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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000 Commission File No. 0-26533
ADVANCED WIRELESS SYSTEMS, INC.
Alabama 63-1205304
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
716 College Avenue, Suite A-2
Santa Rosa, California 95404
(Address of principal executive offices)
Issuer's telephone number: 707-576-1008
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant has been required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No_
At September 30, 2000, a total of 19,979,585 shares of registrant's Common
Stock were outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000
(unaudited)
ASSETS
Current assets
Cash $ 37,817
Accounts receivable, net of allowance
for doubtful accounts of $13,543 109,141
Accounts receivable, related parties 20,222
Inventories, net of reserve for
obsolescence of $57,374 41,106
Prepaid expenses 30,544
-----------
Total current assets 238,830
-----------
Fixed Assets, net of accumulated
depreciation of $585,464 384,206
-----------
Other assets
Deposits 21,801
License acquisition costs, net
of accumulated amortization of $514,475
and escrow obligation of $152,020 1,604,703
Goodwill, net of accumulated amortization
of $80,892 360,699
Other intangibles, net of
accumulated amortization of $69,385 1,041
-----------
Total Other Assets 1,988,244
-----------
TOTAL ASSETS $ 2,611,280
===========
The accompanying notes are an integral part of these financial statements
1
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
September 30, 2000
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 543,246
Current portion of obligations under
capital leases 19,419
Debtor certificates 11,000
Notes payable 207,159
Notes payable, related parties 329,772
Accrued payroll and payroll taxes 106,988
Accrued interest payable 93,712
Other accrued expenses 81,356
-----------
Total Current Liabilities 1,392,652
-----------
Obligations under capital leases,
net of current portion 66,718
Commitments and contingencies --
Stockholders' Equity:
Common stock, $.01 par value, 150,000,000 shares
authorized; 19,979,585 shares issued
and outstanding 199,796
Additional paid in capital 4,009,229
Escrowed stock (1,381,999 shares) (152,020)
Accumulated deficit (2,905,095)
-----------
Total Stockholders' Equity 1,151,910
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,611,280
===========
The accompanying notes are an integral part of these financial statements.
2
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
September 30, 2000
(unaudited)
Nine Months Ended September 30,
-------------------------------
2000 1999
---------------- -------------
REVENUES
Service and other $ 194,305 $ 90,689
---------------- -------------
COSTS AND EXPENSES
Operating 100,072 123,548
General and administrative 872,736 476,376
Depreciation and amortization 220,863 136,477
---------------- -------------
Total Costs and expenses 1,193,671 736,401
---------------- -------------
Net Loss from operations (999,366) (645,712)
OTHER INCOME (EXPENSE)
Interest expense, net (17,540) (15,188)
Gain on asset disposition 329 --
---------------- -------------
NET LOSS $ (1,016,577) $ (660,900)
================ =============
Net loss per share - basic and diluted $ (0.13) $ (0.14)
================ =============
Weighted average number
of shares outstanding -
basic and diluted 7,583,859 4,665,480
================ =============
The accompanying notes are an integral part of these financial statements.
3
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2000 and 1999
(UNAUDITED)
Common Additional
Stock Par Paid-in Escrowed Accumulated
Shares Value Capital Stock Deficit Total
----------- --------- ---------- ---------- ------------ -----------
Balance
December 31, 1999 4,989,342 $ 49,893 $2,139,176 -- $(1,888,518) $ 300,551
Exercise of
Series A Warrants
for Common Stock 44,600 446 33,004 -- -- 33,450
Exercise of
Series B Warrants
for Common Stock 257,386 2,574 254,812 -- -- 257,386
Adjust shares per
transfer agent 21,310 213 8,072 -- -- 8,285
Stock issued for
services 125,000 1,250 61,250 -- -- 62,500
Stock issued for
acquisition of
subsidiary 11,763,102 117,631 1,176,311 (152,020) -- 1,141,922
Exercise of Series C
Warrants for common
stock 37,622 376 37,246 -- -- 37,622
Stock issued for
acquisition of
subsidiary 2,667,000 26,670 266,700 -- -- 293,370
Exercise of Series G
Warrants for common
stock 74,223 743 32,658 -- -- 33,401
Net Loss -- -- -- -- (1,016,577) (1,016,577)
----------- --------- ---------- ---------- ------------ ----------
Balance
September 30, 2000 $19,979,585 $ 199,796 $4,009,229 $ (152,020) $(2,905,095) $1,151,910
=========== ========= ========== =========== ============ ==========
The accompanying notes are an integral part of these financial statements.
