SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 6, 2000
ADVANCED WIRELESS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
ALABAMA 0-26533 63-1205304
(State or other jurisdiction (Commission (IRS Employer
of incorporation or organization File Number) Identification No.)
716 COLLEGE AVENUE, SUITE A-2
SANTA ROSA, CALIFORNIA 95404
(Address of principal executive office)
Issuer's telephone number: 707-576-1008
FINANCIAL STATEMENTS OF DIGITAL WIRELESS SYSTEMS, INC.
We have previously reported the purchase of the assets of Digital Wireless
Systems, Inc. ("DWSI"), on Form 8-K dated August 6, 2000. This amendment
to the August 6, 2000, Form 8-K provides audited financial statements of
the acquired company and pro forma financial information for our Company
reflecting this acquisition.
PURCHASE OF ALL OF THE ASSETS OF DAYBREAK AUTO RECOVERY, INC.
On September 8, 2000, Advanced Wireless Systems, Inc. (the "Company" or
"AWSS") purchased all of the stock of Daybreak Auto Recovery, Inc.
("Daybreak"), pursuant to the Plan and Agreement of Reorganization
("Agreement") between AWSS and Daybreak. Prior to the purchase, Daybreak
operated as Northern California's largest automobile repossession company.
Daybreak was founded November 1998 by Brent Doyle. We purchased the stock
of Daybreak for 2,667,000 shares of our common stock.
CONTENTS
Item 1 Change in Control of Registrant 1
Digital Wireless Systems, Inc. 1
Daybreak Auto Recovery, Inc. 2
Changes in Board of Directors 2
ITEM 2 Acquisition of Assets 3
Digital Wireless Systems, Inc. 3
Terms of the DWSI Purchase 3
Financial History and Background of DWSI 4
Summary of the Asset Purchase Agreement 5
Daybreak Auto Recovery, Inc. 10
Description of Securities Issued in the Acquisitions 10
Common Stock 11
Warrants 11
Risk Factors 12
Item 7 Financial Statements and Exhibits 15
Financial Statements 15
Index to Financial Statements 15
Digital Wireless Systems, Inc. DWSI-1
Daybreak Auto Recovery DAR-1
Advanced Wireless Systems, Inc., and Subsidiary PF-1
Exhibits 15
Signatures 16
ii
Item 1 Change in Control of Registrant
DIGITAL WIRELESS SYSTEMS, INC.
We acquired all of the assets of DWSI on August 6, 2000, as part of the
consummation of DWSI's confirmed Plan of Reorganization under Chapter 11 of
the U.S. Bankruptcy Code. Prior to the purchase, DWSI operated as debtor-in-
possession under Chapter 11 of the U.S. Bankruptcy Code (Case No. 398-10899,
U.S. Bankruptcy Court, Middle District of Tennessee). DWSI was created in
1997 to take over the businesses of two partnerships, one limited liability
company and one corporation that were created in 1993 and 1994 in the same
sort of promotion as Mobile LLC, AWSS's predecessor. It operates wireless
cable and direct broadcast satellite TV services in Baton Rouge Louisiana,
Clarksville Tennessee, Reading Pennsylvania, and Shreveport Louisiana. We
purchased the assets for 10,381,103 equity units consisting of a total of
10,381,103 shares of our common stock and warrants to purchase 41,524,412
shares of our common stock, and we assumed the outstanding liabilities of DWSI
as of the closing date.
Prior to the DWSI acquisition we had about 5.44 million shares of stock issued
and outstanding. Upon completion of the DWSI acquisition, the claimants and
interest holders under the DWSI bankruptcy owned more than 10.38 million
shares of our stock and had the right to purchase more than an additional
41.52 million shares, out of a total of nearly 57.34 million shares (fully
diluted). Thus, the recipients of the shares from the DWSI purchase (which
will be distributed to DWSI interest holders under its Plan of Reorganization)
owned a majority of the shares of our outstanding stock and are able to
control future shareholder votes, including election of all directors.
DWSI had more than 4,000 creditors and equity security holders who received
our shares and warrants as a result of this purchase. We believe that no
individual creditor, security holder, or group of creditors and security
holders, received more than 1,892,680 shares (3.30%) of our stock, fully
diluted, including shares issuable on exercise of all warrants issued in the
DWSI acquisition. No group of DWSI shareholders has gotten together for the
purpose of exercising control over us or electing members to our board of
directors. One individual, Mr. David Schlueter, would, upon exercise of all
of his warrants, own 4.38% of our common stock.
Because the DWSI claimants and interest holders, like our own shareholders
prior to the DWSI acquisition, are mainly small investors, we believe that the
issuance of shares amounting to more than 65.6% of our outstanding common
stock (90.5%, if all outstanding warrants are exercised) does not effectively
cause a change of control of our company or our board directors, because no
person or group will own enough shares to exercise control over AWSS or elect
members of the board of directors. We are including this description of the
issuance of shares in the DWSI acquisition in the interest of clarity, but we
do not agree or acknowledge that a "change of control" has taken place under
Securities and Exchange Commission rules.
As part of the acquisition, in August 2000, we hired David D. Schlueter,
DWSI's chief executive officer, and the remaining directors elected him
chairman of our board of directors to fill a vacancy on the board, because of
his familiarity with the assets and businesses we acquired. On January 30,
2001, Mr. Schlueter resigned from our board.
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DAYBREAK AUTO RECOVERY, INC.
On September 8, 2000, Advanced Wireless Systems, Inc. (the "Company" or
"AWSS") purchased all of the stock of Daybreak Auto Recovery, Inc.
("Daybreak"), pursuant to the Plan and Agreement of Reorganization (the
"Agreement") between AWSS and Daybreak.
Prior to the Daybreak acquisition we had 15,797,160 shares of stock issued and
outstanding. We issued 2,613,660 shares of our stock to the Daybreak
shareholders in the acquisition, out of a total of almost 18.5 million shares
(fully diluted). Thus, the recipients of the shares from the Daybreak
purchase will not own a majority of the shares of our outstanding stock and
will not be able to control future shareholder votes, including elections of
directors. We acquired all 1,000,000 issued and outstanding shares of
Daybreak pursuant to the Agreement.
Two of Daybreak's shareholders, as a result of the reorganization and
purchase, acquired more than five percent (5%) of our shares. In the
exchange, Heidi Doyle relinquished 375,000 shares of Daybreak and received
980,122 shares (5.31%) of our stock, fully diluted. Brent Doyle also
relinquished 375,000 shares of Daybreak and received 980,123 shares (5.31%) of
our stock, fully diluted. Brent and Heidi Doyle are husband and wife, and
they are both active in Daybreak's management. Mr. Doyle is the founder and
president of Daybreak and will remain as its president and chief executive
officer. As part of the acquisition, Mr. Doyle was also appointed to our
board of directors by the remaining directors, to fill a vacancy.
The following table shows all of the 5% owners of our common stock, after
giving effect to both the Daybreak and DWSI acquisitions.
Shares Held
Name and Address of Beneficial Owner Number Percent
Heidi Doyle 1,960,245 (1) 9.8% (2)
P.O. Box 125
Graton, CA 95444
Brent Doyle 1,960,245 (1) 9.8% (2)
P.O. Box 125
Graton, CA 95444
(1)Mrs. Doyle owns 980,122 shares and Mr. Doyle owns 980,123 shares.
(2) Based on a total of 19,979,585 outstanding shares as of September 30,
2000, without giving effect to the exercise of outstanding warrants.
We are including this description of the issuance of shares in the Daybreak
acquisition in the interest of clarity, but we do not agree or acknowledge
that a "change of control" has taken place under Securities and Exchange
Commission rules.
CHANGES IN BOARD OF DIRECTORS
David Schlueter and Brent Doyle were each appointed to our board of directors
in August 2000 and September 2000, respectively. Each of them was appointed
to fill vacancies caused by the resignations of directors, and as contemplated
2
by the DWSI and Daybreak acquisition agreements. The resigning directors were
Miles Humphrey and Oscar Hayes. In resigning to make room for Mr. Schlueter
and Mr. Doyle, neither Mr. Humphrey nor Mr. Hayes expressed any disagreement
with our Company on any matter relating to our operations, policies or
practices.
On January 30, 2001, Mr. Schlueter resigned from our board of directors. In
addition, two other directors, Monte Julius and Demetrios Tsoutsas, also
resigned on that date. None of the resigning members expressed any
disagreements with the Board on any matter relating to the Company's
operations, policies or practices.
The resignations of Messrs. Julius, Tsoutsas and Schlueter created three
vacancies for new directors. The remaining directors appointed Stan Wilson,
Esq., Tom Howard, CPA, and Jeffrey Schneider to our board of directors. Mr.
Wilson is currently President of AWSS and Mr. Howard is currently Chief
Financial Officer of AWSS. The Board also appointed Mr. Wilson as Chairman.
Mr. Schneider is President of the RAP Group, Inc., a company that was acquired
by the Company in February 2001.
ITEM 2 ACQUISITION OF ASSETS
DIGITAL WIRELESS SYSTEMS, INC.
