more adjudication
capabilities, eligibility and benefits verification, referrals,
authorizations, enrollment capabilities, electronic remittance
advice and electronic funds transfer, in addition to existing
eligibility and referral capabilities. Expanded real-time capacity
will be necessary in order to report on the status of claims,
gather and link clinical data with claim processing, and provide
comparative data for Providers who wish to subscribe to these
optional services.
o EDI HUB SOLUTION. EDSS has adapted its products for use by claims
submitters who act as suppliers of Provider claims through a data
processing hub operated by EDSS.
o PROVIDER-MARKETING PROGRAM. EDSS offers a recently completed
CD-ROM presentation/installation program to Payors for marketing
direct EDI connectivity to their respective Provider communities.
This EDSS program represents the first mass distribution of
WinHECET System-TM- within the health care industry for claims
processing.
The recurring revenue potential of healthcare EDI is significant and
growing. Increases are coming from transaction based activity, from uses of
clinical data (subject to confidentiality restraints) and from other information
required by Providers. In conjunction with the WinHECET System-TM- product, many
of these same services could be easily delivered by the existing direct
connection to each present and future Provider site. Also, with approximately
58% of all Provider claims nationwide in 1997 still being submitted on paper
(and perfectly suited for EDSS' Hub solution), management believes EDSS'
marketing efforts could lead to a significant increase in revenue.
COMPANY SERVICES AND PRODUCTS
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EDSS' EDI services and products for third-party Payors, Providers and
billing services include electronic submission of claims, encounters, patient
eligibility, inquiries, referrals and authorizations, claims status inquiry and
remittance advice, and customized reporting capabilities, including the
following:
o TRANSACTION PROCESSING. EDSS is a substantial processor of
commercial third-party Payor claims linking healthcare Providers
and Payors across the United States through EDSS' electronic
network. Network transactions are predominantly used to process
reimbursement claims in traditional fee-for-service commercial or
government Payor systems and to process encounter data in
capitated environments. To submit claims, Providers collect data
throughout the day using software provided by EDSS. The Provider
then forwards these claims electronically to EDSS. EDSS
electronically collects and verifies receipt of the claims,
performs Payor-specific edits, remaps each claim to conform to a
particular Payor's specifications, aggregates daily transactions
by Payor and transmits claims to Payors based upon each Payor's
chosen communications protocols.
o EDI INTERFACES. EDSS has developed a range of hardware and
software interfaces to facilitate the adoption of EDI by Providers
and Payors. EDSS processed an aggregate of approximately 8 million
commercial third-party Payor claims in the fiscal year ending
September 30, 1998. EDSS' transaction network is connected with
645 of the approximately 1,500 commercial third-party Payors,
including all of the top 20 commercial Payors (based upon the
number of members covered by such third-party Payors).
o HECET SYSTEMS-REGISTERED TRADEMARK-/WINHECET SYSTEMS-TM-. HECET
Systems-Registered Trademark- and WinHECET Systems-TM-, EDSS'
proprietary PC-based software products, were developed by EDSS in
1993 and 1998 respectively and are designed with open application
program interfaces ("APIs"). The APIs are established at the
operating system level and enable EDSS software to run on a wide
variety of operating systems including DOS, UNIX and Windows.
HECET Systems-Registered Trademark- and WinHECET Systems-TM-
function as stand-alone editing, formatting and communications
software for Providers and Payors. The stand-alone versions of
HECET Systems-Registered Trademark- and WinHECET Systems-TM- are
offered directly to Providers for a nominal price. HECET
Systems-Registered Trademark- and WinHECET Systems-TM- represent
an installed proprietary software presence for EDSS, reducing the
likelihood that its services will be replaced with a competing
product or service. These proprietary software products provide
flexible formatting and mapping capabilities matching current
hardware and software configurations used by or available to
Providers.
o PAYOR GATEWAY. EDSS has recently developed Payor gateway software
to enable Payor organizations to participate in EDI without
requiring the Payor to develop interface technology. This software
is designed to facilitate the movement of transactions to and from
the Payors' software. The Payor gateway
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manages telecommunications access, security and the retrieval of
data and allows the Payor to participate in EDI, with EDSS
assuming the responsibility for interfacing the Payor Gateway
software to the Payor's system.
o SCANPOWER. EDSS' ScanPower product enables Providers to enter
claims data by scanning their current standardized paper forms
into an electronic format that can be used in EDI. EDSS preps
these forms for scanning. Batches are created by form types, then
run through the high volume scanners. These scanned batches are
identified by receipt date, form type, single/multi, image setting
and document control number, processed, then vertexed, which
includes verification of scanned data elements and data entry with
edits and master file look-ups. Batches are then translated into
an ASCII file for EDI formatting. The file is then sent to the EDI
HUB for automated member and Provider match. The file then goes
through the EDSS EDI translation and formatting for electronic
submission to the appropriate Payor.
o EDSS EDI HUB. The EDSS Hub converts paper claims received by a
client into a mutually agreed upon electronic format. This process
includes medical, hospital and dental claims along with their
corresponding attachments. EDSS then provides a report to the
client of documents scanned by EDSS daily for verification with
the corresponding EDI file transmitted. Claims are then entered
electronically, verified, reformatted and transmitted to the Payor
in real-time.
o CUSTOMER SERVICE. As an adjunct to its transaction processing
services, EDSS maintains customer service facilities with help
desks for real-time customer inquiries. Client support employs a
modern call tracking and response system which is directly
connected to the processing center. Customer support services,
available via telephone, are frequently included in the contract
price for transaction processing services, but may also be billed
separately, depending upon the specific contract terms. EDSS also
offers other services, such as on-site product training and
installation.
SALES AND MARKETING
EDSS develops and maintains Payor, Provider and vendor relationships
through its sales and marketing personnel located in five geographic regions.
EDSS' sales and marketing strategy focuses on selling its services to Providers
either directly, through sales representatives and through organizations, such
as healthcare finance consulting firms, practice management software firms and
third party administrators that have relationships with or access to a large
number of Providers. EDSS develops relationships with third-party Payors and
other large submitters of claims. In addition, EDSS works closely with practice
management system vendors to provide an integrated solution to Providers.
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CUSTOMERS
EDSS' principal customers consist of healthcare Providers, such as
physicians, hospitals, clinics and billing services, and third-party Payors,
such as indemnity insurers, managed care organizations, preferred provider
organizations, claims submitters and state/federal governmental agencies. No
customer accounted for 10% or more of the Company's revenues during fiscal 1998
or 1997.
EDSS typically provides real-time services to customers under contracts
that are not exclusive and generally do not guarantee a specific transaction
volume or revenue stream. The pricing of EDSS' services both on a monthly and
per-claim basis is set under contracts typically having terms of one to three
years, subject to a variety of early cancellation arrangements.
EDSS enters into contracts with Providers, Payors and other claim
submitters, such as practice management system vendors, clearinghouses and
billing services. Claim submitter contracts with EDSS often contain exclusivity
provisions whereby the submitter agrees to process all claims through EDSS,
provided that EDSS has network access to the Payor.
OPERATIONS
EDSS delivers its real-time services through an integrated electronic
transaction processing system, which includes EDSS-designed software, host
computer hardware, network management, switching service, the ability to
interact with the customers' personal computers and a variety of
point-of-service devices, most of which are designed by EDSS.
EDSS' real-time intranet services consist of advanced computer intranet
networks designed and configured to operate 24 hours a day, seven days a week.
These networks are configured to expand to meet increased transaction volume.
The networks are designed and manufactured to accommodate a fault-tolerant,
nonstop environment by maintaining on-line standby computers. The data center is
further protected by uninterruptible power supply systems. The software and
related data files are backed up nightly and stored off-site.
EDSS' communications network consists of dedicated circuits, T-l
facilities and dial modem ports, which facilitate electronic real-time
communication among Payors, Providers and other users of time-sensitive
healthcare information. This private intranet communications network is designed
to provide a low-cost, multipath host access from a computer modem or
point-of-service device with minimal delays and a high degree of accuracy and
integrity. EDSS uses a number of different nationwide public communications
networks to provide access to substantially all potential domestic customers.
PROPRIETARY RIGHTS
EDSS owns certain of the software and systems designs that it uses and
has a limited, perpetual, nonexclusive, royalty-free license to use other
software and systems designs, such as the point-of-service device designs. The
Company also licenses certain other software from third parties.
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EDSS' success is dependent in part upon electronic transaction
processing technology developed by EDSS. A combination of trade secrets, service
mark and contract protection is used to establish and protect that technology.
There can be no assurance these legal protections and the precautions taken by
EDSS will be adequate to prevent misappropriation of technology used by EDSS.
Furthermore, the legal protections do not prevent independent third-party
development of competitive technology.
COMPETITION
EDSS faces potential competition in the healthcare EDI market not only
from other companies that are similarly specialized, but also from companies
involved in other, more highly developed sectors of the electronic transaction
processing market. Such companies could enter into, or focus more attention on,
the healthcare transaction processing market as it develops. In addition, EDSS
faces competition by selected Providers bypassing EDSS' electronic network and
going directly to the Payor. Many of EDSS' existing and potential competitors
have greater financial, marketing and technological resources. EDSS' principal
competitors include Envoy/NEIC, USHDI, ClaimsNet, HBOC, ProxyMed and National
Data Corp. There is no assurance that EDSS can continue to compete successfully
with its existing and potential competitors in the healthcare EDI market.