4
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2000 and 1999
(UNAUDITED)
Nine Months Ended September 30,
2000 1999
---------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,016,577) $ (660,900)
Adjustments to reconcile net loss to
net cash from operating activities:
Noncash items included in net loss:
Depreciation and amortization 220,863 136,477
Gain on disposition of cable TV premises
and other equipment (329) --
Notes issued for services 30,000 --
Stock issued for services 62,500 --
Changes in operating assets
and liabilities:
Accounts receivable 11,355 --
Accounts receivable, related parties (5,089) --
Employee advances -- (50)
Inventories 450 186
Prepaid expenses 6,600 9,000
Deposits (10,000) 4,500
Accounts payable 214,734 -
Accrued interest 15,586 15,187
Accrued payroll and taxes 14,529 (307)
Other accrued expenses 4,296 --
---------------- -------------
Net cash used in operating activities (451,082) (495,907)
---------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of equipment 6,787 --
Purchase of property and equipment (27,751) (256,941)
---------------- -------------
Net cash used in investing activities (20,964) (256,941)
---------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 25,000 --
Repayment of notes payable (7,841) (75,000)
Exercised stock warrants 361,859 872,624
Asset and subsidiary acquisitions 17,617 --
---------------- -------------
Net cash provided by financing activities 396,635 797,624
---------------- -------------
The accompanying notes are an integral part of these financial statements.
5
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Nine Months Ended September 30, 2000 and 1999
(UNAUDITED)
Nine Months Ended September 30,
2000 1999
---------------- -------------
Net increase (decrease) in cash and
cash equivalents (75,411) 44,776
Cash and cash equivalents,
Beginning of period 113,228 56,168
---------------- -------------
Cash and cash equivalents, end of period $ 37,817 $ 100,944
================ =============
NON-CASH TRANSACTIONS
In August 2000, the Company purchased the assets (primarily certain Multipoint
Distribution System ["MMDS"] and Instructional Television Fixed Service
["ITFS"] licenses) of an unrelated entity in a stock transaction valued at
$1,293,942. As part of the agreement, the Company received cash of $23,093
and agreed to assume liabilities totaling $610,900.
In September 2000, the Company acquired the shares of Daybreak Auto Recovery,
Inc. (now a wholly-owned subsidiary) through a stock swap valued at $293,370.
The transaction resulted in the recognition of goodwill in the amount of
$233,586. The Company also effectively assumed a bank overdraft of $5,476.
During the nine months ended September 30, 2000, the Company reduced its
accrued liabilities by transferring $8,285 to paid-in capital.
The accompanying notes are an integral part of these financial statements.
6
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation
- ---------------------
The accompanying condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. However,
certain information or footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed, or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission for interim financial
statements. In the opinion of management, the statements include all
adjustments necessary for interim financial statements (which are of a normal
and recurring nature) for the fair presentation of the results of the interim
periods presented. The results of operations for such periods are not
necessarily indicative of results to be expected for the entire current year
or other future interim periods.
The condensed consolidated financial statements and related disclosures have
been prepared with the presumption that users of the interim consolidated
financial information have read or have access to the audited financial
statements for the preceding fiscal year. Accordingly, these condensed
consolidated financial statements should be read in conjunction with the
audited financial statements and related notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1999. The results of operations for the nine months ended September 30, 2000,
are not necessarily indicative of the results to be expected for any
subsequent period or for the entire fiscal year ending December 31, 2000.