TERMS OF THE DWSI PURCHASE
We purchased the assets of DWSI, as part of the confirmed plan of
reorganization, for over 10.2 million shares of our common stock, plus 10.2
million One-Year Warrants, 10.2 million Eighteen-Month Warrants, 10.2 million
Two-Year Warrants, and 10.2 million Three-Year Warrants. The exercise prices
of the warrants range from $1 to $6. In addition, the Asset Purchase
Agreement and Spectrum Lease Agreement provide for purchase price adjustments
of the equity units if certain conditions are not met. We also agreed to
assume and pay substantially all of DWSI's indebtedness to others and costs of
the DWSI bankruptcy, including payment of administrative claims, costs to
audit DWSI's financial statements, and closing costs of the proposed purchase.
These claims include professional fees, loans, and tax claims. The
professionals and court-approved lenders have the option to be paid either in
cash or in our securities. The unsecured claimants and DWSI's equity security
holders will receive our securities in satisfaction of their claims.
Our shares and warrants were issued to DWSI's claimants and equity security
holders in exchange for their claims and interest, as part of that company's
plan of reorganization. These shares and warrants were issued pursuant to the
exemption from the registration provisions of the Securities Act of 1933
contained in Section 1145 of the U.S. Bankruptcy Code, and, as such, they have
not been registered with the Securities and Exchange Commission.
The disclosure statement that DWSI filed on February 15, 2000, discloses that
DWSI had total tangible assets of $189,000, and total intangible assets of
approximately $1.54 million, of which $1.5 million was listed as the current
market value of DWSI's FCC licenses. The disclosure statement lists the
liquidation value of those assets, prior to disposition costs and costs of
administration, of $813,828. The disclosure statement lists total claims of
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approximately $1.26 million, plus administrative expenses and a lien on the
FCC licenses. The lien on the FCC licenses secures certificates of
indebtedness and junior secured notes issued during the Chapter 11 case for a
total of $653,953. Holders of certificates and notes who do not convert are
entitled to be paid the full amount of their principal and interest. All of
the holders of the certificates of indebtedness and junior secured notes have
elected, under the Plan of Reorganization, to convert their certificates and
notes to AWSS equity units at the rate of two equity units for each one dollar
of indebtedness, except for one certificate holder owning $5,000 principal
amount certificate, who still holds an unpaid certificate.
DWSI has operated at a loss since inception and has reported operating losses
every month since the Chapter 11 case was filed. Immediately prior to our
purchase, DWSI's operating losses were running at $40,000 to $50,000 per
month.
The purchase transaction was originally negotiated in 1999, but the asset
purchase agreement between DWSI and us was not entered until February 15,
2000, and the DWSI plan of reorganization was not confirmed until May 23,
2000. In the meantime, the financial condition of DWSI continued to
deteriorate due to its mounting operating loss. As a result, by the closing
of the transaction on August 6, 2000, DWSI was in dire straits. It had
basically run out of money to continue operations. Nevertheless, we believe
that the value that can be realized from the assets we acquired are worth the
high risks involved in completing the DWSI acquisition.
DWSI's main value lies in its FCC licenses in the four markets where it
operates. These licenses can only be transferred with FCC approval. We have
engaged legal counsel to file the necessary applications and information with
the FCC to transfer DWSI's licenses to us. In the meantime, we have leased all
of DWSI's licenses from DWSI and have taken over their operation from DWSI.
At the time of the acquisition, DWSI did not have audited financial
statements. In order to assure that the necessary financial statements were
obtained, we agreed with certain shareholders of DWSI to place into escrow
284,410 of our equity units that they were to receive in the acquisition,
until the audit was completed. The audit has been completed as required by
the escrow agreement, and those equity units have been released to the
shareholders. The audit report and financial statements are attached to this
amendment to the 8-K report.
FINANCIAL HISTORY AND BACKGROUND OF DWSI
DWSI was founded in January 1997 for the purpose of acquiring and developing
subscription television businesses by acquiring assets from four business
entities who were engaged in the same business - the Baton Rouge Wireless
Cable Television LLC, the Reading Wireless Television Partnership, the
Shreveport Wireless Cable Television Partnership, and Future Vision Wireless
Cable, Inc. DWSI acquired the assets and businesses of these entities in the
last quarter of 1997.
The businesses so acquired were originally established between 1993 and 1994
by promoters, who raised from investors approximately $47 million, only a
fraction of which was made available for these entities to develop and operate
wireless cable television businesses. The promoters were required, under the
agreements entered, to furnish various services and assets to these businesses
which for the most part never occurred. Litigation was commenced by several
of these businesses against the promoters and attorneys which resulted in a
settlement of approximately $1 million and the cancellation of all interests
in the businesses held by such promoters.
4
The foregoing facts left the prior business entities and subsequently DWSI
substantially undercapitalized, and with management who had no substantial
experience in the wireless cable business. As a result, DWSI continued to
lose money without reasonable hope of turning the situation around without a
significant capital infusion.
We acquired DWSI's assets and four businesses in this asset purchase. These
businesses, and their assets, were very similar to our current operations in
Mobile, Alabama. The four DWSI businesses provided television programming to
individual households, business establishments and multiple-dwelling units,
such as hotels, motels, apartments, condominiums, hospitals, and dormitories
in and around Baton Rouge, LA, Clarksville, TN, Reading, PA, and
Shreveport/Bossier City, LA. Programming was provided through agreements with
World Satellite Network, DirecTV, Echostar and other television programming
providers and were delivered by both wireless cable and direct broadcast
satellite transmission.
DWSI has never operated profitably and has, during the course of its Chapter
11 case, continued to incur significant operating losses. We have determined
to cease operating any television services and are in the process of closing
or transferring all of our television programming services. We are closing
the television programming in order to reduce our operating losses.
We are maintaining the FCC licenses that DWSI had in each of its four markets,
and it is our intent to redevelop the FCC licenses in this market for high
speed, broad band wireless services including Internet services. At present,
we do not have FCC approval to offer these services over our licensed
frequencies, nor do we have the capital to build out the required equipment
for such services. We may also decide to sell our FCC licenses in one or more
locations to raise capital for operations and future development.
SUMMARY OF THE ASSET PURCHASE AGREEMENT
PURCHASE PRICE
We entered the asset purchase agreement with DWSI as part of DWSI's confirmed
plan of reorganization. The plan of reorganization calls for us to purchase
substantially all of the business assets of DWSI for 10.38 million shares of
our common stock and warrants to purchase 41.52 million shares of our common
stock at prices ranging from $1 to $6 per share, subject to several
adjustments in the purchase price described below in ADJUSTMENTS TO THE
PURCHASE PRICE. The shares and warrants will be issued to the DWSI claimants
and interest holders in equity units, each equity unit consisting of 1 share
of common stock and 4 common stock purchase warrants. The stock and warrants
are described in DESCRIPTION OF SECURITIES ISSUED IN THE ACQUISITIONS, PAGE .
The closing bid price for our common stock on the OTC Bulletin Board was $0.75
per share on August 4, 2000. At that price, 10.38 million shares of common
stock would be worth approximately $7.79 million. We negotiated the purchase
price with DWSI's management, and the Bankruptcy Court approved the purchase
price as part of DWSI's confirmed plan of reorganization.
DWSI's balance sheet at December 31, 1999, reflected total assets of only
$560,399, which is far less than the $7.79 million market value as of August
4, 2000, for the stock that we issued in the exchange. We agreed to pay this
purchase price mainly for four reasons. First, we believe that we can use the
5
FCC licenses owned and operated by DWSI to generate income, in the same way we
are using our FCC licenses in Mobile. We hope to achieve economies of scale
with these additional licenses that will permit the combined system to operate
profitably. So we believe that the revenue we can generate from the DWSI
assets we purchased will justify the purchase price paid, even though it
exceeds the book value of the assets. We believe that the current fair market
value of the licenses that we are acquiring from DWSI substantially exceeds
their book value, but we do not have an independent appraisal of the licenses.
Second, the purchase price was negotiated in February 2000, before our shares
were traded on any organized securities markets and before they had any
established market value. Neither we nor DWSI's management could be sure
what, if any, value could be placed on our stock at the time the deal was
struck.
Third, the shares and warrants issued to DWSI's equity security holders in the
DWSI purchase are subject to restrictions on transfer imposed by the
Bankruptcy Court's confirmation order. Pursuant to the Court's order, the
common shares issued in the purchase are not transferable until the first day
of the third full month following the date of the confirmation order (June 26,
2000), at which time five percent (5%) of each holder's shares, pro rata,
shall be released from the restrictions on transfer each month until all
shares are released from the Court's transfer restrictions. Accordingly, the
DWSI claimants and interest holders who receive shares in the purchase are
obligated to hold their shares and may not readily sell them in the securities
markets. The restriction on transfer reduces the value of the shares being
given in the purchase.
Fourth, the market for our common stock is thinly traded, so the DWSI
claimants and interest holders could not actually sell the shares they will
receive in the acquisition for prices close to $.75 per share. The reported
daily trading volume for our shares has averaged a little over 3,500 shares
since trading began on May 23, 2000. If a substantial number of the DWSI
claimants and/or interest holders attempted to sell their shares on the same
day, the price of our stock would likely drop sharply, and the sellers would
likely receive substantially less than $0.75 per share, if they could sell
their shares at all.
ADJUSTMENTS TO PURCHASE PRICE
The amended asset purchase agreement and spectrum lease agreement provide for
adjusting the purchase price, for the following conditions:
- - Increasing the number of equity units if AWSS's average closing bid price
is lower than $1.10 for the 30 trading days prior to closing;
- - Decreasing the number of equity units if we are unable to obtain audited
financial statements, after reasonable efforts, within 70 days of
closing;
- - Decreasing the number of equity units because DWSI was unable to transfer
title to the FCC licenses at closing.