Factors influencing competition in the healthcare market include (i)
compatibility with the Provider's software and inclusion in practice management
products and (ii) relationships with third-party Payors, including managed care
organizations. EDSS believes that the breadth, price and quality of its services
and Provider level service are the most significant factors in developing and
maintaining relationships with its customers.
GOVERNMENT REGULATION AND HEALTHCARE REFORM
The United States Food and Drug Administration (the "FDA") is
responsible for assuring the safety and effectiveness of medical devices under
the Federal Food, Drug and Cosmetic Act. Computer products are subject to
regulation when they are used or are intended to be used in the diagnosis of
disease or other conditions, or in the cure, mitigation, treatment or prevention
of disease, or are intended to affect the structure or function of the body. The
FDA could determine in the future that any predictive aspects of EDSS' products
make them clinical decision tools subject to FDA regulation. Compliance with
these regulations could be burdensome, time-consuming and expensive. EDSS also
could become subject to future legislation and regulations concerning the
development and marketing of healthcare software systems. These could increase
the cost and time necessary to market new products and could affect EDSS in
other respects not presently foreseeable. EDSS cannot predict the effect of
possible future legislation and regulation.
The confidentiality of patient records and the circumstances under
which such records may be released for inclusion in EDSS' databases are
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Although compliance with these laws and regulations
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is at present principally the responsibility of the hospital, physician or
other Provider, regulations governing patient confidentiality rights are
evolving rapidly. Additional legislation governing the dissemination of
medical record information has been proposed at both the state and federal
level. This legislation may require holders of such information to implement
security measures that may require substantial expenditures by EDSS. There
can be no assurance that changes to state or federal laws will not materially
restrict the ability of Providers to submit information from patient records
using EDSS' products.
The healthcare industry is highly regulated and subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operation of healthcare organizations. EDSS' products are designed
to function within the structure of the healthcare financing and reimbursement
system currently being used in the United States. Changes in such systems could
result in the need for unplanned product enhancements, delays or cancellations
of product orders or shipments, or the revocation of endorsement of EDSS'
products by hospital associations or other customers. Any of such occurrences
could have a materially adverse effect on EDSS' business, financial condition
and results of operations. During the past several years, the United States
healthcare industry has been subject to an increase in governmental regulation
of, among other things, reimbursement rates. Certain proposals to reform the
U.S. healthcare system are periodically considered by Congress and certain state
legislatures. These programs may contain proposals to increase governmental
involvement in healthcare or otherwise change the operating environment for
EDSS' current and potential customers. Healthcare organizations may react to
these proposals and the uncertainty surrounding such proposals by curtailing or
deferring investments, including those for EDSS' products. On the other hand,
changes in the regulatory environment have increased and may continue to
increase the needs of healthcare organizations for cost-effective information
management and thereby enhance the marketability of EDSS' products and services.
EDSS cannot predict with any certainty what impact, if any, such proposals or
reforms might have on EDSS' business, results of operations and financial
condition. In addition, many Providers are consolidating to create integrated
healthcare delivery systems with greater regional market power. As a result,
these emerging systems could have greater bargaining power, which may lead to
price erosion of EDSS' products. The failure of EDSS to maintain adequate price
levels would have a materially adverse effect on EDSS' business, financial
condition and results of operations. Other legislative or market-driven reforms
could have unpredictable effects on EDSS' business, financial condition and
results of operations.
FACILITIES
EDSS' executive and corporate offices are located in Colorado Springs,
Colorado in approximately 13,000 square feet of office space under a lease that
expires June 14, 2003. EDSS also maintains offices in Ft. Lauderdale, FL,
Orlando, FL, Tampa, FL, Dallas, TX and Chicago, IL. EDSS believes that its
facilities are adequate for its current operations.
EMPLOYEES
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As of January 15, 1999, EDSS had approximately 62 employees, including
approximately 38 salaried and 24 hourly employees (including temporary
employees). None of these employees is represented by a union or other
collective bargaining group. EDSS believes its relationship with its employees
is good.
LITIGATION
EDSS is not currently party to any litigation.
TELECOMMUNICATIONS
- - WIRELESS CABLE
Wireless cable television is provided to subscribers by transmitting
microwave frequencies over the air on a direct "line-of-sight" from the
transmission facility to a small receiving antenna at each subscriber's
location. Local off-air VHF/UHF broadcasts can be provided to a subscriber by
retransmission of the broadcast over a wireless frequency or by installation of
an off-air antenna in conjunction with the wireless antenna located on the
subscriber's home or building. To the subscriber, a wireless cable system
generally operates in the same fashion as a hard-wire cable system. Like the
hard-wire cable systems, wireless cable systems, in exchange for monthly fees,
typically offer local off-air broadcast channels, as well as programming such as
HBO, ESPN, CNN, USA, WGN, WTBS, A&E, Nickelodeon, Discovery, Disney, MTV and
other programming services such as pay-per-view.
In June 1997 the Company completed the sale of its subsidiary, South
Florida Television Inc., which held its rights to provide wireless cable TV
service in Miami, to BellSouth Corporation (NYSE: BLS) for 1,048,321 shares of
BellSouth common stock, based on a $48 million purchase price. The Company does
not currently own any wireless cable systems or channels, and, while the Company
continues to seek and review opportunities in this area, it has no specific
agreements or understandings to acquire any such assets.
- - STRATEGIC ALLIANCES AND INVESTMENTS
DEVELOPING TECHNOLOGY. The Company is reviewing on a preliminary basis
investments in or acquisitions of telecommunications technology companies.
U.K. ACQUISITION. In December 1997 the Company acquired a 24% interest
in a company organized to purchase a U.K. telecommunications company, for
$100,000 plus a commitment to provide substantial additional financing in
connection with the proposed acquisition. This investment was written off when
the proposed acquisition was abandoned.
TLC PRODUCTIONS. On August 22, 1995, the Company completed the
acquisition of all of the outstanding capital stock of TLC Productions, Inc.
("TLC"), from its sole shareholder. TLC is a full-service teleport and uplink
facility located in North Miami, Florida, that provides satellite uplink
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services to clients who then are able to rebroadcast signals to video
programming distributors. Additionally, TLC's fully-equipped television
studio is used for live teleconferencing and special interviews for such
networks as CNN and ESPN.
Other Operations
ACQUISITIONS. The Company is actively seeking to acquire other
businesses in telecommunications, media and unrelated areas, but currently has
no specific agreements or arrangements to acquire any such businesses.
ANAGRAM INTERNATIONAL COMMUNICATIONS LTD. In September 1995 the Company
acquired for $250,000 shares of Class A Convertible Preferred Stock of Anagram
International Communications Ltd. ("Anagram"), currently constituting
substantially all the equity. Anagram was organized in Delaware on August 22,
1995 to engage in, among other things, the business of acquiring television
programming for distribution in the United States and abroad. The majority of
Anagram's programming consists of educational series relating to science and
technology, natural history, history and world cultures and "how to" programs.
The Company believes that Anagram provides valuable programming for educational
television. The Company has invested an additional $365,174 in Anagram. Through
October 31, 1998, the Company has expensed the substantial portion of its
investment in this company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K,
including, without limitation, statements containing the words "believes,"
"anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: the limited nature of the Company's operations and
its history of losses; the uncertain acceptance of EDI; competition; the risk of
the Company's failure to acquire additional businesses; existing government
regulations and changes in, or the failure to comply with, government
regulations; the ability of the Company to sustain, manage or forecast its
growth; dependence on significant suppliers and marketers and the potential loss
thereof; the ability to attract and retain qualified personnel; retention of
earnings; and other factors referenced in this Annual Report on Form 10-K.
Certain of these factors are discussed in more detail elsewhere in this Annual
Report on Form 10-K, including, without limitation, under the captions "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business." Given these uncertainties, undue
reliance should not be placed on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained or
incorporated by reference herein to reflect future events or developments.
14
<PAGE>
ITEM 2. PROPERTIES
The Company generally leases the real estate where its business,
offices and wireless cable transmitters are located. The Company leases space
for its executive offices in Palm Beach, Florida at $760 a month pursuant to a
lease terminating May 31, 1999. In June 1994, a subsidiary of the Company
entered into an 8-year operating lease of office space for its offices in New
York at a rate of $7,651 per month. The Company and certain subsidiaries lease
office space in Rantoul, Illinois from a company which is owned by the Chairman
of the Board of the Company, at an aggregate rental of $1,750 per month. The
lease agreement is on a month-to-month basis based on the needs of the Company.
The Company's subsidiary, EDSS, leases approximately 6,500 square feet of office
space under a lease that expires June 14, 2003 at a rate of $13,347 per month.
EDSS also maintains offices at Ft. Lauderdale, FL, Orlando, FL, Tampa, FL, and
Dallas, TX. The Company's subsidiary, TLC, leases approximately 6,500 square
feet of office space on a month to month basis. The total lease payments for the
year ended October 31, 1998 were approximately $247,000 (net of $79,100 of
rental income) as compared to approximately $243,000 for the year ended October
31, 1997. The Company believes its properties are adequate for its current
needs.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.01 par value, is traded on the Nasdaq
Small Cap Market ("Nasdaq") under the symbol "NWIR". The following table sets
forth the range of high and low sale price information for the Common Stock for
each full fiscal quarterly period for the last two years as reported by Nasdaq.
<TABLE>
<CAPTION>
1998 1997
---------------------- --------------------
QUARTER HIGH LOW HIGH LOW
- ------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First 15 13-1/4 16-1/4 12
Second 18-3/4 13-1/2 16-1/4 11-1/4
Third 18-7/8 15-1/2 17-3/8 14-1/8
Fourth 17-7/8 14 15-1/8 13-1/4
</TABLE>
As of January 26, 1999, there were approximately 1,000 beneficial
holders of Common Stock.