Nature of Operations
- --------------------
Mobile Limited Liability Company, LLC (the "Debtor") was a Nevada limited
liability company formed on April 25, 1994 for purposes of acquiring and
operating certain FCC licenses in the Mobile, Alabama area. The majority
interest member of the LLC was a similarly named general partnership, Mobile
Wireless Partners ("Partners") comprised of 1,094 partners, with a 94.5%
interest in the Debtor. Pursuant to the Plan of Reorganization filed by
Mobile Wireless, LLC, Advanced Wireless Systems, Inc. was created and emerged
from Bankruptcy on January 8, 1998 as the Reorganized Debtor (collectively,
called the "Company"). Additionally, the Plan included the acquisition by the
Company of the Partners' FCC License in exchange for 3,192,518 shares of the
Company's common stock, 3,068,066 "B" Warrants exercisable on a 1 for 1 basis
for the Company's common stock, and the extinguishment of an inter-company
loan from Partners totaling $100,000, which was accounted for as a conversion
to common stock. The License has been recorded by the Company at the
Partners' historical cost basis which was $225,000. In substance, the
reorganization and asset transfer and resulting combination between Partners
and the Company is a change in legal organization, but not a change in entity.
The transfer of the license and elimination of inter-company receivable,
representing all assets of the Partners, in exchange for all outstanding
shares in the newly formed corporation is deemed a transfer of assets under
common control. Accordingly, the assets transferred have been accounted for
at historical cost in a manner similar to that in a pooling of interests. The
Partnership had no prior results of operations. As such, results of operations
on a combined basis represent the activities of Mobile LLC during those
periods.
The Company is an established provider of direct-broadcast satellite
television service in the Mobile, Alabama market, primarily serving rural and
outlying areas where the delivery of traditional land-based cable television
7
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------
Nature of Operations (continued)
- --------------------
service is impractical. The Company recently acquired the technology to
provide high speed Internet access through its existing broadcast frequencies
and is beginning to develop a base of service for these users, as well as
continuing to provide direct-broadcast satellite television service to the
existing market.
On August 6, 2000, the Company purchased certain MMDS and ITFS licenses in
Baton Rouge, Louisiana, Clarksville, Tennessee, Reading, Pennsylvania and
Shreveport, Louisiana (along with other assets) for 11,763,102 shares of the
Company's common stock (see Note 3 below).
On September 8, 2000, the Company purchased 100% of the common stock of
Daybreak Auto Recovery, Inc. (an automobile repossession company) through a
stock swap involving the issuance of 2,667,000 shares of the Company's common
stock (see Note 3 below). Daybreak Auto Recovery, Inc. is now a fully-owned
subsidiary of the Company.
Management Use of Estimates
- ---------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain reclassifications have been made to the 1999 financial statements to
conform with the 2000 financial statement presentation. Such reclassifications
had no effect on net income (loss) as previously reported.
NOTE 2. EXPIRATION OF WARRANTS
----------------------
In 1998, the Company issued 466,000 Series A Warrants exercisable at $0.75
each and 3,068,066 Series B Warrants exercisable at $1.00 each, in conjunction
with the conversion of debt and the acquisition of FCC licenses, respectively,
occurring upon emergence of the Company from Chapter 11 Bankruptcy
Reorganization. During the nine months ended September 30, 2000, a total of
44,600 Series A Warrants were exercised and 257,386 Series B Warrants were
exercised for cash in the aggregate amount of $290,836. Cumulative exercises
from inception were 367,254 for the Series A Warrants and 1,211,788 for the
Series B Warrants. The remaining unexercised balance of 98,746 Series A
Warrants and 1,856,278 Series B Warrants expired on July 15, 2000.
On September 11, 2000, a financial advisor, as part of the effort to raise
additional capital for the Company, contributed back to the Company 203,551
each of Series C, Series D, Series E, and Series F Warrants (814,204 warrants
in aggregate) received in the asset purchase agreement described in Note 3
below. The exercise price on these warrants was adjusted downward to $0.45
through the issuance of 814,204 new Series G Warrants for a 60-day period.
Through September 30, 2000, 74,223 of the Series G Warrants were exercised for
cash amounting to $33,402. Subsequent to September 30, 2000, an additional
685,092 Series G Warrants were exercised for cash in the aggregate of
$308,290. The balance of 54,889 Series G Warrants expired on November 9,
2000.
8
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(unaudited)
NOTE 3. PURCHASE AGREEMENTS
-------------------
(a) On February 15, 2000, the Company executed an asset purchase agreement
with an unrelated entity (the "Seller") owning the rights to certain MMDS and
ITFS licenses in Baton Rouge, Louisiana, Clarksville, Tennessee, Reading,
Pennsylvania, and Shreveport, Louisiana. The Seller was operating as a
Debtor-in-Possession under Chapter 11 of the US Bankruptcy Code. The
agreement called for the Company to acquire all of the assets of the Seller
and to assume and agree to pay substantially all of the Seller's indebtedness
to others, all as part of the Seller's plan of reorganization under the
Bankruptcy Code. In addition, the Purchase Agreement provided for a purchase
price adjustment of additional shares of the Company's common stock if certain
conditions relative to the trading of the Company's stock were not met.