- - Increasing the number of equity units in consideration for the lease of
transmission capacity to AWSS during the license transfer period.
6
INCREASE IN PRICE DUE TO AWSS BID PRICE. The purchase agreement requires us
to increase the number of shares and warrants to be issued if the average
daily closing bid price for our stock is less than $1.10 for the 30 business
days prior to closing. The required adjustment divides 8,800,000 by the
average bid price for the 30 business days prior to August 6, 2000 ($0.8584
per share). The calculation, 8,800,000 divided by $0.8584, equals 10,251,631,
an increase of 2,251,631 (28%) each of common stock, Series C warrants, Series
D Warrants, Series E Warrants and Series F Warrants.
We had earlier made a preliminary calculation of the purchase price adjustment
based on 30 days' trading prior to July 7, 2000, a date when we had originally
hoped to close. That purchase price adjustment would have resulted in
issuance of an additional 869,632 equity units to the DWSI claimants and
equity security holders. The following two additional adjustments to the
purchase price were calculated to equal 1,381,999 shares, which is the
difference between the July 7th and August 6th purchase price increase
calculations.
DECREASE IN NUMBER OF EQUITY UNITS DUE TO FAILURE TO PROMPTLY TRANSFER TITLE
AT CLOSING. DWSI had not obtained approval from the FCC to transfer the
licenses at closing. We have retained FCC counsel to complete this process,
but until it is complete we cannot be sure that we will receive the full
benefit of our bargain to purchase the DWSI assets, the most significant of
which are its FCC licenses. Accordingly, we have agreed to reduce the
purchase price paid to DWSI's equity security holders by 1,097,589 shares on
account of the failure to transfer the FCC licenses at closing.
INCREASE IN NUMBER OF EQUITY UNITS FOR LEASE OF LICENSES. Under the Spectrum
Lease Agreement, we have agreed to pay DWSI's equity security holders
transmission fees of 100,000 equity units per month in consideration for the
lease of transmission capacity on its licenses until the licenses are
transferred.
ESCROW OF SHARES UNTIL RECEIPT OF AUDITED FINANCIAL STATEMENTS. We agreed to
decrease the total number of equity units to be issued by 284,410 shares if we
are unable to obtain audited financial statements for DWSI for the years ended
December 31, 1999 and 1998. We have since received the required financial
statements and released these equity units from escrow.
After making these adjustments, we were obligated to issue a total of
8,869,632 equity units for the purchase price. An additional 1,511,471
equity units were issued to the various administrative claimants, who elected
to convert their claims into equity units under the terms of DWSI's plan of
reorganization. At closing on August 6, 2000, we issued 10,381,103 equity
units. Subsequently we issued an additional 284,410 equity units upon receipt
of the audit.
DISTRIBUTION TO DWSI EQUITY SECURITY HOLDERS
DWSI was owned primarily by four business entities, all of whom have
underlying equity security holders that were the investors in the wireless
cable TV promotions from which DWSI was created. DWSI's confirmed plan of
reorganization treats these underlying equity security holders as the security
holders of DWSI. As provided in DWSI's confirmed plan of reorganization, we
distributed our equity units directly to the underlying equity security
holders and not to the four business entities that are DWSI's nominal
stockholders.
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ASSETS PURCHASED
We agreed to take over all assets of DWSI at the closing date. These assets
consisted of DWSI's wireless cable and direct broadcast satellite (DBS)
operations in Shreveport, Louisiana, Baton Rouge, Louisiana, Clarksville,
Tennessee, and Reading, Pennsylvania. The assets include the equipment
necessary to operate the wireless cable and DBS businesses in each location.
We took over business office and radio tower leases in each location. The
tower rents in all locations are in arrears ranging from five to ten months.
After DWSI filed its Chapter 11 case, DWSI continued to operate its radio
frequencies during its bankruptcy without asking the FCC to formally transfer
the license to DWSI as "debtor in possession" under the Bankruptcy Code, as
required by the FCC. Now that DWSI has sold all its assets to us, we must,
with DWSI, have the licenses transferred first to DWSI as debtor in
possession, and then to our name. We have engaged FCC counsel to complete the
license transfer process on behalf of us and DWSI.
The asset purchase agreement calls for us to buy the FCC radio frequency
licenses from DWSI; however, we can't complete that purchase until the FCC
approves transferring the licenses to us. In the meantime, we have entered a
spectrum lease agreement with DWSI that gives us the right to operate these
frequencies. A summary of the FCC licenses acquired follows:
E-Group and F-Group in the Baton Rouge, LA Metropolitan area.
H-1 and H-3 Channels in the Clarksville, TN Metropolitan area.
E-Group and F-Group in the Reading, PA Metropolitan area.
H-3 Channel in the Shreveport/Bossier City, LA Metropolitan area.
The asset purchase agreement also calls for us to acquire several FCC radio
frequency licenses from DWSI in the form of leases with the FCC radio
frequency license owner. A summary of the FCC licenses available to us in the
form of leases follows:
H-1, H-2 and H-3 Channel in the Baton Rouge, LA Metropolitan area
A-Group, B-Group, C-Group, D-Group, E-Group, F-Group, G-Group and H-
2 Channel in the Clarksville, TN Metropolitan area
E-Group, H-1 Channel, and H-2 Channel in the Shreveport/Bossier City, LA
Metropolitan area.
In addition, DWSI has transferred to us channel lease agreements with entities
who have made application for various FCC radio frequency licenses. None of
these licenses have been issued by the FCC at this time. In the event any of
the underlying FCC licenses are issued to our applicant, we will be able to
operate the corresponding radio frequencies under the terms and conditions of
the lease agreement. A summary of the FCC licenses covered by these channel
lease agreements follows:
A-Group, B-Group, C-Group, and G-Group in the Baton Rouge, LA
Metropolitan area.
A-Group, B-Group, C-Group, D-Group, and G-Group in the Reading, PA
Metropolitan area.
A-Group, B-Group, C-Group, D-Group and G-Group in the Shreveport, LA
Metropolitan area.
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LITIGATION CLAIMS
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
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.
LIABILITIES ASSUMED AND PAYMENTS MADE ON DWSI'S BEHALF
ACCOUNTS PAYABLE. We have assumed DWSI's accounts payable in the ordinary
course of business. The schedule of accounts payable provided to us at
closing showed accounts payable of $299,295.46 as of June 21, 2000. These
accounts include rent in arrears on our radio towers in all four DWSI
locations, professional fees and expenses, and other ongoing expenses where,
if the provider discontinued services or usage by us, our operations in the
affected locale would be interrupted. DWSI, and now AWSS, has been
negotiating with its creditors over how to handle these obligations.
ADMINISTRATIVE EXPENSES OF THE CHAPTER 11 CASE AND OTHER LEGAL FEES. We
agreed to pay administrative expenses of DWSI's Chapter 11 case of
approximately $130,000. These administrative claims include legal fees to the
two law firms that represented DWSI in its chapter 11 proceedings:
Sidney J. Diamond, LLP $73,960.58 through May 25, 2000,
plus post-closing fees estimated at
$25,000.
Boult Cummings Conners & Berry PLC $25,032.54, through May 25, 2000,
plus additional billed services of
$4,707.63 through June 30, 2000.
DWSI also incurred approximately $6,000 in legal fees to two other law firms
for work on a claim DWSI made in Denver, Colorado, and FCC license transfer
work. AWSS has executed promissory notes to pay the fees for these four law
firms on behalf of DWSI for the amounts, with a total current balance of
approximately $134,000 plus interest. The notes are secured by an assignment
of the FCC licenses, which are the main asset we are acquiring in the
purchase. The security agreement also covers future fees earned by these
firms for the work they do. The notes bear interest at 9% per annum and
require monthly payments, with the entire amounts becoming due December 31,
2000. If we are unable to pay off these notes as they become due, we could
lose the FCC licenses that we have just purchased.
On August 2, 2000, DWSI filed a motion in the Bankruptcy Court seeking the
nunc pro tunc allowance of loans, totaling $160,000 in principal, which were
made to DWSI after the filing of its voluntary petition but before the Court
9
approval of the junior secured notes. Upon approval of this motion, the
principal and accrued interest of these loans will become an administrative
priority expense of AWSS.
In addition to assuming the liabilities listed above, we advanced
approximately $40,000 to DWSI betwen May 1, 2000, and August 6, 2000, to pay
operating expenses and have purchased one piece of equipment from DWSI for
about $20,000. We made these advances to preserve the assets of DWSI, pending
closing of this purchase transaction.
DAYBREAK AUTO RECOVERY, INC.
Daybreak was founded in November 1998 and incorporated in November 1999. At
its headquarters in Sebastopol, California, Daybreak employs 15 people, but
Daybreak's services reach from San Jose, California to the Oregon border.
Daybreak works with approximately thirty (30) national and regional financing
companies like Chase Manhattan Bank, Toyota Motor Credit Corporation, Chrysler
Credit Corporation, WFS Financial and Bank of the West. We acquired Daybreak's
stock to diversify the business of AWSS.
During the last two years, Daybreak has had much success in repossessing cars.
It has become the fastest growing auto recovery agency in the North Bay Area.
In 2000, Daybreak more than doubled its gross annual revenue from 1999.
Daybreak has operated profitably and has audited financial statements for the
fiscal period ending December 31, 2000, attached as Exhibit 99.1.