The Company paid a cash dividend of $1.30 on the Common Stock in fiscal
1997; however, the Company does not anticipate paying cash dividends on the
Common Stock in the foreseeable future. The payment of cash dividends on shares
of Common Stock will be within the discretion of the Company's Board of
Directors and will depend upon the earnings of the Company, the Company's
capital requirements and other financial factors which are considered relevant
by the Company's Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data for the Company presented below
under the captions "Operating Data" and "Balance Sheet Data" as of October 31,
1994, 1995, 1996, 1997 and 1998, and for the years ended October 31, 1994, 1995,
1996, 1997 and 1998 are derived from the Company's consolidated financial
statements. The selected financial data should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
16
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Operating Data:
Total Revenue ....................... $ 6,801,632 $ 4,717,681 $ 2,317,734 $ 2,100,289 $ 605,035
Service Revenue ..................... 4,492,991 3,308,080 1,223,561 945,616 59,958
Expenses ............................ 7,699,825 6,055,033 3,334,558 2,740,370 1,055,679
Net Loss on securities transactions . (4,116,031) -- -- -- --
Gain on Sale of SFTV(1) ............. -- 44,196,516 -- -- (450,644)
Net Income (Loss) ................... (3,314,224) 25,969,164 (1,016,824) (640,081) (0.19)
Net Income (Loss) per common share(2) (1.01) 7.96 (0.31) (0.20)
Weighted average number of common
shares outstanding (2) .............. 3,283,000 3,259,923 3,253,000 3,222,863 2,407,794
Balance Sheet Data:
Cash and cash equivalents ........... $ 27,359,353 $ 21,256,356 $ 14,788,765 $ 4,888,240 $ 911,266
Marketable securities ............... 32,541,020 49,598,687 0 11,964,634 19,782,512
Total assets ........................ 66,628,350 79,085,656 21,583,552 22,981,237 22,245,332
Total liabilities ................... 20,273,317 36,016,130 1,391,064 1,771,925 395,939
Total stockholders' equity .......... 46,355,033 43,069,526 20,192,488 21,209,312 21,849,393
</TABLE>
(1) See Note 3 to Consolidated Financial Statements
(2) See Note 2 to Consolidated Financial Statements
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
National Wireless Holdings Inc. ("NWH" or the "Company") is a
communications company focussing primarily on acquisition and operation of
telecommunications and other high tech businesses. The Company currently owns
and operates an electronic data interchange company, providing links between
healthcare Providers and third party Payors. In addition, the Company owns and
operates a satellite programming uplink facility, an educational programming
distribution company and other early stage businesses. In addition to these
businesses, the Company continues its business of acquiring controlling
interests in telecommunications, media and other high tech areas. The Company
also acquired an interest in a company organized to purchase a British
telecommunications company, and may acquire or invest in other businesses. In
June 1997, the Company sold its wireless cable assets in Miami, Florida in
exchange for common stock of BellSouth Corporation.
The Company was incorporated in Delaware on August 31, 1993. The
Company's fiscal year ends on October 31.
Certain statements contained in this Annual Report on Form 10-K
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. See "Business--Special Note
Regarding Forward-Looking Statements" and the Financial Statements.
RESULTS OF OPERATIONS
1998 AS COMPARED TO 1997
Service Revenue:
Service revenue increased from $3,308,080 in 1997 to $4,492,991 in 1998
primarily as a result of increased revenues of EDSS (as described below), a
majority owned subsidiary acquired in December 1996.
Interest and Dividend Income:
Interest income increased from $870,810 in 1997 to $1,829,378 in 1998 primarily
as a result of increased cash balances. Dividend income decreased from $538,791
in 1997 to $479,263 in 1998 as a result of the sale in 1998 of a portion of the
Company's BellSouth common stock, which was acquired in June 1997.
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<PAGE>
Cost of Services:
Cost of services increased from $1,626,661 in 1997 to $2,606,475 in 1998 as a
result of increased operating costs and the acquisition referred to above.
Wireless Market and Technology Development:
Wireless market and technology development expenses increased from $555,422 in
1997 to $858,000 in 1998 primarily as a result of expenses relating to the sale
of the Company's South Florida wireless cable subsidiary as described below,
Anagram marketing and operational expenses and expenses relating to
acquisitions.
Professional Fees:
Professional fees increased from $473,430 in 1997 to $735,491 in 1998, primarily
as a result of activity on proposed acquisitions. Professional fees also reflect
continued activity relating to subsidiaries and corporate actions.
General and Administrative:
General and administrative expense increased from $2,459,347 in 1997 to
$2,664,329 in 1998 primarily as a result of increased costs to support the
growth of EDSS.
Depreciation and Amortization:
Depreciation and amortization decreased from $832,413 in 1997 to $777,823 in
1998 primarily as a result of the sale of the Company's South Florida wireless
cable subsidiary as described below.
Interest Expense:
Interest expense decreased from $107,760 in 1997 to $57,707 in 1998 due to
payment of long-term debt.
Loss from Operations:
As a result of the foregoing events, loss from operations was ($898,193) in 1998
as compared to a loss from operations of ($1,337,352) in 1997.
Realized Loss on Sale of Securities:
As a consequence of closing of hedge positions on certain marketable securities
in the fourth quarter of 1998, the Company realized a net loss for 1998 of
($4,116,031), as compared to $0 in 1997. Unrealized appreciation of marketable
securities in 1998, reflected in the balance sheet but not in the results of
operations, increased to $7,559,006, net of provision for tax of $4,130,000, in
1998 as compared to $959,275 in 1997.
Net Income:
Net loss in 1998 was ($3,314,224) as compared to net income of $25,859,164 in
1997 due to realization of losses on hedge positions on marketable securities in
1998 and the sale in June 1997 of the Company's South Florida wireless cable
subsidiary as described below.
1997 AS COMPARED TO 1996
19
<PAGE>
Gain on Sale of SFTV:
During 1997, the Company realized a pre-tax gain of $44,196,516 from the sale in
a tax-free reorganization of the Company's wireless cable subsidiary ("SFTV") in
Miami, Florida in exchange for $48,000,000 of BellSouth common stock. The
Company recorded $16,900,000 of deferred income taxes on such gain. In addition,
the Company had a net unrealized gain of $959,275 as of October 31, 1997 on its
positions in BellSouth common stock.
Service Revenue:
Service revenue increased from $1,223,561 in 1996 to $3,308,080 in 1997 as a
result primarily of increased revenues of TLC in 1996 and the addition of
revenues from the acquisition of a controlling interest in EDSS in December
1996.
Interest and Dividend Income:
Interest income decreased from $1,094,173 in 1996 to $870,810 in as a result of
a reduction in funds invested in interest bearing instruments. Dividend income
increased from $0 in 1996 to $538,791 in 1997, reflecting net dividends on the
BellSouth common stock.
Cost of Services:
Cost of services increased from $799,045 in 1996 to $1,626,661 in 1997 as a
result of increased costs of operation of TLC and costs associated with the
operations of EDSS.
Wireless Market and Technology Development:
Market development expenses decreased from $798,870 in 1996 to $455,422 in 1997
as a result of lower activity in the development of the Miami market and the
sale of the related assets in June 1997. Technology development expenses
increased from $35,370 in 1996 to $100,000 in 1997.
Professional Fees:
Professional fees increased from $273,234 in 1996 to $473,430 in 1997 as a
result of increased activity relating to various transactions in 1997.
General and Administrative:
General and administrative expense increased from $790,511 in 1996 to $2,459,347
in 1997 as the Company incurred additional costs in connection with selling its
wireless cable assets in the Miami market and increased costs relating to the
operations of EDSS.
Depreciation and Amortization:
Depreciation and amortization increased from $564,139 in 1996 to $832,413 in
1997 as a result of the effect during 1997 of the acquisition of EDSS and
increased amounts of equipment placed in service during 1996 at TLC.
Interest Expense:
Interest expense increased from $73,389 in 1996 to $107,760 in 1997, reflecting
long-term debt from the acquisition of TLC and charges on hedge positions.
20
<PAGE>
Net Income (Loss):
As a result of each of the foregoing events, net income amounted to $25,959,164
in 1997 as compared to a loss of ($1,016,824) in 1996.
1996 AS COMPARED TO 1995:
Service Revenue:
Service revenue increased from $945,616 in 1995 to $1,223,561 in 1996 as a
result primarily of increased revenues of TLC in 1996.
Interest Income:
Interest income decreased from $1,154,673 in 1995 to $1,094,173 in 1996 as a
result of a reduction in funds invested in interest bearing instruments due to
investments in affiliates and subsidiaries and acquisitions of transmission
equipment.
Cost of Services:
Cost of services increased from $512,449 in 1995 to $799,045 in 1996 as a result
of increased costs of operation of TLC.
Wireless Market and Technology Development:
Market development expenses decreased from $835,560 in 1995 to $798,870 in 1996
as a result of lower activity in the development of the Miami market. Technology
development expenses decreased from $39,776 in 1995 to $35,370 in 1996 as a
result of lower activity in technology development in 1996.
Professional Fees:
Professional fees decreased from $294,547 in 1995 to $273,234 in 1996 as a
result of less acquisition activity in 1996.
General and Administrative:
General and administrative expense increased from $641,737 in 1995 to $790,511
in 1996 as the Company incurred additional costs while developing the Miami
market.