The Seller's plan of reorganization was confirmed by the U.S. Bankruptcy Court
on May 23, 2000, and the asset purchase transaction was consummated on August
6, 2000. The stock trading purchase price adjustment, plus other price
adjustments agreed at closing, resulted in a purchase price to the Seller
(after purchase price adjustments of 3,762,102 as to shares and to all classes
of warrants, respectively) of 11,763,102 shares of the Company's $0.01 par
value common stock, plus 11,763,102 Series C One-Year Warrants, 11,763,102
Series D Eighteen-Month Warrants, 11,763,102 Series E Two-Year Warrants, and
11,763,102 Series F Three-Year Warrants. The exercise prices range from $1 to
$6. As described in Note 2 above, each of the Series C-F Warrants were
subsequently transferred to 814,204 Series G Warrants at an exercise price
of $0.45 each, expiring November 9, 2000. The entire purchase transaction was
valued at $1,293,942, representing acquired licenses of $1,749,995, other
assets of $154,847, and the assumption of $610,900 in liabilities.
A total of 1,381,999 units of equity (each unit representing 1 share of $0.01
par value common stock plus 1 each of Series C-F Warrants, respectively)
issued to officers, directors, and the other equity holders of the Seller,
were placed in an escrow account, pending the completion of certain
guarantees pertaining to the transfer of ownership rights to the licenses and
the issuance of audited financial statements. The Company has recognized an
escrow obligation (presented as a contra asset against license acquisition
costs) and a corresponding charge to equity on the September 30, 2000 balance
sheet in the amount of $152,020 for these escrowed shares. All of the
aforementioned 1,381,999 units of equity remained in escrow at the September
30, 2000 balance sheet date.
(b) On September 8, 2000, the Company acquired all 1,000,000 of the issued
and outstanding shares of Daybreak Auto Recovery, Inc., an automobile
repossession company located in northern California, in exchange for 2,667,000
shares of the Company's $0.01 par value common stock (of which 53,340 shares
were issued to a financial advisor as a finder's fee). The transaction was
valued at $293,370, consisting of $568,384 of assets (including the
recognition of $233,586 in goodwill) and $275,014 in liabilities.
(c) The Company also signed Letters of Intent with several unrelated entities
to purchase the assets and assume the liabilities of each of the businesses.
Definitive purchase agreements have not yet been finalized, but it is expected
that the combined purchase prices will include the issuance of additional
shares of the Company's $0.01 par value common stock.
NOTE 4. GOING CONCERN
-------------
As discussed in Note 1 to the audited financial statement on Form 10-KSB for
the year ended December 31, 1999, the Company has emerged from Chapter 11
Bankruptcy. The Company's ability to continue as a going concern depends, in
9
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(unaudited)
NOTE 4. GOING CONCERN (continued)
-------------
part, on its ability to develop new markets for its MMDS frequencies
including, but not limited to, high-speed Internet access, and to raise new
capital through public offerings of the Company's stock and through the
exercise of common stock purchase warrants. There can be no assurance that
the Company will successfully develop new markets for its services, or that
sales of the Company's stock will generate sufficient working capital to
offset operating losses.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following information should be read in conjunction with our financial
statements and notes appearing elsewhere in this registration statement. This
registration statement contains forward-looking statements. The words,
"anticipate," "believe," "expect," "plan," "intend," "estimate," "project,"
"could," "may," "foresee," and similar expressions are intended to identify
forward-looking statements. These statements include information regarding
expected development of our business and development of the wireless cable TV
and Internet access service business where we will focus our marketing
efforts. These statements reflect our current views about future events and
financial performance and involve risks and uncertainties, including without
limitation the risks described in "Risk Factors". Should one or more of these
risks or uncertainties occur, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated.