We purchased the stock of Daybreak for 2,667,000 million shares of our common
stock. The common stock was issued in reliance on Section 4(2) of the
Securities Act of 1933 in a privately negotiated transaction and constitutes
restricted securities under the 1933 Act. Daybreak will continue operations
as a wholly owned subsidiary of AWSS, with Brent Doyle, its founder and
president, continuing to serve as its president and chief executive officer.
The closing bid price for our common stock on the OTC Bulletin Board was $0.53
per share on September 1, 2000. At that price, 2,667,000 shares of common
stock would be worth approximately $1,413,510.00.
After the exchange was completed, the Daybreak shareholders paid Daniel J.
Demers a finder's fee of 53,340 shares of the AWSS common stock they received
in the exchange.
We agreed to take over all assets of Daybreak at the closing date. These
assets consisted of Daybreak's capital leases on six motor vehicles, office
equipment and furniture including computers, phones and software, and all
contracts and agreements with banks, credit unions, and other groups or
agencies which enable Daybreak to perform its services.
DESCRIPTION OF SECURITIES ISSUED IN THE ACQUISITIONS
We are authorized to issue up to 150,000,000 shares of common stock, par value
$.01 per share. In the DWSI acquisition, we issued 10,665,513 equity units,
each unit consisting of one share of common stock and four common stock
purchase warrants with expiration dates of one year, 18 month, 2 years and 3
years, respectively.
10
In the Daybreak asset purchase, we issued 2,667,000 shares of common stock to
the Daybreak shareholders as payment for the assets.
A description of the common stock issued in the DWSI and Daybreak
acquisitions, and the warrants issued in the DWSI acquisition, follows.
COMMON STOCK
Each shareholder of AWSS common stock is entitled to one vote for each share
of common stock held on all matters to be voted on by shareholders. In the
election of directors, shareholders may not cumulate votes (i.e., cast for any
one or more candidates a number of votes greater than the number of shares)
unless a shareholder has given notice of the intention to cumulate votes prior
to the commencement of voting. If any shareholder has given notice of the
intent to cumulate votes, then each shareholder has the right to give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of shares held by the shareholder, or distributing
such number of votes among as many candidates as the shareholder sees fit.
Shareholders have no preemptive rights to purchase shares, should we decide to
issue additional shares.
AWSS shareholders have no conversion rights, redemption rights, or sinking
fund provisions. Shareholders are entitled to receive dividends, when
declared by its board of directors, out of funds legally available therefore,
subject to the restrictions set forth in the Alabama Statutes. If the Company
were to liquidate, dissolve, or wind up, the holders of the Common Stock would
be entitled to receive, pro rata, the net assets of the Company remaining
after the Company satisfies its obligations with its creditors. Under our
bylaws, the Company has eliminated the potential liability of directors to it,
and is also required to indemnify its directors against any liability for
monetary damages, to the extent allowed by Alabama law. All outstanding
shares of Common Stock are fully paid and not subject to further calls or
assessments.
WARRANTS
Each recipient of an equity unit in the purchase will receive four common
stock purchase warrants - one Series C. one Series D, one Series E, and one
Series F warrant. The warrants are identical except for their exercise prices
and expiration dates. Each warrant contains a step-up in price after an
initial period. The per share exercise prices and expiration dates are:
Initial Second Third
Exercise Exercise Exercise
Price Until Price Until Price Until
Series C $1.00 Dec. 23, 2000 $2.00 Jun. 26, 2001 None None
Series D $2.00 Jun. 26, 2000 $2.50 Sep. 24, 2001 $3.00 Dec. 25, 2001
Series E $3.00 Dec. 25, 2001 $3.50 Mar. 25, 2002 $4.00 Jun. 26, 2002
Series F $4.00 Jun. 26, 2001 $5.00 Jan. 2, 2003 $6.00 Jun. 26, 2003
Each warrant may be redeemed by AWSI for a price of $0.05 per warrant upon 30
days' written notice to the holders. Our Board of Directors has the right to:
11
1. decrease the exercise price of the warrants;
2. increase the life of the warrants in which event the exercise price may
be increased; or
3. make such other changes as our directors deem appropriate provided, the
changes contemplated do not violate any statutory or common law.
The warrants are also exempt from registration under the Securities Act of
1933, pursuant to Section 1145 of the U.S. Bankruptcy Code. As such,
unsecured claimants who receive our warrants issued in the acquisition will be
able to immediately sell their warrants without registration under federal and
state securities laws. However, there is no public market for the warrants
and we do not expect that any such market for them will ever develop. DWSI
claimants and interest holders should be prepared to hold their warrants until
they are either exercised by the holder or they expire under their terms.
RISK FACTORS
Because of our poor financial condition, substantial risks are involved in
these acquisitions and in any investment in our company. The following
discussion summarizes the most important of those risks. Because of the high
risks involved, investors should not invest in our securities unless they can
afford a complete loss of their investment.
WE HAVE CHANGED THE FOCUS OF OUR BUSINESS PLAN
Beginning with the acquisition of Daybreak and the addition of Brent Doyle to
the board of directors, we have begun to change our business focus away from
operation of wireless systems and Internet services and to redirect our
business toward businesses associated with the automotive industry. We have
acquired Daybreak, an auto repossession firm, and we have also recently
acquired RAP Group, Inc., which is in the business of selling repossessed
autos for lending institutions. We believe that these two acquisitions will
increase our chances to operate profitably in the near future, but we cannot
know yet, how they will affect our business. The president of RAP Group has
also been recently added to our board.
We believe that the FCC licenses we own are a valuable asset, but our
experience tells us we are unable to operate them successfully. We have
temporarily ceased operating our wireless systems and are continuing to
maintain our FCC licenses while we decide how they can best be utilized. We
are considering a new technology for using these licenses. We cannot be sure
that we will be able to operate successfully in our new endeavor or that we
can raise substantial cash from selling the FCC licenses.
WE NEED AN INFUSION OF CAPITAL TO CONTINUE OPERATIONS AT CURRENT LEVELS
Both DWSI's and our own businesses are operating at a loss. We have a
critical need for operating capital in order to continue operating our
business and the newly acquired DWSI businesses at current levels. When we
acquired DWSI, it had unpaid bills and no funds with which to pay them. We do
not have enough cash to pay off these debts and we continue to operate our
existing business at a loss. We must have an infusion of capital in the
immediate future or we will be forced to curtail or close some operations.
12
We are issuing more than 41 million warrants to purchase our common stock in
the DWSI acquisition, as part of DWSI's confirmed plan of reorganization. We
hope that the DWSI equity holders will exercise warrants for our stock, to
provide operating capital. All of the warrants are exercisable at prices
(from $1 to $6 higher than the current price of our stock ($0.81 on August 8,
2000). We cannot be sure that any DWSI equity holders will exercise any
warrants, and we do not have other funding sources ready to generate revenue
to sustain our operations.
We have entered negotiations to sell some or all of the assets we acquired
from DWSI. We believe that sale of the DWSI license assets can provide
working capital while we continue to reorganize and redirect our business
plan.
We are seeking alternate sources of capital to temporarily fund our
operations. We have entered into discussions with one financing group but, at
this time, there can be no assurances that the necessary capital will be
forthcoming. Therefore, we risk being forced to close at least some of the
operations we are buying because of lack of funds to continue. We then risk
the permanent loss of these assets and any revenue we could get from operating
or selling them.
WE HAVE MADE AN ASSIGNMENT OF THE DWSI LICENSES AS COLLATERAL TO SECURE
PAYMENT OF DWSI'S LEGAL FEES.
Prior to closing, we executed promissory notes to cover fees owed to four law
firms that represented DWSI in its bankruptcy proceedings, to cover their
outstanding bills through May 25, 2000, totaling approximately $134,000. Both
notes are secured by an assignment of the FCC licenses, which are the main
asset we are acquiring in the purchase. Both notes bear interest at 9% per
annum and require monthly payments, with the entire amounts becoming due
December 31, 2000. As of March 14, 2001, these notes are overdue and unpaid.
If we are unable to pay off these notes as they become due, we could lose the
FCC licenses that we have just purchased.
WE HAVE A HISTORY OF LOSSES AND EXPECT MORE LOSSES IN THE FORESEEABLE FUTURE.
Our predecessor, Mobile LLC, filed for Chapter 11 bankruptcy proceedings in
1997 because it was unable to operate profitably. Its situation and history
were very similar to that of DWSI. Since we emerged from bankruptcy in early
1998, we have continued to experience losses from operations. We have
determined to suspend installations for new customers in our only business
line with an operating history, the wireless cable TV business, because we
believed our limited channel capacity made it impossible to compete with the
hard-wire cable and direct broadcast satellite television providers. We can
expect losses in our Internet business line until we build a large enough
customer base to generate revenue in excess of start-up and operating costs.
In all likelihood, we will end up selling all or almost all of our FCC license
assets.
We believe that, to make a profit from our current business in Mobile, we
would have to dramatically expand our Internet customer base. We do not have
estimates, as yet, of the number of customers it will take to become
profitable at the newly acquired locations in Shreveport, Baton Rouge,
Reading, and Clarksville. Accordingly, we cannot expect to operate at a
profit in the foreseeable future.
13
WE WILL NEED ADDITIONAL CAPITAL TO CONTINUE AND EXPAND OPERATIONS.