Depreciation and Amortization:
Depreciation and amortization increased from $363,232 in 1995 to $564,139 in
1996 as a result of certain equipment being placed in service during 1996 which
resulted in the commencement of depreciation and amortization.
Interest Expense:
Interest expense increased from $53,069 in 1995 to $73,389 in 1996, reflecting
addition of long-term debt from the acquisition of TLC.
Net Loss:
As a result of each of the foregoing events, net loss increased from ($640,081)
in 1995 to
21
<PAGE>
($1,016,824) in 1996.
EDSS RESULTS OF OPERATIONS:
The Company's results of operations reflect EDSS operating losses of
($476,034) on a cumulative basis through September 30, 1998, including
($528,512) of loss in 1998, and $52,478 of income in 1997. Such losses have been
financed principally through a $200,000 loan from EDSS' President and a
$1,000,000 line of credit from the Company pursuant to a loan agreement, which
has been substantially utilized as of October 31, 1998. Based upon existing
contracts with physicians and other Providers and current expense levels,
management believes that EDSS would achieve positive cash flow from operations
for fiscal 1999 without the need to obtain additional financing. EDSS, however,
may seek to obtain additional financing, and the Company may provide additional
funds, to accelerate EDSS' strategic business plan.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations with the net proceeds from its initial
public offering in 1994 of 2,000,000 shares of Common Stock aggregating, after
payment of offering costs, approximately $22,000,000 and the June 1997 sale of
its South Florida wireless cable subsidiary for $48 million in BellSouth common
stock. The proceeds have been used for, and are currently reserved to fund
acquisitions of, EDI (electronic data interchange) investments,
telecommunications assets, media businesses, development of the Company's other
businesses and development and acquisition of new technologies and businesses in
other areas. Such amount, with interest thereon, is expected to be sufficient to
implement this business plan through October 1999, or for a shorter period if
the Company determines to invest a substantial portion of its assets in major
acquisitions or equity investments.
As of October 31, 1998, the Company had approximately $60 million in
cash and marketable BellSouth common stock, as well as its interest in EDSS, its
full-service teleport and satellite uplink facility in Miami, an educational
video programming distributor and investments in other early stage companies.
In the year ended October 31, 1998, the Company sold portions of its
position in BellSouth common stock. While the Company continues to review its
position in BellSouth common stock and from time to time has sold and purchased
shares and options on the position, it has not yet determined whether it will
sell or hedge its remaining BellSouth securities in the near future or how it
will invest the proceeds of any such sale.
In July 1998 the Company completed its purchase of $1,200,000 of shares
of Series A Preferred Stock of Electronic Data Submission Systems, Inc.
("EDSS"), which when combined with its existing share ownership represents 58%
of the outstanding diluted common stock and, with additional voting rights, 82%
control of EDSS. The Company paid for such securities with $1,000,000 in cash
and $200,000 reduction in the principal amount of a note
22
<PAGE>
outstanding pursuant to a loan agreement between EDSS and the Company, dated
June 19, 1995. At October 31, 1998, the Company had outstanding loans to EDSS of
$788,000, and advanced an additional $100,000 on this loan on January 8, 1999.
The outstanding balance under this loan agreement was eliminated from the
balance sheet in consolidation. The Company may invest additional amounts in
EDSS to finance its sales growth. Operating overhead costs of EDSS have
increased in order to support its continued growth. The Company anticipates
related increased revenues at EDSS in the next three to nine months.
Following completion of the sale of its South Florida wireless cable
assets, the Company has allocated its capital to development of its other
businesses and to acquisitions; and the Company actively seeks to acquire or
invest in other businesses in telecommunications, media or in unrelated areas.
The Company has no specific arrangements with respect to any such acquisitions
or investments at the present time. There can be no assurance that any such
acquisitions or investments will be made.
YEAR 2000 ISSUES
Introduction
Many existing computer systems and software products use only two
digits to represent a year. Time/date-sensitive software or hardware written or
developed in this fashion may not be able to distinguish between 1900 and 2000,
and programs written in this manner that perform arithmetic operations,
comparisons or sorting of date fields may yield incorrect results when
processing a Year 2000 ("Year 2K") date.
The Company's State of Readiness
The Company has analyzed Year 2K issues in four areas: (i) financial
and information technology ("IT") systems, (ii) non-IT network systems, (iii)
third party vendors and suppliers, and (iv) EDSS' proprietary software products.
The Company believes that its financial and information technology systems and
its non-IT systems are Year 2K compliant. In addition, the Company believes that
EDSS' proprietary software products are Year 2K compliant.
The Company's survey is also assessing the Company's vulnerability to
the Year 2K problems of third-party service suppliers. The Company relies on
third-party suppliers to deliver fiber telecommunications links, Internet
access, banking services, payroll services and electricity. The Company also
intends to develop new relationships with several providers of fiber-optic
telecommunications service, Internet service providers, telecommunications
resellers, and other companies in the telecommunications industry. The Company
intends to continuously identify and prioritize critical suppliers and
communicate with them about their plans and progress in addressing the Year 2K
problem.
The Company's Year 2K Risk
23
<PAGE>
GENERAL
The Company currently believes that its systems and those of its
subsidiaries are Year 2K compliant. However, there can be no assurance that all
potential Year 2K problems will be successfully identified, or that the
necessary corrective actions will be completed in a timely manner. Failure to
successfully identify and remediate such Year 2K problems in a timely manner
could have a material adverse effect on the Company's results of operations,
financial position or cash flow.
In addition, the Company believes that there is a risk relating to
significant service suppliers' failure to remediate their Year 2K issues in a
timely manner. Although the Company is communicating with its suppliers
regarding the Year 2K problem, the Company does not know whether these
suppliers' systems will be Year 2K compliant in a timely manner. If one or more
significant suppliers are not Year 2K compliant, this could have a material
adverse effect on the Company's results of operations, financial position or
cash flow. In considering acquisitions, the Company reviews Year 2K compliance
of its targets.
EDSS
EDSS faces Year 2K risks in addition to and/of a greater magnitude than
those discussed generally above.
Although the Company believes that EDSS' proprietary software products
are Year 2K compliant, EDSS believes that it is impossible to predict with
complete certainty that all potential Year 2K problems that may affect such
products have been identified due to the complexity of the products and the fact
that these products interact with other third party vendor products and operate
on computer systems that are not under EDSS' control.
In addition, EDSS is communicating with certain of its customers,
including major payors and vendors, and suppliers as to their progress in
identifying and addressing problems that their computers will face in correctly
processing date information as the Year 2K approaches and is reached. Because of
the complexity of the Year 2K issue and the differing stages of readiness of
these third parties EDSS expects these discussions to continue throughout 1999.
Furthermore, because of the nature of EDSS' business, the success of EDSS'
efforts may depend on the success of Payors, Providers, vendors and other third
parties in dealing with the Year 2K issue. Failure to address appropriately the
Year 2K issue by a major customer or supplier or a material percentage of EDSS'
smaller customers could have a material adverse impact on the financial
condition and results of operations of EDSS.
EDSS' business is heavily reliant upon external suppliers to provide
certain operating elements of its business. Some of these suppliers include
telecommunications providers, data processing service providers, utility
companies, key vendors and certain governmental agencies. EDSS also depends on
the operations of its customers, the Providers and Payors. EDSS exerts no
control over the efforts of these companies to become Year 2K compliant. The
services provided by these parties are critical to the operations of EDSS and
EDSS is heavily
24
<PAGE>
reliant upon these parties to successfully address the Year 2K issue. Therefore,
if any of these parties fail to provide EDSS with services, EDSS' ability to
conduct business could be materially impacted. The result of such impact may
have a material adverse effect on the financial condition and results of
operations of EDSS.
Worst case scenarios could be as insignificant as a minor interruption
in EDSS's ability to conduct business resulting from unanticipated problems
encountered in the IT and non-IT systems of EDSS or could be significant to the
extent any of the significant third parties such as Payors with whom EDSS does
business suffer major business interruption. The pervasiveness of the Year 2K
issue makes it likely that previously unidentified issues will require
remediation during the normal course of business. On the other hand, a worst
case Year 2K scenario could be as catastrophic as a complete, and long-term,
loss of telecommunications, data processing and utility services. In this
connection, an extended loss of telecommunication, data processing and utility
services could have a material adverse effect on the financial condition and
results of the operations of EDSS.
Although EDSS believes its Year 2K compliance efforts will address all
of the Year 2K issues for which EDSS is responsible, to the extent these efforts
are not successful, additional compliance efforts would be necessary together
with additional customer service efforts and expenditures. If third parties fail
in their compliance efforts, EDSS also could be impacted and required to provide
additional customer service efforts. In such an event, EDSS could incur
additional costs and experience a negative impact on its financial condition and
results of operations.
The Company's Contingency Plans
The Company has not created a formal contingency plan for Year 2K
problems. The Company intends to take appropriate actions to mitigate the
effects of third parties' failures to remediate their Year 2K issues and for
unexpected failures in its own systems. Such actions may include having
arrangements for alternate suppliers and using manual intervention where
necessary. If it becomes necessary for the Company to take these corrective
actions, it is uncertain whether this would result in significant interruptions
in service or delays in business operations or whether it would have a material
adverse effect on the Company's results of operations, financial position or
cash flow.