Among the factors that could cause actual results to differ materially are the
following: a lack of sufficient capital to finance our business strategy on
terms satisfactory to us; pricing pressures which could affect demand for our
services; changes in labor, equipment and capital costs; our inability to
develop and implement new services such as wireless broadband access and
high-speed Internet access; our inability to obtain the necessary
authorizations from the FCC for such new services; competitive factors, such
as the introduction of new technologies and competitors into the wireless
communications business; or our Company's failure to attract strategic
partners; general business and economic conditions; and inexperience of
management in deploying a wireless broadband access business.
We do not have reliable projections of how long it may take to generate
positive cash flow or operating profits from our combined activities. We
believe that, to make a profit from our current operations, we must
restructure our Internet and satellite operations. Cost cutting measures
have been initiated to reduce operating expenses. The effect of these
actions will not be realized, if at all, for a period of time. Accordingly,
we cannot expect to operate at a profit in the foreseeable future.
- - The DWSI Acquisition
In August 2000, we purchased all of the assets of Digital Wireless Systems,
Inc. ("DWSI"), pursuant to DWSI's confirmed plan of reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Prior to the purchase, DWSI operated
as debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code (Case No.
398-10899, U.S. Bankruptcy Court, Middle District of Tennessee). DWSI was
created in 1997 to take over the businesses of two partnerships, one limited
liability company and one corporation that were created in 1993 and 1994 in
the same sort of promotion as Mobile LLC, AWSS's predecessor. It operates
wireless cable and direct broadcast satellite TV services in Baton Rouge
Louisiana, Clarksville Tennessee, Reading Pennsylvania, and Shreveport
Louisiana.
The asset purchase and the business of DWSI are described in detail in
our report on Form 8-K dated as of August 6, 2000, and this report on Form 10-
QSB should be read in conjunction with the description of the DWSI acquisition
in that Form 8-K. The Form 8-K does not contain required historic and pro
forma financial information concerning DWSI and the combined operations. We
are working on the required financial statements and will file them as an
amendment to the 8-K report as soon as we can.
We purchased the assets of DWSI, as part of the confirmed plan of
reorganization, for over 11.76 million shares of our common stock, plus 11.76
million One-Year Warrants, 11.76 million Eighteen-Month Warrants, 11.76
million Two-Year Warrants, and 11.76 million Three-Year Warrants. The
exercise prices of the warrants range from $1 to $6. In addition, the Asset
Purchase Agreement provides for purchase price adjustments of the equity units
if certain conditions are not met. We also agreed to assume and pay
substantially all of DWSI's indebtedness to others and costs of the DWSI
11
bankruptcy, including payment of administrative claims, costs to audit DWSI's
financial statements, and closing costs of the proposed purchase.
After the acquisition, the lessor of certain FCC leases in Clarksville,
Tennessee, filed an objection in the Bankruptcy Court to the continued
operation of the Clarksville leases. If the objection is sustained, could
cause us to lose our Clarksville operation. See, Part II, Item 1, Legal
Proceedings.
- - The Daybreak Auto Recovery Acquisition
In September 2000, we acquired all of the outstanding equity securities of
Daybreak Auto Recovery, Inc. ("Daybreak Auto Recovery"), in exchange for
2,667,000 shares of our common stock. Daybreak Auto Recovery is an automobile
repossession business in Northern California. Daybreak Auto Recovery's annual
revenues approach $700,000. Daybreak continues as a separately operated
subsidiary. It is operated by its former owner, Brent Doyle. As part of the
acquisition, Mr. Doyle became a member of our board of directors.
Because Daybreak was acquired (effectively) at the end of the reporting
period, it did not contribute to third quarter revenues because of the timing
of the acquisition.
Results of Operations for the Nine Months Ended September 30, 2000, as
Compared to the Nine Months Ended September 30, 1999
We initiated cost cutting measures on the satellite TB operations that were
acquired from DWSI. Additional capital will be required to sustain those
operations until a breakeven level has been obtained. Our Internet service in
Mobile, Alabama, continues to operate at a loss.
Our gross revenue increased $103,616 (114%) to $194,305 for the first nine
months of 2000, from $90,689 for the same period in 1999. The increase was
due mainly to the increased operating revenues from the DWSI operations that
we purchased in July 2000. We also acquired Daybreak Auto Recovery in the
third quarter, but it did not contribute significantly to third quarter
revenues because of the timing of the acquisition.