Since we began operations we have depended on capital provided by financing
during the bankruptcy proceedings as well as on equity provided by exercise of
warrants for our common stock, which were issued as part of the
reorganization. Assuming we can successfully grow our high speed Internet
access business, we likely must find additional capital, either in the form of
loans or sale of more equity, to invest in equipment necessary for that
business and to provide operating capital until the Internet business
generates positive cash flow. Given our history of losses and lack of
operating history, we cannot be sure that we will be able to raise sufficient
capital to continue in business until we become profitable.
Since confirmation of the Mobile LLC Plan of Reorganization, our stockholders
who acquired stock as part of the Plan and who were investors in the earlier
partnership have exercised warrants that were distributed to those
stockholders as part of the Plan. We have depended on the funds from exercise
of these warrants for operating capital during the past year, all of which
warrants have either been exercised or have expired. We are issuing more than
41 million more warrants to DWSI claimants and equity security holders as part
of this acquisition, and we expect to use proceeds from exercise of these
warrants to finance our operations for the foreseeable future. If the warrant
holders do not exercise the warrants, we may have insufficient capital to
continue operations at their current levels for the newly acquired businesses
in Shreveport, Baton Rouge, Clarksville and Reading, or to continue our
present operations in Mobile.
OUR SENIOR SECURED INDEBTEDNESS IS DUE AND UNPAID.
At September 30, 2000, $175,000 in principal amount plus accrued interest was
due and unpaid on a loan made to us by a director who assisted in financing
our operations while we were still in bankruptcy. The outstanding loan is
secured by essentially all of our assets, including our wireless frequency
licenses. This loan is now due and payable in full, together with accrued,
unpaid interest. In addition, we owe a former director accrued and unpaid
interest on a similar secured loan, whose principal amount we repaid last
year. These lenders have not demanded payment nor declared the loans in
default, but they also have not waived any provisions of the loan agreement.
We are negotiating an extension or settlement of this indebtedness, but if we
are unable to renegotiate the terms of this debt, the lenders could demand
payment and foreclose on assets which are important to continuing our
business.
14
ITEM 7 FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS OF ACQUIRED COMPANIES
Digital Wireless Services, Inc. DWSI-1
Independent Auditors' Report DWSI-2
Balance Sheets DWSI-3
Statements of Operations DWSI-5
Statements of Chages in Shareholders' Equity (Deficit) DWSI-6
Statements of Cash Flows DWSI-7
Notes to Financial Statements DWSI-9
Daybreak Auto Recovery DAR-1
Independent Auditors' Report DAR-2
Balance Sheet DAR-3
Statement of Operations and Changes in Owners' Equity DAR-5
Statement of Cash Flows DAR-6
Notes to Financial Statements DAR-7
PRO FORMA FINANCIAL STATEMENTS OF ADVANCED WIRELESS, INC.
AND SUBSIDIARY (UNAUDITED) PF-1
Pro Forma Balance Sheet (Unaudited) PF-2
Pro Forma Statement of Operations (Unaudited) PF-5
Notes to Unaudited Pro Forma Financial Statements PF-6
15
DIGITAL WIRELESS SYSTEMS, INC.
Financial Statements
December 31, 1999 and 1998
HURLEY & COMPANY
Certified Public Accountants
DWSI-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Digital Wireless Systems, Inc.:
We have audited the accompanying balance sheets of Digital Wireless Systems,
Inc. (the "Company") as of December 31, 1999 and 1998, and the related
statements of operations, changes in shareholders' equity (deficit), and cash
flows for each of the two years in the period ended December 31, 1999 and the
two months ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Wireless Systems, Inc.
as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended and the two months ended December 31, 1997
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a significant working capital deficit at December 31, 1999 that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Hurley & Company
Granada Hills, California
November 13, 2000
DWSI-2
DIGITAL WIRELESS SYSTEMS, INC.
BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,618 $ 45,341
Accounts receivable, net of
allowance for doubtful accounts
of $5,943 and $3,939,respectively 26,263 19,221
Other receivable - 210,745
----------- -----------
Total current assets 29,881 275,307
PROPERTY AND EQUIPMENT
Cable equipment 100,000 1,617,765
Converter boxes 45,000 312,302
Automotive equipment 8,000 103,288
Furniture and fixtures 23,000 51,413
Leasehold improvements - 22,513
Computer equipment 13,000 25,770
Software - 19,897
Tools and warehouse equipment - 18,109
Signal meters - 7,782
----------- -----------
189,000 2,178,839
Less accumulated depreciation
and amortization 59,971 370,993
----------- -----------
129,029 1,807,846
OTHER ASSETS
Licenses, net of accumulated
amortization of $46,021
and $23,931, respectively 285,329 307,419
Goodwill, net of accumulated
amortization of $13,890
and $7,223, respectively 86,110 92,777
Other, net 30,050 31,290
----------- -----------
Total other assets 401,489 431,486
----------- -----------
Total assets $ 560,399 $ 2,514,639
=========== ===========
See accompanying independent auditors' report
and notes to these financial statements.
DWSI-3
DIGITAL WIRELESS SYSTEMS, INC.
BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
----------- -----------
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable, pre-petition $ 185,229 $ 213,354
Accounts payable, post-petition 155,466 -
Accrued expenses 125,358 29,161
Related party payable 275,800 145,800
Current portion long-term debt 594,493 116,000
----------- -----------
Total current liabilities 1,336,346 504,315
Long-term debt, net of current portion - -
Commitments and contingencies - -
SHAREHOLDERS' (DEFICIT) EQUITY:
Common stock, par value $.003;
20,000,000 shares authorized,
3,688,139 and 3,666,127 shares
issued and outstanding at December
31, 1999 and 1998, respectively 11,064 10,998
Additional paid-in-capital 4,339,064 4,264,590
Accumulated deficit (5,126,075) (2,265,264)
----------- -----------
Total shareholders'
(deficit) equity (775,947) 2,010,324
----------- -----------
Total liabilities and
shareholders' equity $ 560,399 $ 2,514,639
=========== ===========
See accompanying independent auditors' report
and notes to these financial statements.
DWSI-4
DIGITAL WIRELESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999 and 1998
and the Two Months Ended December 31, 1997
1999 1998 1997
------------ ----------- -----------
Net Revenues $ 476,586 $ 446,658 $ 23,971
Cost of sales 385,129 413,616 44,544
------------ ----------- -----------
Gross profit 91,457 33,042 (20,573)
Selling, administrative
and other operating expenses 1,224,586 1,794,237 192,558
------------ ----------- -----------
Operating loss (1,133,129) (1,761,195) (213,131)
Other income (expense):
Interest expense (54,220) (14,234) (528)
Interest income 467 7,535 3,962
Costs of damaged equipment - (287,673) -
Loss on impairment of assets (1,673,929) - -
------------ ----------- -----------
Net loss $ (2,860,811) $(2,055,567)$ (209,697)
=========== =========== ===========
Net loss per share,
basic and diluted $ (.78) $ (.65)$ (.07)
=========== =========== ===========
Weighted average number
of shares outstanding,
basic and diluted 3,685,862 3,153,127 2,875,000
=========== =========== ===========
See accompanying independent auditors' report
and notes to these financial statements.
DWSI-5
DIGITAL WIRELESS SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1999 and 1998
and the Two Months ended December 31, 1997
Common Stock Additional
Par Paid-In Accumulated
Shares Value Capital Deficit Total
------------ --------- ----------- --------- -----------
Balance at November 1, 1997 - $ - $ - $ - $ -
Shares issued to acquire assets 2,875,000 8,625 3,478,984 - 3,487,609
Net loss for the two months
ended December 31, 1997 - - - (209,697) (209,697)
------------ --------- ----------- --------- -----------
Balance at December 31, 1997 2,875,000 8,625 3,478,984 (209,697) 3,277,912
New stock issued for cash
at $1.30 per share 208,709 626 270,617 - 271,243
Stock issued for director's fee 11,084 33 34,216 - 34,249
Stock issued to acquire assets 571,334 1,714 480,773 - 482,487
Net loss for the year
ended December 31, 1998 - - - (2,055,567) (2,055,567)
------------ --------- ----------- --------- -----------
Balance at December 31, 1998 3,666,127 10,998 4,264,590 (2,265,264) 2,010,324
New stock issued for cash
at $3.39 per share 22,012 66 74,474 - 74,540
Net loss for the year
ended December 31, 1999 - - - (2,860,811) (2,860,811)
------------ --------- ----------- ---------- ------------
3,688,139 $ 11,064 $ 4,339,064 $(5,126,075) $ (775,947)
============ ========= =========== =========== ============
See accompanying independent auditors' report and notes to these financial
statements.
DWSI-6
DIGITAL WIRELESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
and the Two Months Ended December 31, 1997
1999 1998 1997
------------ ------------- ------------
Net loss $ (2,860,811) $ (2,055,567) $ (209,697)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization 64,893 349,875 60,904
Loss on damaged equipment - 287,673 -
Loss on impairment of assets 1,673,929 - -
Stock issued for services - 34,249 -
Changes in:
Accounts receivable (7,042) (8,614) (10,607)
Other receivables 210,745 (145,745) (65,000)
Prepaid expenses - 9,961 (9,961)
Accounts payable 127,341 630,227 65,614
Accrued expenses 96,197 3,726 25,435
Related party payables 130,000 145,800 -
Other intangible assets (6,728) 46,123 (86,045)
------------ ------------ -----------
Total adjustments 2,289,335 1,353,275 (19,660)
------------ ------------ -----------
Net cash used in
operating activities (571,476) (702,292) (229,357)
------------ ------------ -----------
Cash flows from investing activities:
Capital expenditures (23,280) (91,713) -
------------ ------------ -----------
Net cash used in
investing activities (23,280) (91,713) -
------------ ------------ -----------
See accompanying independent auditors' report
and notes to these financial statements.