As risks are identified, contingency plans will be established and
additional steps will be taken to further minimize the risks associated with the
Year 2K issue. Those plans will focus on matters that appear to be the Company's
most likely Year 2K risks, such as possible additional customer support efforts
by the Company that would be necessary if customers, such as, in the case of
EDSS, Providers or Payors, or vendors are not Year 2K compliant, or if a Year 2K
issue should not be timely detected in the Company's own compliance efforts. In
the event that the Company's systems do not function as a result of a most
reasonably likely worst case scenario, the Company would make reasonable efforts
to enter into temporary alternative arrangements with third parties to service
the Company's customers, including routing transactions to the Company's
competitors. In addition, in the case of EDSS, in the event
25
<PAGE>
EDSS could not process transactions electronically, either as a result of the
failure of its own systems or a loss of telecommunications, data processing or
utility services generally, EDSS or its customers could print transactions
normally processed electronically to paper for manual processing until such time
as the Company's systems are functional.
Costs of Year 2K Remediation
As of October 31, 1998, the Company has not incurred material costs
related to the Year 2K problem, and does not expect to incur material costs in
the future. The Company has not deferred other information technology projects
due to Year 2K expenses, and does not expect to defer such projects in the
future. However, due to the complexity and pervasiveness of the Year 2K issue,
and in particular the uncertainty regarding the compliance efforts of third
parties, there can be no assurance that the costs associated with the Year 2K
problem will not be greater than anticipated.
The Company has not yet estimated Year 2K costs for periods after 1999,
which may include costs of customer service efforts resulting from the failure
of third parties to be Year 2K compliant or other unforeseen problems.
Readers are cautioned that forward-looking statements contained in the
Year 2K Disclosure should be read in conjunction with the Company's disclosures
under the heading "Special Note Regarding Forward-Looking Statements" above.
26
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to this item is contained in the financial
statements appearing in Item 14 of this report. Such information is incorporated
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the executive
officers and directors of the Company is incorporated herein by reference to the
sections entitled "Executive Officers of the Company and Election of Directors"
in the Company's definitive proxy statement for its Annual Meeting of
Stockholders to be held in April 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item with respect to executive
compensation is incorporated herein by reference to the section entitled
"Executive Compensation" in the Company's definitive proxy statement for its
Annual Meeting of Stockholders to be held in April 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item with respect to executive
compensation is incorporated herein by reference to the section entitled
"Security Ownership of Directors and Executive Officers" in the Company's
definitive proxy statement for its Annual Meeting of Stockholders to be held in
April 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section entitled "Certain Transactions" in the Company's
definitive proxy statement for its Annual Meeting of Stockholders to be held in
April 1999.
27
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The financial statements:
The consolidated financial statements included in this item
are indexed on page F-1. "Index to Financial Statements".
2. Financial Statement schedules:
None
3. Exhibit list.
The following exhibits were previously filed as indicated or
are filed herewith.
3.1(1) Certificate of Incorporation and By-laws of Registrant. See
Exhibit 4-3-Exhibit A.
3.1(a)(12) Amendment, dated June 29, 1995, to the Company's By-Laws.
3.1(a)(18) Amendment to Certificate of Incorporation, dated June 10, 1997.
3.1(b)(18) Amendment to By Laws, dated June 10, 1997.
4(15) Rights Agreement, dated as of December 12, 1996, between
National Wireless Holdings Inc. and Continental Stock Transfer
and Trust Company, as Rights Agent, which includes as Exhibit A
the Form of Certificate of Designations designating the
relative rights, preferences and limitations of the Series A
Junior Preferred Stock, as Exhibit B the Form of Right
Certificate, and as Exhibit C the Summary of Rights to Purchase
Preferred Shares.
4.1(4) Specimen of Common Stock Certificate.
4.2(1) Form of Representative Warrant Agreement with form of
Representative's Warrant attached.
10.1(1) Terrence S. Cassidy Employment Agreement, dated September 22,
1993.
10.2(1) Withdrawn.
10.3(1) Paul Sinderbrand Consulting and Employment Agreement, dated
September 22, 1993.
10.4(1) Registrant's 1993 Stock Option Plan.
10.6(1) Strategic Alliance Agreement with Preferred Entertainment,
Inc., dated November 11, 1993.
28
<PAGE>
10.7(1) Withdrawn.
10.28(9) Stock Purchase Agreement dated April 6, 1995 by and among the
Registrant and E. Vernon Oliver.
10.29(9) $1,100,000 Promissory Note dated April 21, 1995 made by
Registrant in favor of E. Vernon Oliver.
10.30(9) Security Agreement dated April, 1995 by and among the
Registrant and TLC Productions, Inc.
10.33A(10) Withdrawn.
10.33(11) Loan documentation relating to the EDSS credit facility, all
dated June 9, 1995.
(a) Loan Agreement.
(b) Borrower Security Agreement.
(c) Form of Note.
(d) Withdrawn.
(e) Withdrawn.
10.34(13) Documentation relating to Acquisition of Anagram International
Communications Ltd. ("Anagram").
(a) Certificate of Incorporation of Anagram.
(b) By-laws of Anagram.
(c) Subscription Agreement re: Class A Convertible Preferred Stock.
(d) Employment Agreement with Andrea Traubner.
(e) Shareholders Agreement dated October 1, 1995 among the Company,
Leonard Giarraputo, Andrea
Traubner and Anagram International Communications Ltd.
10.35(13) Agreement dated November 8, 1995 between Registrant and
Wireless Broadcasting Systems of America, Inc.
10.36(14) Agreement with Spike Technologies.
10.37(a)(15) Severance Benefit Agreement, dated December 12, 1996, with
Terrence S. Cassidy.
10.37(b)(15) Severance Benefit Agreement, dated December 12, 1996, with
Michael J. Specchio.
10.38(16) Press Release, dated February 27, 1997.
10.38(17) Consulting Agreement, dated February 28, 1997, with Michael J.
Specchio, Inc.
10.39(18) Consulting Agreement, dated April 1, 1997, between the
registrant and BellSouth Wireless Cable, Inc.
10.40(19) Form of Director Indemnification Agreement.
10.41(a)(19) Secured Term Note.
10.41(b)(19) Pledge Agreement, dated July 9, 1997.
10.42(19) 1997 Equity Incentive Plan.
10.43(19) Restated Stockholders Agreement, dated September 10, 1997,
between the Company, Joseph D. Truscelli and Electronic Data
Submission Systems, Inc.
10.44(20) Withdrawn.
10.45(21) Subscription Agreement, dated March 4, 1998, between the
Company, Joseph D. Truscelli, and Electronic Data Submissions
Systems, Inc.
11.1(20) Withdrawn.
21(20) Subsidiaries of Registrant.
29
<PAGE>
(b) Reports on Form 8-K: Not applicable.
A Definitive Proxy Statement for the Annual Meeting of Stockholders to be held
in April 1999 will be filed by amendment.
- ---------------------------
(1) - Filed with the initial filing of the Registrant's Registration Statement
on Form S-1, File No. 33-7914.
(2) - Filed with Amendment No. 1 to the Registrant's Registration Statement.
(3) - Filed with Amendment No. 2 to the Registrant's Registration Statement.
(4) - Filed with Amendment No. 3 to the Registrant's Registration Statement.
(5) - Filed with Form 10-Q for the Quarter ended January 31, 1994.
(6) - Filed with Form 10-Q for the Quarter ended April 30, 1994.
(7) - Filed with Form 10-Q for the Quarter ended July 31, 1994.
(8) - Filed with Form 10-K for the Fiscal Year ended October 31, 1994.
(9) - Filed with Form 8-K dated April 13, 1995.
(10) - Filed with Form 10-Q for the Quarter ended January 31, 1995 as Exhibit
10-28.
(11) - Filed with Form 10-Q for the Quarter ended April 30, 1995.
(12) - Filed with Form 10-Q for the Quarter ended July 31, 1995.
(13) - Filed with Form 10-K for the Fiscal Year ended October 31, 1995.
(14) - Filed with Form 10-Q for the Quarter ended July 31, 1996.
(15) - Filed with Form 8-K dated December 12, 1996.
(16) - Filed with Form 8-K dated February 26, 1997.
(17) - Filed with Form 10-Q for the Quarter ended January 31, 1997.
(18) - Filed with Form 10-Q for the Quarter ended April 30, 1997.
(19) - Filed with Form 10-Q for the Quarter ended July 31, 1997.
(20) - Filed with Form 10-K for the Fiscal Year ended October 31, 1997.
(21) - Filed with Form 10-Q for the Quarter ended January 31, 1998.