Operating expenses decreased by $23,476 (19%), to $100,072 in the first nine
months of 2000, compared to $123,548 for the same period in 1999. The
decrease was due to operating efficiencies imposed during the third quarter.
Gross revenues exceeded operating expenses by $94,233 for the first nine
months of 2000, while in the first nine months of 1999, operating expenses
exceeded gross revenues by $32,859. For financial statement purposes, we
consider operating expenses to be costs such as installation, channel fees,
Internet telephone costs, maintenance and supplies.
Administrative expenses continue to exceed gross revenues. For the nine
months ended September 30, 2000, these expenses were $872,736, an increase
of$396,360 (83%) over $476,376 in the first nine months of 1999. The high
administrative costs were caused by the two acquisitions, DWSI and, to a
lesser extent, Daybreak Auto Recovery, which were completed during the third
quarter of 2000.
We still might raise some capital from the exercise of warrants issued
pursuant to the DWSI plan of reorganization. We are looking for other ways to
finance operations including the sale of some assets. We are also considering
other acquisitions that may strengthen our cash flow and our overall financial
condition.
Capital Resources And Liquidity:
Our financial statements for the years ended December 31, 1999, contain a
"going concern" qualification from our auditors. We emerged from bankruptcy
in early 1998 and since then have continued to sustain operating losses.
During the past two years, both during and after the Chapter 11 case, we have
satisfied our working capital needs primarily through our financing activities
including raising capital through sale of certificates of indebtedness, loans
from our directors, and the exercise of warrants that were issued as part of
12
the Plan. In order to continue as a going concern we must develop a
profitable Internet access service. We probably must also raise additional
equity capital for development and expansion, possibly in a public offering of
securities.
Since confirmation of the Mobile LLC Plan of Reorganization, our stockholders
who acquired stock as part of the Plan and who were investors in the earlier
partnership have exercised warrants that were distributed to those
stockholders as part of the Plan. We have depended on the funds from exercise
of these warrants to purchase our common stock for operating capital during
the past year. All of the warrants issued in the Mobile LLC reorganization
either have been exercised or have expired, so those warrants are no longer a
potential source of capital. We issued warrants to the DWSI claimants and
equity security holders in the DWSI acquisition, but the exercise price of
those warrants exceeds the recent trading range of our common stock.
We are exploring possible acquisitions of similar businesses with positive
cash flow to improve our financial position. These include reductions in our
operations and selling some of the assets we bought in the DWSI acquisition.
Operating Activities
For the nine months ended September 30, 2000, cash used in operating
activities was $451,082, compared to $495,907 for the same nine month period
ending September 30, 2000. This includes a $214,734 increase in accounts
payable. A significant part of the increase was due to the DWSI acquisition
and our assumption of DWSI's liabilities, as well as the costs we incurred in
connection with the DWSI acquisition.
Investing Activities
We paid $27,751 to purchase equipment in the first nine months of 2000. We
also received $6,787 for selling miscellaneous equipment. This amounts to a
decrease in the amount used for investing activities of 92% from $256,941
spent during the same period in 1999.
Financing Activities
For the first nine months of 2000, we raised $361,859 from the exercise of
warrants to purchase common stock, compared to $872,624 for the same period in
1999. In both cases we used the proceeds to pay operating expenses. In the
third quarter of 2000, we also issued $30,000 in notes payable for working
capital. Net cash on balance sheets of companies we acquired (DWSI and
Daybreak Auto Recovery) amounted to $17,617.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We acquired DWSI's assets pursuant to DWSI's confirmed Plan of Reorganization
pursuant to Chapter 11 of the U.S. Bankruptcy Code, in the U.S. Bankruptcy
Court, Middle District of Tennessee (Case No. 398-10899). As part of the
acquisition, we agreed to assume substantially DWSI's liabilities, including
costs of the Chapter 11 case and any liabilities incurred from legal actions
against DWSI.