DWSI-7
DIGITAL WIRELESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31, 1999 and 1998
and the Two Months Ended December 31, 1997
1999 1998 1997
------------ ------------- ------------
Cash flows from financing activities:
Additional borrowings $ 478,493 $ 76,000 $ 40,000
Proceeds from issuance
of common stock 74,540 271,243 681,460
------------ ------------ -----------
Net cash provided by
financing activities 553,033 347,243 721,460
------------ ------------ -----------
Net increase/(decrease) in
cash and cash equivalents (41,723) (446,762) 492,103
Cash and cash equivalents
at beginning of period 45,341 492,103 -
------------ ------------ -----------
Cash and cash equivalents
at end of period $ 3,618 $ 45,341 $ 492,103
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 16,312 $ 7,974 $ -
============ =========== ===========
Cash paid for income taxes $ - $ - $ -
============ =========== ===========
Non-cash investing and financing activities
Acquisition of assets
for stock $ - $ 482,487 $ 3,487,609
See accompanying independent auditors' report
and notes to these financial statements.
DWSI-8
DIGITAL WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Digital Wireless Systems, Inc. (the "Company") was incorporated in the
State of Delaware in 1997. In November and December, 1997, the
Company acquired the assets of four companies (Baton Rouge Wireless
Cable TV LLC, Future Vision Wireless Cable, Inc., Reading Wireless
Cable TV Partnership and Shreveport Wireless Cable TV Partnership),
and proceeded to conduct operations. The Company provides television
programming to individual households, business establishments and
multiple-dwelling units (such as hotels, motels, apartments and
dormitories) in and around the Baton Rouge, LA, Clarksville, TN,
Reading, PA and Shreveport, LA areas. Programming is provided through
agreements with several programming providers. The programming is
delivered by both wireless cable and direct broadcast satellite
transmission.
REORGANIZATION
On November 17, 1998, the Company filed a Voluntary Petition with the
United States Bankruptcy Court in the Middle District of Tennessee
(the "Court"), for relief under Chapter 11 of the U.S. Bankruptcy
Code, case number 398-10899. Under Chapter 11, certain claims against
the Company in existence prior to the filing of the petition for
relief under the Federal bankruptcy laws were stayed while the Company
continued operations as Debtor-in-Possession. On March 17, 1999, the
Court authorized the issuance and sales of up to $500,000 in
Certificates of Indebtedness to raise new capital for the Company. On
March 7, 2000, the Company filed a proposed Plan of Reorganization
(the "Plan"). Under the Plan, all of the Company's assets would be
sold and substantially all of the Company's liabilities would be
assumed by an unrelated third party, Advanced Wireless Systems, Inc.
("AWSI") (see notes 9 and 10 below). On May 23, 2000, the Court
confirmed the Company's Plan.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and on deposit and highly
liquid debt instruments and certificates of deposit with original
maturities of three months or less.
PROPERTY AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company
provides for depreciation using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives
range from five to fifteen years.
DWSI-9
DIGITAL WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles necessarily requires
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, receivables and accounts payable
approximates fair value due to the short maturity of these
instruments. In management's opinion, the carrying value of notes
payable and other short-term debt also approximates fair value.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases, including operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. A valuation allowance is made for any deferred tax assets
whose realization is not certain.
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional costs are expensed as incurred.
Advertising and promotional expenses were $4,342 and $16,141 in 1999
and 1998, respectively.
LOSS PER COMMON SHARE
Basic net loss per share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding during
the year. The Company has a net operating loss, so any computations
reflecting the exercise of options would be considered anti-dilutive.
DWSI-10
DIGITAL WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RECENT PRONOUNCEMENTS
Recent Financial Accounting Standards Board ("FASB") pronouncements,
including FASB 133 and FASB 138 regarding hedging activity, will have
no material effect on these financial statements.
RECLASSIFICATIONS
Certain prior year amounts in the accompanying financial statements
have been reclassified to conform to the current year's presentation.
NOTE 2. BASIS OF PRESENTATION
During the two years ended December 31, 1999 and 1998, the Company did
not generate enough revenue to cover its expenses, resulting in
substantial losses. Due to these continued losses, the Company
entered into Chapter 11 bankruptcy in 1998. Management's plans
regarding the Company were to sell its assets and transfer a portion
of its liabilities to AWSI for AWSI stock and stock purchase warrants.
This plan was completed in August 2000 (see Note 10).
The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of the recorded
asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue in
existence.
NOTE 3. IMPAIRMENT OF LONG-LIVED ASSETS
During 1999, after considering the Company's history of operating
losses and the uncertainty of the continuation of operations, the
Company evaluated the ongoing value of its long-lived assets. Based
on this valuation, the Company determined that assets with a carrying
value of $2,202,118 were impaired according to the provisions of
Statement of Financial Accounting Standards No. 121 ("Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of") and wrote down the carrying value of these assets by
$1,673,929 as of December 31, 1999 to their estimated fair value.
Fair value was based on the assessed value of the assets in the
Company's Chapter 11 Bankruptcy filing.
During 1998, certain equipment in the Clarksville area was permanently
damaged in a lightning storm. The equipment is being used, but at only
a fraction of its capabilities.
DWSI-11
DIGITAL WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 3.IMPAIRMENT OF LONG-LIVED ASSETS (continued)
Management wrote-down the value of the affected equipment by 50% to
reflect the expected recovery of value.
NOTE 4. INTANGIBLE ASSETS
In acquiring the assets of the four companies in 1997, the Company
acquired $331,350 of MMDS (Multipoint Multichannel Distribution
Services) and ITFS (Instructional Television Fixed Service) licenses.
These licenses entitle the licensee to certain broadcasting channels
and are issued by the FCC. The Company is amortizing the cost of
these licenses over 15 years using the straight-line method.
Also in the acquisition, the Company recognized goodwill of $100,000,
which is being amortized over 15 years using the straight-line method.
NOTE 5. INCOME TAXES
Under Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes", deferred tax assets or liabilities are computed on
the temporary differences between book income and tax income using the
enacted marginal income tax rate effective for the year in which the
differences are expected to reverse. Deferred income tax expenses or
credits are based on the changes in the deferred income tax assets or
liabilities from period to period. At December 31, 1999, the Company
had federal and state net operating loss carryforwards available of
approximately $5,122,000 which will expire in full by 2014.
The approximate tax effect of temporary differences which gave rise to
significant deferred tax assets at December 31, 1999 and 1998, are as
follows:
1999 1998 1997
----------- ----------- ------------
Federal tax benefit $(2,845,000) $(2,080,000) $ (197,000)
Valuation allowance 2,845,000 2,080,000 197,000
----------- ----------- ------------
$ - $ - $ -
=========== =========== ============
DWSI-12
DIGITAL WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 6.NOTES PAYABLE
Notes payable at December 31, 1999 and 1998 consisted of the following:
1999 1998
---------- ----------
Notes payable, unsecured, payable
at maturity plus accrued interest
at 10.5% per annum. Matured 1999
and is in default. $ 41,000 $ 41,000
Note payable, unsecured, payable
at maturity plus accrued interest
at 12.5% per annum. Matured 1999
and is in default 75,000 75,000
Notes payable, unsecured, payable
at maturity plus accrued interest
at 10% per annum. Matures from
March 2000 to December 2000 478,493 -
---------- ----------
594,493 116,000
Less current portion 594,493 116,000
---------- ----------
$ - $ -
========== ==========
NOTE 7. RELATED PARTY TRANSACTIONS
The Company has received advances and loans from officers and
shareholders in the Company. The advances total $130,000, accrue no
interest and are due on demand. The loans total $145,800, accrue
interest at rates from 10%-12% per annum and are due in 2000. During
1999, the Company received $130,000 in advances and no new loans from
the related parties. No payments on these funds were made in 1999.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancellable operating lease
agreements which require payments of $6,025 per month and expire in
October 2004. The Company also leases channels from FCC licensees
which require payments of $3,600 per month and have renewable 5 year
periods. Future minimum annual payments required under the leases are
as follows:
DWSI-13
DIGITAL WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 8. COMMITMENTS AND CONTINGENCIES (continued)
December 2000 $ 110,975
December 2001 87,600
December 2002 77,100
December 2003 60,600
December 2004 57,700
---------
$ 393,975
========
NOTE 9. LITIGATION
On October 28, 1999, the Company filed suit against Decathlon
Communications, Inc. ("Decathlon") in the U.S. Bankruptcy Court for the
Middle District of Tennessee to recover monies paid in 1998 for equipment
which was never delivered to the Company and for other purchased equipment
which did not perform as represented by Decathlon. The Company alleges
that Decathlon owes it $210,745 for equipment that was not delivered and
damages in the amount of $582,280. On March 29, 2000 and April 13, 2000,
Decathlon filed lawsuits against the Baton Rouge LLC and the Shreveport
Partnership, respectively, in the U.S. District Court in Colorado alleging
that the Baton Rouge LLC and the Shreveport Partnership had not made full
payment for equipment ordered from Decathlon in 1996 and 1997. Shortly
after the filing of these lawsuits, the Company assumed defense of these
lawsuits on behalf of the Baton Rouge LLC and the Shreveport Partnership.