30
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets as of October 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended October 31, 1998,
1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years ended October 31, 1998,
1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended October 31, 1998,
1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
December 17, 1998
To the Board of Directors and Stockholders of
National Wireless Holdings Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of National
Wireless Holdings Inc. and its subsidiaries at October 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended October 31, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
F-2
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 27,359,353 $ 21,256,356
Marketable securities 32,541,020 49,598,687
Trade and other receivables 751,413 893,498
Due from related parties - 1,178,093
Prepaid expenses and other current assets 136,085 52,447
---------------- ----------------
Total current assets 60,787,871 72,979,081
Wireless frequency license and acquisition costs, net of accumulated
amortization of $144,336 and $106,165 in 1998 and 1997, respectively 237,375 275,546
Transmission and related equipment, net of accumulated depreciation
of $526,385 and $328,899 in 1998 and 1997, respectively 932,169 853,629
Leasehold improvements, office equipment and service vehicles, net of
accumulated depreciation of $607,921 and $434,372 in 1998 and 1997,
respectively 789,033 364,113
Intangible assets, net of accumulated amortization of $686,920 and
$419,086 in 1998 and 1997, respectively 3,594,215 3,983,956
Investments and other assets 287,687 629,331
---------------- ----------------
Total assets $ 66,628,350 $ 79,085,656
---------------- ----------------
---------------- ----------------
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses $ 4,819,901 $ 1,890,734
Current maturities of long-term debt 88,449 241,673
Marketable securities - short sale - 16,559,375
Current income taxes 3,900,000 -
Deferred income taxes 10,930,000 16,900,000
Total current liabilities 19,738,350 35,591,782
---------------- -------------
Note payable to related party 200,000 400,000
Long-term debt 334,967 24,348
---------------- -------------
Total liabilities 20,273,317 36,016,130
---------------- -------------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $.01 par value; 20,000,000 shares authorized; 3,283,000
shares issued and outstanding 32,830 32,830
Additional paid-in capital 22,647,372 22,647,372
Retained earnings 16,115,825 19,430,049
Unrealized gain on marketable securities, net 7,559,006 959,275
---------------- --------------
Total stockholders' equity 46,355,033 43,069,526
---------------- --------------
Total liabilities and stockholders' equity $ 66,628,350 $ 79,085,656
---------------- --------------
---------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Service revenue $ 4,492,991 $ 3,308,080 $ 1,223,561
Interest income 1,829,378 870,810 1,094,173
Dividend income 479,263 538,791 --
------------ ------------ ------------
Total revenue 6,801,632 4,717,681 2,317,734
------------ ------------ ------------
Expenses:
Cost of services 2,606,475 1,626,661 799,045
Wireless market, distribution and technology 858,000 555,422 834,240
Professional fees 735,491 473,430 273,234
General and administrative 2,664,329 2,459,347 790,511
Depreciation and amortization 777,823 832,413 564,139
Interest 57,707 107,760 73,389
------------ ------------ ------------
Total expenses 7,699,825 6,055,033 3,334,558
------------ ------------ ------------
Loss from operations (898,193) (1,337,352) (1,016,824)
Loss on securities transactions, net (4,116,031) -- --
Gain on sale of SFTV -- 44,196,516 --
------------ ------------ ------------
Income (loss) before provision for
income taxes (5,014,224) 42,859,164 (1,016,824)
Provision (benefit) for income taxes (1,700,000) 16,900,000 --
------------ ------------ ------------
Net income (loss) $ (3,314,224) $ 25,959,164 $ (1,016,824)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per common share:
Basic $ (1.01) $ 7.96 $ (0.31)
------------ ------------ ------------
------------ ------------ ------------
Diluted $ (1.01) $ 7.92 $ (0.31)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common shares outstanding:
Basic 3,283,000 3,259,923 3,253,000
------------ ------------ ------------
------------ ------------ ------------
Diluted 3,283,000 3,277,837 3,253,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Unrealized
Retained Earnings Gain on
Additional (Accumulated Marketable
Common Stock Paid-In Capital Deficit) Securities, Net Total
------------ --------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1995 $ 32,530 $ 22,421,173 $ (1,244,391) - $ 21,209,312
Net loss - - (1,016,824) - (1,016,824)
------------ --------------- ----------------- ---------------- ----------------
Balance, October 31, 1996 32,530 22,421,173 (2,261,215) - 20,192,488
Options exercised to acquire 30,000
shares of common stock 300 226,199 - - 226,499
Dividends paid - - (4,267,900) - (4,267,900)
Net income - - 25,959,164 - 25,959,164
Unrealized gain on marketable
securities, net - - - $ 959,275 959,275
------------ --------------- ----------------- ---------------- ----------------
Balance, October 31, 1997 32,830 22,647,372 19,430,049 959,275 43,069,526
Net loss - - (3,314,224) - (3,314,224)
Unrealized gain on marketable
securities, net - - - 6,599,731 6,599,731
------------ --------------- ----------------- ---------------- ----------------
Balance, October 31, 1998 $ 32,830 $ 22,647,372 $ 16,115,825 $ 7,559,006 $ 46,355,033
------------ --------------- ----------------- ---------------- ----------------
------------ --------------- ----------------- ---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,314,224) $ 25,959,164 $ (1,016,824)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 777,823 832,413 564,139
Accretion of interest income -- (306,100) --
Gain on sale of SFTV -- (44,196,516) --
Loss on securities transactions, net 4,116,031 -- --
Deferred income taxes (10,470,000) 16,900,000 --
Change in assets and liabilities:
Receivables 142,085 (574,656) 109,867
Prepaid expenses and other current assets (83,638) 4,749 36,279
Deposits and other assets (43,802) 187,635 88,767
Accounts payable and accrued expenses (441,352) (43,846) 65,374
Current income taxes payable 3,900,000 -- --
Other 1,183,068 -- --
------------ ------------ -------------
Net cash used in operating activities (4,234,009) (1,237,157) (152,398)
------------ ------------ -------------
Cash flows from investing activities:
Wireless frequency license and acquisition costs -- (170,190) (364,625)
Acquisition of transmission and related equipment (276,026) (40,900) (294,889)
Acquisition of leasehold improvements, office equipment and service vehicles (182,478) (183,261) (17,528)
Purchases of U.S. treasury securities -- (15,693,040) --
Proceeds from redemption of U.S. treasury securities -- 15,999,140 12,000,000
Acquisition of marketable securities to settle short sales (33,463,975) -- --
Proceeds of marketable securities - short sale 12,132,048 15,919,961 --
Proceeds from sale of marketable securities 31,439,714 -- --
Increase in notes receivable from EDSS -- -- (215,000)
Investments (94,702) (277,173) (608,800)
Acquisition of EDSS -- (2,293,700) --
Repayments from (advance to) related party 1,100,000 (1,105,093) --
------------ ------------ -------------
Net cash provided by investing activities 10,654,581 12,155,744 10,499,158
------------ ------------ -------------
Cash flows from financing activities:
Dividends paid -- (4,267,900) --
Exercise of stock options -- 226,499 --
Principal payments of long-term debt (317,575) (509,595) (446,235)
Proceeds of long term debt -- 100,000 --
------------ ------------ -------------
Net cash used in financing activities (317,575) (4,450,996) (446,235)
------------ ------------ -------------
Net increase in cash and cash equivalents 6,102,997 6,467,591 9,900,525
Cash and cash equivalents, beginning of year 21,256,356 14,788,765 4,888,240
------------ ------------ -------------
Cash and cash equivalents, end of year $ 27,359,353 $ 21,256,356 $ 14,788,765
------------ ------------ -------------
------------ ------------ -------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 57,707 $ 107,760 $ 73,389
Cash paid for taxes 4,500,000
Capital lease assets acquired and obligations incurred 505,567
Non-cash financing and investing activities:
In 1997, the Company sold South Florida Television Inc. for $48,000,000
in BellSouth Common Stock
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OPERATIONS AND BASIS OF PRESENTATION:
National Wireless Holdings Inc. ("NWH"), a Delaware corporation
organized on August 31, 1993, is a communications company focusing
primarily on the acquisition and operation of telecommunications and
other high-tech businesses. NWH and its majority owned subsidiaries
(collectively, the "Company") currently own and operate an electronic
data interchange company, providing links between healthcare providers
and third party payors. In addition, the Company owns and operates a
satellite programming uplink facility, an educational programming
distribution company and other early stage businesses. In addition to
these businesses, the Company continues its business of acquiring
controlling interests in telecommunications, media, and other high-tech
areas. In June 1997, the Company sold its wireless cable assets in
Miami, Florida in exchange for common stock of BellSouth Corporation
(see Note 3).
The consolidated financial statements include the accounts of NWH and
its majority-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS:
The Company considers all highly liquid investments with maturities,
when purchased, of three months or less to be cash equivalents. Cash
equivalents consist primarily of investments in various money market
funds.
MARKETABLE SECURITIES:
The Company's marketable securities consist of an investment in
BellSouth Corporation common stock. The Company's marketable equity
securities have been classified as available for sale. Available for
sale securities are carried at fair value, with unrealized gains and
losses, net of tax effects, reported as a separate component of
stockholders' equity, until realized.
WIRELESS FREQUENCY LICENSE AND ACQUISITION COSTS:
Wireless frequency license and acquisition costs are capitalized and
amortized on the straight-line method over the life of the related
agreements, which range from 5 to 10 years.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment is recorded at cost and depreciation expense is provided
under the straight-line method over the estimated useful lives of the
related assets, which range from 5 to 10 years; leasehold improvements
are amortized over the shorter of the life of the improvements or the
related lease term.
F-7
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INTANGIBLE ASSETS:
Intangible assets consist primarily of goodwill. Goodwill represents
the excess of the purchase price over the net assets of acquired
companies and is being amortized on the straight-line method over 10 to
15 years.
LONG-LIVED ASSETS:
Based upon events or changes in circumstances, the Company assesses any
impairment in value of its long-lived assets, including intangible
assets, by making a comparison of the current and projected operating
cash flows of each of its assets over its remaining useful life, on an
undiscounted basis, to the carrying amount of the related assets. Such
carrying amounts would be adjusted, if necessary, to reflect any
impairment in value.
REVENUE RECOGNITION:
Service revenue is recognized as earned in the period the services are
provided. Service revenue for EDSS (see Note 4) includes installation
revenue and revenue associated with electronic transactions to and from
physicians, hospital networks and health insurance carriers.
INCOME TAXES:
The Company accounts for income taxes under the liability method of
accounting. Under the liability method, deferred taxes are determined
based on differences between the financial statement and tax bases of
assets and liabilities at enacted tax rates in effect in the year in
which the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the
amounts expected to be realized.
