SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1 to Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 14 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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.)
927 Sunset Drive
Irving, Texas 75061
(Address of principal executive offices)
Issuer's telephone number: 972-254-7604
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, 1999, there were a total of 4,761,230 shares of registrant's
Common Stock outstanding.
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PART I
Item 1. Financial Statements
ADVANCED WIRELESS SYSTEMS, INC.
BALANCE SHEETS
September 30, December 31,
1999 1998
(Unaudited) (Audited)
-------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 100,944 $ 56,168
Accounts receivable, net 2,608 2,608
Inventory 44,763 44,949
Employee Advances 50 -
Prepaid expenses 9,000 18,000
-------------- -----------
Total current assets 157,365 121,725
-------------- -----------
Fixed Assets, net of depreciation 114,681 115,078
-------------- -----------
Other assets
Deposits 11,400 15,900
License Acquisition Costs, net 150,153 532,000
Intangibles, net 204,623 10,189
-------------- -----------
Total Other Assets 366,176 558,089
-------------- -----------
TOTAL ASSETS $ 638,222 $ 794,892
-------------- -----------
-------------- -----------
(See Notes to Financial Statements)
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ADVANCED WIRELESS SYSTEMS, INC.
BALANCE SHEETS
September 30, December 31,
1999 1998
(Unaudited) (Audited)
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current Liabilities:
Debtor certificates $ 6,000 $ 6,000
Notes payable, related parties 175,000 250,000
Accrued payroll taxes 4,924 5,231
Accrued interest payable 54,034 38,847
----------- -----------
TOTAL LIABILITIES 239,958 300,078
----------- -----------
Stockholders' Equity:
Common stock, $.01 par value, 50,000,000 shares
authorized; 4,761,230 and 3,832,009 shares
issued and outstanding at September 30, 1999
and December 31, 1998, respectively 47,612 38,320
Additional paid in capital 2,032,356 1,169,024
Accumulated deficit (1,681,704) ( 712,531)
----------- -----------
Total Stockholders' equity 398,264 494,814
----------- ------------
Total Liabilities and
Stockholders' Equity $ 638,222 $ 794,892
----------- ------------
----------- ------------
(See Notes to Financial Statements)
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ADVANCED WIRELESS SYSTEMS, INC.
STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ----------
REVENUES
Service and other $ 48,199 $ 35,339 $ 90,689 $ 76,150
COSTS AND EXPENSES
Operating 59,195 66,015 123,548 142,112
General and
Administrative 150,952 55,461 476,376 220,704
Depreciation and
Amortization 31,666 70,289 140,953 210,867
Provision for impairment
of license acquisition
costs - - 303,797 -
--------- --------- --------- ----------
Total costs and expenses 241,813 191,765 1,044,674 573,683
---------- --------- --------- ----------
Net loss from operations (193,614) (156,426) (953,985) (497,533)
OTHER INCOME (EXPENSE)
Interest income - - - 2,230
Interest expense (3,938) (5,112) (15,188) (15,335)
--------- --------- --------- ---------
Total Other Income (Expense) (3,938) (5,112) (15,188) (13,105)
--------- --------- --------- ---------
Net Loss (197,552) (161,538) (969,173) (510,638)
---------- --------- --------- ----------
---------- --------- --------- ----------
Basic Loss Per Share $ (.04) $ (.04) $ (.23) $ (.14)
---------- --------- --------- ----------
Weighted Average Number
of Shares Outstanding 4,665,480 3,660,651 4,305,000 3,433,518
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(See Notes to Financial Statements)
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ADVANCED WIRELESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
-------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (969,173) $ (510,638)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 140,953 210,867
Provision for impairment of
license acquisition costs 303,797 -
Changes in operating assets
and liabilities:
Employee advances (50) -
Prepaid expenses 9,000 -
Inventory 186 -
Deposits 4,500 -
Postpetition liabilities - (61,500)
Accrued interest 15,187 24,535
Accrued payroll taxes (307) 354
----------- -----------
Net Cash Used in Operating Activities (495,907) (336,382)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Dibbs Internet Services, Inc. (225,000) -
Purchase of property and equipment (31,941) (27,072)
----------- -----------
Net Cash Used in Investing Activities (256,941) (27,072)
----------- -----------
(Continued)
(See Notes to Financial Statements)
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ADVANCED WIRELESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
-----------------------
1999 1998
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercised stock warrants 872,624 12,000
Proceeds from sale of debtor certificates - 185,850
Payments of note principal (75,000) -
Proceeds from issuance of notes 75,000