On August 6, 2000, in conjunction with the sale of the Company's assets to
AWSI (see Note 10 below), AWSI assumed defense for all three lawsuits. All
three lawsuits have been re-filed in Colorado and were consolidated in the
U.S. District Court for Colorado. The trial date has been set for June 4,
2001.
On December 16, 1999, the Company filed a lawsuit against David Bednarsh
and Wireless Advantage, Inc. ("Bednarsh") to compel Bednarsh to comply with
the terms of a May 1998 Settlement Agreement under which Bednarsh was
obligated to transfer and assign certain wireless cable licenses and
leases. On March 17, 2000, the Court issued an order of default judgment
in favor of the Company.
NOTE 10. SUBSEQUENT EVENTS
On August 6, 2000, the Company sold all of its assets and some of its debt
and liabilities to AWSI for 11,763,102 shares of AWSI common stock,
11,763,102 Class C - One Year warrants, 11,763,102 Class D - Eighteen Month
Warrants, 11,763,102 Class E - Two Year Warrants and 11,763,102 Class F -
DWSI-14
NOTE 10. SUBSEQUENT EVENTS (continued)
Three Year Warrants. Pursuant to the approved plan of reorganization of
the Company, AWSI assumed liabilities of the Company totaling $610,900
(which includes substantially all of the accounts payable and some of the
notes payable of the Company at December 31, 1999, as well as some
liabilities subsequent to December 31, 1999) and converted the remaining
debt ($740,293) of the Company (including the debt in default) into units
of equity in AWSI. The converted debt received 2 units of equity for each
$1 of debt converted.
DWSI-15
DAYBREAK AUTO RECOVERY
Financial Statements
December 31, 1999
HURLEY & COMPANY
Certified Public Accountants
DAR-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Daybreak Auto Recovery
Sebastopol, California
We have audited the accompanying balance sheet of Daybreak Auto Recovery
(the "Company") as of December 31, 1999, and the related statement of
operations, changes in owners' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Daybreak Auto Recovery
as of December 31, 1999, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted
accounting principles.
Hurley & Company
Granada Hills, CA
February 29, 2000
DAR-2
DAYBREAK AUTO RECOVERY
BALANCE SHEET
December 31, 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,205
Accounts receivables, net of allowance for
doubtful accounts of $0 54,679
Employee receivables 1,092
Prepaid expenses 2,399
- - - - - - - - - -
Total current assets 59,375
PROPERTY AND EQUIPMENT
Autos and trucks 120,790
Office equipment 12,371
- - - - - - - - - -
133,161
Less accumulated depreciation 20,097
- - - - - - - - - -
113,064
OTHER ASSETS
Deposits 4,383
- - - - - - - - - -
Total assets $ 176,822
= = = = = = = = = =
See accompanying independent auditor's report
and notes to these financial statements.
DAR-3
DAYBREAK AUTO RECOVERY
BALANCE SHEET (CONTINUED)
December 31, 1999
LIABILITIES AND OWNER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,350
Accrued Expenses 7,872
Loan from officer 3,798
Current portion, long-term debt 17,589
- - - - - - - - - - -
Total current liabilities 34,609
Long-term debt, net of current portion 81,520
Commitments and contingencies -
OWNERS' EQUITY
Retained earnings 60,693
- - - - - - - - - - - -
Total owners' equity 60,693
- - - - - - - - - - - -
Total liabilities and owners' equity $ 176,822
= = = = = = = =
See accompanying independent auditor's report
and notes to these financial statements.
DAR-4
DAYBREAK AUTO RECOVERY
STATEMENT OF OPERATIONS AND
CHANGES IN OWNERS' EQUITY
For the year Ended December 31, 1999
Revenue, net $ 356,273
Cost of repossessions 85,979
- - - - - - - - - -
Gross profit 270,294
Selling, general and administrative expenses 176,335
- - - - - - - - - -
Income from operations 93,959
Other income (expense)
Interest (8,311)
- - - - - - - - - -
Income before provision for income taxes 85,648
Provision for income taxes -
- - - - - - - - - -
Net income $ 85,648
= = = = = = =
Retained
Earnings
- - - - - - - - - -
Balance at January 1, 1999 $ 15,845
Net income for the year
ended December 31, 1999 85,648
Distributions (40,800)
- - - - - - - - - -
Balance at December 31, 1999 $ 60,693
= = = = = = =
See accompanying independent auditor's report
and notes to these financial statements.
DAR-5
DAYBREAK AUTO RECOVERY
STATEMENT OF CASH FLOWS
For the year Ended December 31, 1999
Net income $ 85,648
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 17,095
Changes in:
Accounts receivable (54,679)
Employee receivables (1,092)
Prepaid expenses (2,399)
Other assets (4,383)
Accounts payable 5,350
Accrued expenses 7,872
Officer payable 3,798
- - - - - - - - - -
Total adjustments (28,438)
- - - - - - - - - -
Net cash provided by operating activities 57,210
- - - - - - - - - -
Cash flows from investing activities:
Capital expenditures (91,747)
- - - - - - - - - -
Net cash used in investing activities (91,747)
- - - - - - - - - -
Cash flows from financing activities:
Proceeds from long-term debt 79,376
Payments on long-term debt (15,899)
Distributions to owner (40,800)
- - - - - - - - - -
Net cash used in financing activities 22,677
Net decrease in cash and cash equivalents (11,860)
Cash and cash equivalents at beginning of period 13,065
- - - - - - - - - -
Cash and cash equivalents at end of period $ 1,205
= = = = = = =
Supplemental disclosures of cash flow information:
Cash paid for interest $ 8,323
Cash paid for income taxes -
See accompanying independent auditor's report
and notes to these financial statements.
DAR-6
DAYBREAK AUTO RECOVERY
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Daybreak Auto Recovery (the "Company") started as a sole
proprietorship in 1998. The Company was incorporated November 13,
1999 in the state of California, but remained a sole proprietorship
until January 1, 2000. The Company operates an automobile
repossession service primarily in Sebastopol, California.
The Company's business activities are with customers primarily in the
Northern California area.
USE OF ESTIMATES
The preparation of the Company's 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 disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and on deposit and
highly liquid debt instruments with original maturities of three
months or less. Substantially all funds are on deposit with one
financial institution.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
on property and equipment using the straight-line method over expected
useful lives of the assets, which are generally three years.
INCOME TAXES
The Company operated as a sole proprietorship through December 31,
1999. As such, the owner of the Company is responsible for paying
income tax. Therefore, no income tax provision has been made to the
financial statements.
DAR-7
DAYBREAK AUTO RECOVERY
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION
Revenue from automobile repossession is recognized at the time the
vehicle is repossessed.
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional costs are expensed as incurred.
Advertising and promotional expenses were $872 at December 31, 1999
NOTE 2. COMMITMENTS
The Company leases office and yard space under verbal and month to
month lease agreements which require payments of $1,166 per month.
The Company also leases its vehicles under non-cancelable financing
leases. Future minimum annual payments are as follows:
December 31, 2000 $ 29,744
December 31, 2001 29,744
December 31, 2002 29,744
December 31, 2003 29,834
December 31, 2004 12,695
- - - - - - - - -
131,761
Less amounts representing interest 32,652
- - - - - - - - -
Present value of capital lease obligation 99,109
Current portion of lease commitments 17,589
- - - - - - - - -
Capital lease obligations,
net of current portion $ 81,520
= = = = = =
DAR-8
DAYBREAK AUTO RECOVERY
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 3. RELATED PARTY TRANSACTIONS
An officer of the Company is also the bookkeeper. Another officer of
the Company advanced funds to the Company at no interest. The balance
due this officer at December 31, 1999 was $3,798.
NOTE 4. LITIGATION
From time to time in the ordinary course of business, the Company is
involved in litigation. In management's estimation, the ultimate
result of any litigation would not have a material adverse effect on
the financial statements beyond what is already accrued on the balance
sheet.