On October 28, 1999 DWSI filed a complaint against Decathlon Communications,
Inc. ("Decathlon") alleging that Decathlon owed it $210,745 for digital
compression equipment that was paid for but not delivered and asserting
damages in the amount of $582,280. On February 23, 2000, the U.S. Bankruptcy
Court heard Decathlon's motion for a change of venue and ruled that Colorado
was the proper venue. DWSI subsequently filed its lawsuit in Denver, Colorado
and, under the terms of the asset purchase agreement, AWSS has asserted its
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rights as plaintiff Decathlon subsequently filed lawsuits against the Baton
Rouge Wireless Cable Television LLC and the Shreveport Wireless Cable
Television Partnership alleging that each entity failed to make final payments
on digital compression equipment ordered from Decathlon. DWSI, and now AWSS,
have assumed the defense for these cases in accordance with the terms of their
respective asset purchase agreements. All three cases are in their early
stages. We have had negotiations over a global settlement of these suits, but
we cannot now predict their outcome.
After the DWSI acquisition, the lessor of certain of the DWSI channel leases
in Clarksville, Tennessee, filed an objection in the Chapter 11 case with the
Bankruptcy Court which challenges the validity of the leases and DWSI's right
to transfer them to us. Among other things, the lessor objected that our
Company cannot give "adequate assurance" under the Bankruptcy Code that we are
able to perform our future obligations on the leases because of our precarious
financial condition. A hearing on the objections is set for January 2001. If
the Bankruptcy Court sustains the lessor's objection and rules that the
Clarksville channel leases cannot be transferred to us, it will jeopardize our
continued operation of the Clarksville operation. Although the Clarksville
operation does not now operate at a profit, we believe that the leases are a
valuable asset and that our net worth would be materially damaged if we lose
the leases.
ITEM 2. CHANGES IN SECURITIES
During the three months ended September 30, 2000, we issued
11,763,102 shares of common stock and warrants to purchase 47,052,408 shares
of common stock pursuant to an asset purchase agreement in which we purchased
substantially all of the assets of DWSI, pursuant to DWSI's confirmed Plan of
Reorganization under Chapter 11 of the U.S. Bankruptcy Code. Both the
warrants and the stock were issued under an exemption from the registration
requirements of the Securities Act of 1933 (the "Securities Act") pursuant to
Section 1145 of the Bankruptcy Code.
After the DWSI acquisition, we issued 111,845 shares of stock to existing
shareholders pursuant to the exercise of warrants that we issued in the DWSI
acquisition. The stock issued on exercise of the warrants was exempt from
registration pursuant to Bankruptcy Code Section 1145.
During the three months ended September 30, 2000, the Company issued 2,613,660
restricted shares of common stock to three individuals in exchange for all of
the outstanding shares of Daybreak Auto Recovery and 53,340 shares to a
consultant as a finder's fee. The shares were exempt from registration under
Section 4(2) of the Securities Act.
During the three months ended September 30, 2000, the Company issued 4,000
shares of common stock to existing shareholders pursuant to the exercise of
warrants. The Company received total consideration of $4,000 upon exercise of
the warrants. These warrants were originally issued pursuant to the confirmed
Plan of Reorganization of Mobile Wireless, L.L.C., the Company's predecessor.
The stock issued on exercise of the warrants was exempt from registration
pursuant to Bankruptcy Code Section 1145.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A report was filed on Form 8-K dated July 6, 2000, announcing the retirement
of Monte Julius, 67, as president of the Company. The Company also announced
that it had appointed Thomas H. Howard, CPA, (its chief financial officer) to
fill the vacated position of president. Mr. Julius will remain on the board
of directors.
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An additional report filed on Form 8-K dated August 6, 2000, announced the
completion of the purchase of all of the assets of Digital Wireless Systems,
Inc. ("DWSI"), pursuant to DWSI's confirmed plan of reorganization under
Chapter 11 of the U.S. Bankruptcy Code. As part of the acquisition, the
Company hired David D. Schlueter, DWSI's chief executive officer, and elected
him chairman of the board of directors. He replaced Miles Humphrey on the
board, who resigned effective August 6, 2000. Other events reported on Form
8-K were the retention of Hurley & Company as principal accountant to audit
the Company's financial statements, the adoption by shareholders of an
amendment to the Company's articles of incorporation to increase the
authorized common stock of the Company from 50,000,000 to 150,000,000 shares,
and the adoption of a second amendment to delete the provision in the articles
giving shareholders preemptive rights (the right of existing shareholders to
acquire enough shares to maintain their pro rata ownership interest, in the
event the Company elects to issue more shares).
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Advanced Wireless Systems, Inc.
/s/ Thomas M. Howard
Date: December 12, 2000 ____________________________________
Thomas M. Howard, President and CFO
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