Decrease in pre-petition liabilities (138,320)
----------- ----------
Net Cash Provided by Financing Activities 797,624 134,530
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 44,776 (228,924)
Cash and Cash Equivalents, Beginning of Period 56,168 247,686
----------- ----------
Cash and Cash Equivalents, End of Period $ 100,944 $ 18,762
----------- ----------
----------- ----------
(See Notes to Financial Statements)
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ADVANCED WIRELESS SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
Common Additional
Stock Par Paid-in Accumulated
Shares Value Capital Deficit Total
--------- --------- --------- ---------- ---------
Balance (Audited)
December 31, 1998 $3,832,009 $ 38,320 $1,169,024 $(712,531) $494,814
Exercise of
Class A Warrants
for Common Stock 226,379 2,264 167,520 - 169,784
Exercise of
Class B Warrants
for Common Stock 702,840 7,028 695,812 - 702,840
Net Loss - - - (969,173)(969,173)
--------- --------- --------- ---------- ---------
Balance (Unaudited)
September 30, 1999 $4,761,228 $ 47,612 $2,032,356 $(1,681,704)$398,264
--------- --------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------
(See Notes to Financial Statements)
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ADVANCED WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
Note A - Significant accounting policies:
Nature of operations - Mobile Limited Liability Company (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). The
Company succeeded to the LLC's assets, liabilities and operations.
Additionally, the Plan included the acquisition by the Company of the
Partners' FCC License in exchange for 3,192,518 shares of the Company's
common stock; 3,068,066 B Warrants exercisable on a 1 for 1 basis for
the Company's common stock; and the extinguishment of an intercompany
loan from Partners totaling $100,000 which was accounted for as a
conversion to common stock. The License has been recorded by the Company
at the Partners' historical cost basis which was $225,000. In substance,
the reorganization and asset transfer and resulting combination between
Partners and the Company is a change in legal organization, but not a
change in entity. The transfer of the license and elimination of
intercompany receivable, representing all assets of the Partners, in
exchange for all outstanding shares in the newly formed corporation is
deemed a transfer of net assets between entities under common control.
Accordingly, the assets transferred have been accounted for at historical
cost in a manner similar to that in a pooling of interest. The
Partnership had no prior results of operations. As such, results of
operations on a combined basis represent the activities of Mobile LLC
during those periods.
Company activities - The Company is an established provider of wireless
television service in the Mobile, Alabama market, primarily serving rural
and outlying areas where the delivery of traditional land-based cable
television service is impractical. The Company recently acquired the
technology to provide high speed Internet access through its existing
broadcast frequencies and is beginning to develop a base of service for
these users, as well as continuing to provide wireless television service
to the existing market.
Reorganization - On August 23, 1997, the Debtor filed a Petition with the
United States Bankruptcy Court in the Northern District of Texas, for
relief under Chapter 11 of the U.S. Bankruptcy Code, Case Number
397-37735-HCA-11. 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 business
operations as
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Note A - Significant accounting policies - (continued):
Debtor-in-Possession. On October 18, 1997, the Bankruptcy Court further
authorized the issuance and sales of up to $1,000,000 in Certificates of
Indebtedness to raise new capital for the Company pursuant to Section
364(c) of the Code. On November 6, 1997, the Company filed a proposed
Plan of Reorganization (the Plan). Under the Plan, a new corporation
would be formed such that, upon confirmation of the Plan, all assets and
liabilities of the Debtor would be assumed by the corporation, and all
equity interests in the Debtor would be extinguished. The resulting
reorganized debtor, Advanced Wireless Systems, Inc., would carry on the
business activities of the Debtor. On January 8, 1998, the Bankruptcy
Court confirmed the Company's Plan, which provided for the following:
Prepetition liabilities subject to compromise - These unsecured claimants
may have portions of their claims rejected. Pursuant to the Plan,
creditors with claims less than $1,000 will be paid in full by the
Company following confirmation. Creditors with claims in excess of $1,000
will either be paid an amount agreed to by the parties in interest, or
may elect to receive shares of the Company's common stock in lieu of
payment. All liabilities within this category have been discharged as of
December 31, 1998.