DAR-9
ADVANCED WIRELESS SYSTEMS, INC., AND SUBSIDIARY
Pro Forma Financial Statements
(Unaudited)
September 30, 2000
PF-1
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
PRO FORMA BALANCE SHEET
(UNAUDITED)
AS OF SEPTEMBER 30, 2000
Historical Pro Forma
__________________________________________ _________________________
Advanced Digital Daybreak
Wireless Wireless Auto
Systems, Inc. Systems, Inc. Systems, Inc. Adjustments Consolidated
Current Assets
Cash $ 20,146 $ - $ 23,093 $ - $ 43,239
Accounts receivable, net 11,551 19,918 77,672 - 109,141
Accounts receivable,
related parties 20,289 - (67) - 20,222
Due from DWSI 35,421 - - (a)(35,421) -
Prepaid expenses 6,900 - 23,644 - 30,544
Inventories 12,606 28,500 - - 41,106
----------- ----------- ------------ ----------- ------------
Total Current Assets 106,913 48,418 124,342 (35,421) 244,252
----------- ----------- ------------ ----------- ------------
Fixed Assets, net of
depreciation 92,225 85,908 206,073 - 384,206
----------- ----------- ------------ ----------- ------------
Other Assets
Deposits 10,300 7,118 4,383 - 21,801
License acquisition costs,
net of accumulated
amortization and escrow
obligations 103,950 1,500,753 - - 1,604,703
Goodwill, net of
amortization 127,113 - - (b)233,586 -
- (c)(58,397) 302,302
Other tangibles, net of
accumulated amortization 1,041 - - - 1,041
Investment in subsidiary 293,370 - - (b)(293,370) -
----------- ----------- ------------ ----------- ------------
Total Other Assets 535,774 1,507,871 4,383 (118,181) 1,929,847
----------- ----------- ------------ ----------- ------------
TOTAL ASSETS $ 734,912 $ 1,642,197 $ 334,796 $ (153,602) $ 2,558,305
=========== =========== ============ =========== ============
(See Notes to Pro Forma Financial Statements)
PF-2
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
PRO FORMA BALANCE SHEET
(UNAUDITED)
AS OF SEPTEMBER 30, 2000
Historical Pro Forma
__________________________________________ _________________________
Advanced Digital Daybreak
Wireless Wireless Auto
Systems, Inc. Systems, Inc. Systems, Inc. Adjustments Consolidated
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank overdraft $ - $ 5,422 $ - $ - $ 5,422
Accounts payable 227,156 315,382 708 543,246
Current portion of
obligations under
capital leases - - 19,419 - 19,419
Debtor certificates 6,000 5,000 - - 11,000
Notes payable 47,159 160,000 140,000 347,159
Notes payable,
related parties 175,000 - 14,772 - 189,772
Accrued payroll and
payroll taxes 3,081 103,907 - - 106,988
Accrued interest
payable 70,534 20,945 2,233 - 93,712
Other accrued expenses 12,982 37,210 37,031 (b) (5,867) 81,356
Due to AWSI - 35,421 - (a)(35,421) -
----------- ------------ ------------ ----------- ------------
Total Current Liabilities 541,912 683,287 214,163 (41,288) 1,398,074
----------- ------------ ------------ ----------- ------------
Leases payable, net
of current portion - - 66,718 - 66,718
----------- ------------ ------------ ----------- ------------
Total Liabilities 541,912 683,287 280,881 (41,288) 1,464,792
(See Notes to Pro Forma Financial Statements)
PF-3
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
PRO FORMA BALANCE SHEET
(UNAUDITED)
AS OF SEPTEMBER 30, 2000
Historical Pro Forma
__________________________________________ _________________________
Advanced Digital Daybreak
Wireless Wireless Auto
Systems, Inc. Systems, Inc. Systems, Inc. Adjustments Consolidated
LIABILITIES AND STOCKHOLDERS' EQUITY (continued)
Stockholders' Equity:
Common stock, $.01
Par value, 150,000,000
Shares authorized:
19,979,585 shares
issued and outstanding 82,165 117,631 60,692 (b)(60,692) 199,796
Additional paid in capital 2,832,919 1,176,310 - - 4,009,229
Escrowed stock - (152,020) - (152,020) (152,020)
Retained earnings
(Deficit) (2,722,084) (183,011) (6,775) (b) 6,775 -
(c)(58,397) (2,963,492)
----------- ------------ ------------ ----------- ------------
Total Stockholders'
Equity 193,000 958,910 53,917 (112,314) 1,093,513
----------- ------------ ------------ ----------- ------------
Total Liabilities and
Stockholders' Equity $ 734,912 $ 1,642,197 $ 334,798 $ (153,602) $ 2,558,305
----------- ------------ ------------ ----------- ------------
(See Notes to Pro Forma Financial Statements)
PF-4
ADVANCED WIRELESS SYSTEMS, INC. AND SUBSIDIARY
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Historical Pro Forma
__________________________________________ _________________________
Advanced Digital Daybreak
Wireless Wireless Auto
Systems, Inc. Systems, Inc. Systems, Inc. Adjustments Consolidated
Revenue
Service and other $ 147,019 $ 47,286 $ 501,807 $ - $ 696,112
Costs and expenses
Operating 76,002 24,070 67,887 - 167,959
General and administrative 771,511 101,225 401,310 - 1,274,046
Depreciation and amortization 118,884 101,979 24,892 (c)58,397 304,152
----------- ------------ ------------ ----------- ------------
Total costs and expenses 966,397 227,274 494,089 58,397 1,746,157
----------- ------------ ------------ ----------- ------------
Income(loss)from operations (819,378) (179,988) 7,718 (58,397) (1,050,045)
----------- ------------ ------------ ----------- ------------
Other income (expense)
Interest expense (14,517) (3,023) (14,493) - (32,033)
Gain on asset disposition 329 - - - 329
----------- ------------ ------------ ----------- ------------
Net (Loss) $ (833,566) $ (183,011) $ (6,775) $ (58,397) $ (1,081,749)
=========== ============ ============ =========== ============
Net loss per share -
basic and diluted $ (.14) $ (.14)
=========== ============
Weighted average number
Of shares outstanding
Basic and diluted 7,583,859 7,583,859
=========== ============
(See Notes to Pro Forma Financial Statements)
PF-5
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
NOTE 1 - BASIS OF PRESENTATION
On August 6, 2000, Advanced Wireless Systems, Inc. (the "Company")
purchased all of the assets of Digital Wireless Systems, Inc ("DWSI"). It
operates wireless cable and direct broadcast satellite TV services in Baton
Rouge Louisiana, Clarksville Tennessee, Reading Pennsylvania, and
Shreveport Louisiana.
The assets were purchased for 10,381,103 equity units of the Company
consisting of a total of 10,381,103 shares of common stock and warrants to
purchase 41,524,412 shares of common stock and assumption of the
outstanding liabilities of DWSI as of the closing date.
A total of 1,381,999 units of equity were placed in an escrow account,
pending the completion of certain guarantees pertaining to the transfer of
ownership right 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 balance sheet in the amount of $152,020 for these
escrowed shares.
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 issues to a financial advisor as a finder's fee). The
transaction was valued at $203,370, consisting of $568,384 of assets
(including the recognition of $244,586 in goodwill) and $275,104 in
liabilities.
The pro forma balance sheet at September 30, 2000, has been prepared
assuming that the business acquisition was consummated on September 30,
2000. The pro forma statement of operations for the nine months ended
September 30, 2000 was prepared assuming that the business acquisition was
consummated on January 1, 2000.
The preparation of the pro forma financial statements is based on certain
adjustments to the historical financial statements of the Company and its
subsidiary, Daybreak Auto Recovery, Inc., and are not necessarily
indicative of the financial position or results of operations had the
above-described business acquisition occurred on the assumed date. These
pro forma financial statements should be read in conjunction with the
financial statements of the acquired business and of the Company contained
in its registration statement.
PF-6
NOTE 2 - PRO FORMA ADJUSTMENTS
(a) Reflects the elimination of intercompany amounts between the
Company and DWSI.
(b) Goodwill related to the acquisition of Daybreak Auto Recovery,
Inc. business has been determined as follows:
Purchase price $293,370
Less common stock (60,692)
Less finder's fee (5,867)
Add back: Operating loss,
nine months ended
September 30, 2000 6,775
Total: $233,586
========
(c) The acquisition of Daybreak Auto Recovery, Inc., has been
accounted for using the purchase method of accounting. The
purchase price has been allocated to the tangible and intangible
values at the time the acquisition was consummated. The purchase
price allocated to fixed assets was its net book value at the date
of purchase. Goodwill acquired in the amount $233,586 is amortize
over an estimated useful life of three years. An adjustment of
$58,397 for amortization expense is reflected for the nine months
ended September 30, 2000.
PF-7
EXHIBITS
2.1* Plan of Reorganization, In Re: Digital Wireless Systems, Inc., Debtor,
Case No. 398-10899, U.S. Bankruptcy Court, Middle District of
Tennessee, dated March 7, 2000.
2.2* Debtor's Modification to Plan of Reorganization, In Re: Digital
Wireless Systems, Inc., Debtor, Case No. 398-10899, U.S. Bankruptcy
Court, Middle District of Tennessee, filed May 23,2000.
2.3* Amended Disclosure Statement, In Re: Digital Wireless Systems, Inc.,
Debtor, Case No. 398-10899, U.S. Bankruptcy Court, Middle District of
Tennessee, dated April 14, 2000.
2.4* Asset Purchase Agreement by and between Digital Wireless Systems,
Inc., as Debtor and Advanced Wireless Systems, Inc., as Purchaser,
February 15, 2000.
2.6* Closing Agreement between Digital Wireless Systems, Inc., and Advanced
Wireless Systems, Inc., entered on August 6, 2000.
2.7* Escrow Agreement with respect to 284,410 units of equity of Advanced
Wireless Systems, Inc.
2.8** Plan and Agreement of Reorganization, by and between Daybreak Auto
Recovery, Inc., and Advanced Wireless Systems, Inc., September 8,
2000.
4.1* Form of Warrant Agreement.
4.2* Form of Series C Warrant Certificate.
4.3* Form of Series D Warrant Certificate.
4.4* Form of Series E Warrant Certificate.
4.5* Form of Series F Warrant Certificate.
10.1* Spectrum Lease Agreement between Digital Wireless Systems, Inc., and
Advanced Wireless Systems, Inc., entered on August 6, 2000.
16.1* Letter of Brown, Armstrong, Randall, Reyes, Pauldin & McCown
Accounting Corporation regarding change in certifying certifying
accountant.
* Incorporated by reference to the Company's Form 8-K dated August 6,
2000.
** Filed herewith.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ADVANCED WIRELESS SYSTEMS, INC.
Date: April 27, 2001
/s/ Stanley Wilson
-----------------------------------
Stanley Wilson, President
16