NET INCOME (LOSS) PER SHARE DATA:
The Company adopted the provisions of SFAS No. 128 "Earnings per Share"
effective November 1, 1997, with restatement of all prior periods
presented. Basic earnings per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing
net income by the sum of the weighted average number of common shares
outstanding plus all additional common shares that would have been
outstanding if potentially dilutive common shares had been issued. No
potential common shares were included in the computation of diluted
earnings per share when a net loss existed for the period, as
potentially dilutive common shares would have an antidilutive effect on
earnings per share
F-8
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Computations of net income (loss) per share are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1998 1997 1996
----------------- ----------------- -------------------
<S> <C> <C> <C>
Net income (loss) $ (3,314,224) $ 25,959,164 $ (1,016,824)
----------------- ----------------- -------------------
----------------- ----------------- -------------------
Weighted average common shares outstanding:
Basic:
Shares of common stock outstanding 3,283,000 3,259,923 3,253,000
----------------- ----------------- -------------------
----------------- ----------------- -------------------
Fully diluted:
Shares of common stock outstanding 3,283,000 3,259,923 3,253,000
Dilutive effect of stock options 17,914
----------------- ----------------- -----------------
3,283,000 3,277,837 3,253,000
----------------- ----------------- -------------------
----------------- ----------------- -------------------
Income (loss) per share - basic $ (1.01) $ 7.96 $ (0.31)
Income (loss) per share - fully diluted $ (1.01) $ 7.92 $ (0.31)
</TABLE>
ESTIMATES:
The presentation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at 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.
RECENTLY ISSUED PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No.130, Comprehensive
Income ("SFAS 130"). SFAS 130, effective for fiscal years beginning
after December 15, 1997, establishes standards for the reporting and
display of comprehensive income and its components in financial
statements. Comprehensive income generally represents all changes in
shareholders' equity except those resulting from investments by or
distributions to shareholders. Upon adoption of the statement,
unrealized gains or losses on marketable securities arising during each
year will be reflected in comprehensive income.
In June 1997, the FASB issued SFAS No.131, Disclosures About Segments
of an Enterprise and Related Information. SFAS No. 131, which is
effective for fiscal years beginning after December 15, 1997,
establishes new disclosure requirements for operating segments,
including products, product services, geographical areas and major
customers. The Company will adopt SFAS No.131 for the 1999 fiscal year,
but does not expect the new accounting standard to have a material
effect on the Company's reported financial results.
F-9
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In June 1998, the FASB issued SFAS No.133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133, effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, establishes new
accounting and reporting standards for derivative financial instruments
and for hedging activities. Under SFAS 133, certain unrealized losses
on security transactions amounting to $1,298,000, net of taxes, might
have been charged to income for the year ended October 31, 1998.
3. SALE OF SFTV:
On February 26, 1997, the Company and its wholly-owned subsidiary,
South Florida Television, Inc. ("SFTV") entered into an Agreement and
Plan of Reorganization, as amended, (the "Merger Agreement") which
became effective on June 27, 1997 with BellSouth Corporation
("BellSouth") and its wholly-owned subsidiary, BellSouth South Florida
Merger Subsidiary, Inc. ("BellSouth Sub"), pursuant to which BellSouth
Sub merged into SFTV. SFTV became a wholly-owned subsidiary of
BellSouth and the Company received an aggregate of $48,000,000 in
BellSouth common stock (the "Merger") which resulted in a pre-tax gain
of approximately $44,200,000 The Merger has been treated as a tax-free
reorganization. The BellSouth common stock is reflected as available
for sale marketable securities in the accompanying consolidated balance
sheets as of October 31, 1998 and 1997.
4. ACQUISITION OF EDSS:
In August 1996, the Company completed a partial exercise of its option
to acquire a 50% interest in Electronic Data Submission Systems, Inc.
("EDSS") by purchasing 11% of EDSS voting common stock for $343,800 in
cash.
On December 13, 1996, the Company exercised a warrant and an option to
purchase additional shares of the common stock of EDSS, which when
combined with its existing share ownership represents 50% of the
outstanding common stock and, pursuant to the EDSS Shareholders
Agreement, dated as of July 25, 1996, control of EDSS. The aggregate
purchase price for the EDSS shares was $1,887,500, of which an
aggregate of $887,500 was paid to EDSS and $1,000,000 was paid to the
principal stockholder of EDSS. The acquisition has been accounted for
under the purchase method of accounting and the results of operations
from the date of purchase have been reflected in the consolidated
statement of operations.
On September 10, 1997, the Company purchased an additional 5% of the
common stock of EDSS from the president of EDSS for $750,000. The
purchase price has been allocated principally to intangible assets
(goodwill) and is being amortized over 15 years.
F-10
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On July 31, 1998, the Company completed the purchase of $1,200,000 of
shares of Series A Preferred Stock of EDSS, which when combined with
its existing share ownership represents 58% of the outstanding common
stock and, with additional voting rights, 82% control of EDSS. The
Company paid for such securities with $1,000,000 in cash and $200,000
reduction in the principal amount of a note outstanding pursuant to a
loan agreement between EDSS and the Company, dated June 19, 1995. After
such transaction, the Company had outstanding loans to EDSS of
$788,000. The President of EDSS also agreed to convert $200,000 of
indebtedness owed to him by EDSS into Series B Convertible Preferred
Stock of EDSS.
The consolidated statement of operations includes the following
relating to EDSS:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- --------------- ---------------
<S> <C> <C> <C>
Service revenue $ 3,274,244 $ 1,864,000 $ -
Expenses:
Cost of services 2,327,131 840,000 -
Other 1,062,178 840,000 -
</TABLE>
EDSS has developed a comprehensive software system, referred to as
HECET Systems-Registered Trademarks- in 1993, which is DOS-based,
and released a new Windows version, WinHECET-TM- in 1998, that
enables physicians, clinics, managed care organizations, HMO's,
PPOs, major insurance companies including Blue Cross/Blue Shield,
Medicare, Medicaid, and commercial payors to communicate
electronically the information needed to process and pay insurance
claims, check patient eligibility, make claim status inquiries, and
provide comprehensive reporting on those claims. HECET
Systems-Registered Trademarks- and WinHECET-TM- enable health care
professionals throughout the country to reduce the need for paper
claims processing while enhancing the payment process. The Company
has entered into various service agreements with health care
providers including FHS, Inc., FHP Health Care, Metra Health
Insurance Company, Mutual of Omaha and Prudential Insurance Company.
EDSS has incurred operating losses of $2,958,364 on a cumulative
basis through September 30, 1998. Based upon existing contracts with
physicians and providers and current expense levels, management of
EDSS believes that it will achieve positive cash flow from
operations for fiscal 1999 without the need to obtain additional
financing. The Company, however, may seek to obtain additional
financing to accelerate its strategic business plan.
F-11
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. LEASE AND PURCHASE COMMITMENTS:
The Company leases administrative facilities and office equipment under
operating leases that expire between 1999 and 2003. Certain of the
leases contain escalation clauses providing for increased rentals based
on operating expenses or the consumer price index. Rent expense, net of
rental income, under operating leases was approximately $247,000
$243,000 and $200,000 for the years ended October 31, 1998, 1997 and
1996, respectively.
Future annual minimum rental payments as of October 31, 1998 under
noncancellable operating leases for the next five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 258,568
2000 255,052
2001 255,052
2002 173,669
2003 111,124
</TABLE>
6. CONSULTING AND EMPLOYMENT AGREEMENTS:
On February 28, 1997, the Company entered into a consulting agreement
with Michael J. Specchio, Inc. ("MJS Inc.") which is owned and managed
by Michael J. Specchio, Chairman of the Company, and simultaneously
terminated its employment agreement with Mr. Specchio. Under the
consulting agreement, MJS Inc. is retained as a consultant and is
obliged to provide the services of Mr. Specchio on substantially a
full-time basis for a term ending September 2001 for annual
compensation of $180,000, on substantially the same terms as Mr.
Specchio was previously employed under the employment agreement. Under
the consulting agreement, MJS Inc. also has the same severance
benefits as previously provided to Mr. Specchio.
The Company has entered into employment agreements, as amended in
December 1996, with other executive officers and directors which expire
between 2000 and 2001, aggregating approximately $262,000 annually.
During the years ended October 31, 1998, 1997 and 1996, salaries and
consulting fees of approximately $768,000, $1,087,000, and $629,000,
respectively, were incurred under these contracts.
During fiscal 1997, EDSS entered into an employment agreement with the
president of EDSS for a period of five years with an initial annual
base salary of $180,000 for years one and two and increasing to
$220,000 in years three through five.
F-12
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1998 1997
---------------- ------------------
<S> <C> <C>
Long-term debt comprises:
Obligations under capital leases (with interest rates ranging
from 11.8% to 16.02% and expiring through 2003) $ 423,416 $ 33,346
8% note payable - 202,078
Other - 30,597
---------------- ------------------
423,416 266,021
Less, current maturities 88,449 241,673
---------------- ------------------
$ 334,967 $ 24,348
---------------- ------------------
---------------- ------------------
</TABLE>
8. INCOME TAXES:
The provision (benefit) income taxes comprises:
<TABLE>
<CAPTION>
1998 1997
---------------- ------------------
<S> <C> <C>
Federal:
Current $ 7,981,000 $ -
Deferred (9,528,000) 15,000,700
State and Local:
Current 789,000 -
Deferred (942,000) 1,899,300
---------------- ------------------
---------------- ------------------
$ (1,700,000) $ 16,900,000
---------------- ------------------
---------------- ------------------
</TABLE>
As of October 31, 1998 and 1997, the deferred income tax liability
relates to marketable securities received from the sale of SFTV,
comprising the gain not yet recognized for income tax purposes and the
unrealized gain on such securities since the sale. During 1997, NOL's
which had been offset by a 100% valuation allowance in prior years were
either utilized to reduce taxable income or were transferred to
BellSouth as part of the sale of SFTV.
The difference between the actual provision (benefit) for income taxes
and the provision (benefit) for income taxes computed by applying the
statutory federal rate to income (loss) before provision for income
taxes is principally attributable to state and local taxes, net of
federal income tax benefit.
The Company is currently undergoing a tax examination by the
Internal Revenue Service ("IRS") for fiscal 1995 and 1996. Although the
IRS has proposed certain adjustments, the Company does not believe that
the ultimate outcome will have a material effect on the financial
statements.
F-13
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STOCK:
In connection with the its initial public offering in March, 1994, the
Company issued and sold to the underwriter warrants for five years to
purchase 200,000 shares of common stock at a price of $.001 per warrant
(the "Warrants"). The Warrants are exercisable at any time during a
period of four years commencing at the beginning of the second year
after their issuance at a price of $20.625 (165% of the initial public
offering price).
The Company is authorized to issue 1,000,000 shares of Serial Preferred
Stock, par value $.01 per share with dividend and liquidation
preferences over the common stock.
The Company granted to a third party a right, which expires on March
17, 1999, to purchase 300,000 shares of common stock at $15 per share
(120% of the Company's initial public offering price). The party may
exercise its right to purchase the shares of common stock for cash or
to receive a reduced number of shares, without payment of cash,
equivalent to the value of the common stock at the exercise date in
excess of the exercise price.
10. STOCK OPTION PLAN:
The 1993 Stock Option Plan, as amended, and the 1997 Equity Incentive
Plan (the "Plans") have participants which include key employees
(including officers), directors, advisors, and independent consultants
to the Company or to any of its subsidiaries. The Company has reserved
80,000 and 200,000 shares of common stock for issuance under the 1993
and 1997 Plans, respectively. Options granted to employees may be
designated as incentive stock options ("ISO's") or non-qualified stock
options ("NQSO's"), as defined by the Internal Revenue Service. Options
granted to independent consultants and other non-employees may only be
designated NQSO's. Options granted pursuant to the Plans which are
ISO's will enjoy the attendant tax benefits provided under Sections 421
and 422 of the Internal Revenue Code of 1986, as amended.
The exercise price of options granted under the Plans may not be less
than 100% of the fair market value of the common stock on the date of
grant. Generally, options will be exercisable for a term that will not
exceed ten years from the date of grant.
During fiscal 1997, the Company granted 100,000 five-year options under
the Plans, one third of which vested immediately while the remaining
vest ratably over two years.
F-14
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Information with respect to shares under option is summarized below:
<TABLE>
<CAPTION>
EXERCISE PRICE
ISO'S NQSO'S PER SHARE
---------- ------------ ------------------
<S> <C> <C> <C>
Balance, October 31, 1995 11,750 68,250 $6.50-$8.50
Granted - - -
Exercised - - -
---------- ------------
Balance, October 31, 1996 11,750 68,250 $6.50-$8.50
Granted 11,730 88,270 $17.05
Exercised (30,000) $6.50-$8.25
---------- ------------
Balance, October, 31, 1997 23,480 126,520 $8.50-$17.05
Granted - - -
Exercised - - -
---------- ------------
Balance, October 31, 1998 23,480 126,520 $8.50-$17.05
---------- ------------
---------- ------------
Exercisable, October 31, 1998 21,175 95,492 $8.50-$17.05
---------- ------------
---------- ------------
</TABLE>
No options were forfeited or expired during any period presented. The
remaining weighted average contractual life of options outstanding at
October 31, 1998 was 3.17 years.
The Company has elected to adopt the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation". Accordingly, no compensation cost has been
recognized with regard to options granted under the Plan in the
accompanying financial statements. If stock-based compensation costs
had been recognized based on the estimated fair values at the dates of
grant for options awarded during 1997, net income and net income per
common share for 1998 would have been reduced by approximately $156,000
or $.05 per share (basic and diluted) and for 1997 would have been
reduced by $125,000 or $.04 per share (basic and diluted).
These pro forma adjustments to net income and net income per common
share assume fair values of each option grant estimated using the
Black-Scholes option pricing formula. The more significant assumptions
underlying the determination of such fair value for options granted
during 1997 include: (i) weighted average risk-free interest rates of
5.92%; (ii) weighted average expected option life of 5 years; (iii) an
expected volatility of 41%, and (iv) an expected dividend yield of 0%.
The per share weighted average fair value at the dates of grant for
options awarded during 1997 was $4.67 and there were no options granted
for the year ended October 31, 1998.
11. RELATED-PARTY TRANSACTIONS:
On July 9, 1997 the Company loaned $1,100,000 to an officer of the
Company under a note receivable which bore interest at 8% and was paid
on June 26, 1998.
F-15
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The note payable to related party (president of EDSS) of $200,000 as of
October 31, 1998 bears interest at the bank's prime rate plus 2% (10.5%
at October 31, 1998) and is due on demand after the full payment of an
intercompany loan of $788,000 due from EDSS to the Company.
In fiscal 1998, 1997 and 1996, the Company purchased new service
vehicles from an automobile dealership which is owned by the Chairman
of the Company for approximately $4,474, $29,000 and $33,000,
respectively.
The Company leases office space in Rantoul, Illinois from a company
which is owned jointly by the Chairman and an officer of the Company,
for $1,750 per month. The lease agreement is on a month-to-month basis
based on the needs of the Company. The Company also subleases office
space in New York to a company owned by a director of the Company for
$800 per month. The sublease, which commenced December 1, 1994, is on a
month-to-month basis based on the needs of the Company.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair
value of each category of financial instruments:
CASH AND CASH EQUIVALENTS:
Cash equivalents comprise money market funds whose carrying amounts
approximate fair value due to the short-term maturity of the
instruments.
LONG-TERM DEBT AND NOTE PAYABLE:
Long-term debt relates principally to equipment lease obligations,
service vehicle loans payable and a note payable to a related party.
Interest rates on the debt approximate the rates available at October
31, 1998 and the Company believes that their carrying value of debt at
October 31, 1998 approximates fair value.
MARKETABLE SECURITIES:
Marketable securities are reflected at fair value in the accompanying
consolidated balance sheet at October 31, 1998.
F-16
<PAGE>
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Quarterly information for 1998, 1997 and 1996 is set forth in the table
below:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
------------------ --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
1998:
Revenue $ 1,624,000 $ 1,722,196 $ 1,730,503 $ 1,724,933
Net (loss) income 212,614 248,620 228,207 (4,003,665)
Net (loss) income per common
Share:
Basic 0.06 0.08 0.07 (1.22)
Diluted 0.06 0.08 0.07 (1.22)
1997:
Revenue $ 701,760 $ 996,263 $ 1,429,088 $ 1,590,570
Net (loss) income (540,558) (328,522) 27,085,670 (257,426)
Net (loss) income per common
Share:
Basic (0.17) (0.10) 8.33 (0.08)
Diluted (0.17) (0.10) 8.23 (0.08)
1996:
Revenue $ 560,218 $ 590,838 $ 624,068 $ 542,610
Net loss (225,600) (227,961) (264,657) (298,606)
Net loss per common share:
Basic (0.08) (0.07) (0.08) (0.08)
Diluted (0.08) (0.07) (0.08) (0.08)
</TABLE>
The loss for the quarter ended October 31, 1998 is principally
attributable to the loss on securities transactions realized during
that quarter.
The sum of the quarterly net income (loss) per common share amounts do
not necessarily equal the full year amount primarily because the
computations of the denominator for basic and diluted earnings per
share for each quarter and the full year are made independently.
Certain revenue amounts for the first three quarters of 1998 have been
reclassified to conform with the year-end presentation.
F-17
<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.
NATIONAL WIRELESS HOLDINGS INC.
-------------------------------
(Registrant)
Date: January 29, 1999 /s/ Terrence S. Cassidy
-------------------------------------------------
Terrence S. Cassidy, Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Terrence S. Cassidy
- ---------------------------
Terrence S. Cassidy Director January 29, 1999
/s/ Thomas R. DiBenedetto
- ---------------------------
Thomas R. DiBenedetto Director January 29, 1999
/s/ Louis B. Lloyd
- ---------------------------
Louis B. Lloyd Director January 29, 1999
/s/ Michael A. McManus, Jr.
- ---------------------------
Michael A. McManus, Jr. Director January 29, 1999
/s/ Michael J. Specchio
- ---------------------------
Michael J. Specchio Director January 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 27,359,353
<SECURITIES> 32,541,020
<RECEIVABLES> 751,413
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 60,787,871
<PP&E> 2,855,508
<DEPRECIATION> 1,134,306
<TOTAL-ASSETS> 66,628,350
<CURRENT-LIABILITIES> 19,738,350
<BONDS> 0
0
0
<COMMON> 32,830
<OTHER-SE> 46,322,203
<TOTAL-LIABILITY-AND-EQUITY> 66,628,350
<SALES> 4,492,991
<TOTAL-REVENUES> 6,801,632
<CGS> 2,608,475
<TOTAL-COSTS> 7,642,118
<OTHER-EXPENSES> 4,116,031
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,707
<INCOME-PRETAX> (5,014,224)
<INCOME-TAX> (1,700,000)
<INCOME-CONTINUING> (3,314,224)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,314,224)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> (1.01)
</TABLE>