Postpetition liabilities - These amounts include professional fees, costs
of administration, wage and tax claims, and certificate of indebtedness
note holders. Claimants for professional fees and certificate holders may
elect to receive shares of the Company's common stock in lieu of payment.
All liabilities within this category have been discharged as of December
31, 1998.
Cash and cash equivalents - For purposes of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
Inventory - Inventories consist of high speed modems held for resale and
installation materials, including antennas, cabling, and various other
hardware and parts. Inventory is stated at the lower of cost (first in,
first out) or market. Provision has been made for overstocked, slow
moving, and obsolete inventory.
Property and depreciation - Property and equipment are carried at cost and
depreciated on a straight-line basis over their estimated useful lives,
ranging from 2.5 to 15 years. Maintenance and repair costs are charged to
expense as incurred; major renewals and betterments are capitalized.
Subscriber installation costs are capitalized and amortized over a 2.5
year period, the approximate average subscription term of a subscriber.
The costs of subsequently disconnecting and reconnecting are charged to
expense in the period incurred.
- 9 -
Note A - Significant accounting policies - (continued):
Amortization of Intangibles - Amortization of intangibles is calculated
using the straight-line method. Amortization lives are as follows:
Goodwill 3 years
Organization costs 5 years
Non-compete agreement 2 years
Amortization expense related to these assets totaled $16,071 and $7,642,
and $13,585 and $13,585 at September 30, 1999 and 1998, and December 31,
1998 and 1997, respectively.
License Acquisition Costs - License acquisition costs include costs
incurred to lease wireless cable licenses issued by the Federal
Communications Commission (FCC), including channel lease acquisition
costs. In past years, these costs were deferred amortized ratably over 15
years. In 1997, the Company also revised the deferral period from 15
years to 5 years. The revision decreased net income and increased net
loss per share for the year ended December 31, 1998 by approximately
$78,000 and $.02 per share, respectively. In the second quarter of
1999, the Company determined that assets with a carrying value of
$465,500 were impaired according to the provisions of SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. Fair value was determined based on recent
transactions in the wireless cable industry, including changes in the
the Company's use of these assets as indicated by the decision to
discontinue new installations for wireless cable television service in
early 1999, as well as estimates made in the second quarter of the
future earnings from alternative uses for these assets such as high-
speed Internet access. Accumulated amortization related to these costs
was $371,050 and $259,750 at September 30, 1999 and 1998 (unaudited),
and $293,000 and $160,000 at December 31, 1998 and 1997, respectively
(audited).
Revenue recognition - Revenues from wireless subscription services are
recognized monthly upon billing. Initial hook-up revenue is recognized to
the extent of direct selling cost incurred. To date, direct selling
costs have exceeded installation revenues. Revenues from Internet
services are recognized monthly upon billing.
Common stock - The Company has authorized 50,000,000 shares of $.01 par
value common stock. Each share entitles the holder to one vote. There are
no dividend or liquidation preferences, participation rights, call prices
or dates, conversion prices or rates, sinking fund requirements, or
unusual voting rights associated with these shares.
Warrants - Warrants to purchase up to 2,226,029 shares of Common Stock of
the Company, issued pursuant to the Plan of Reorganization and in
conjunction with the conversion of Debtor Certificates, were outstanding
at November 30, 1999. The warrants issued by the Company include A and
B warrants having an exercise price of $.75 and $1, respectively. All
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outstanding warrants had original expirations of May 31, 1999, but were
subsequently extended until January 14, 2000.
Income taxes - Under SFAS 109, deferred tax assets or liabilities are
computed based on the temporary differences between financial statements
and income tax bases of assets and liabilities using the enacted marginal
income tax rate in effect 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.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Unaudited Interim Periods Ended September 30, 1999 and 1998 - The
accompanying financial statements include unaudited financial information
for the six month periods ended September 30, 1999 and 1998. In the
opinion of management, the accompanying unaudited financial statements
include all adjustments, consisting only of normally recurring
adjustments, necessary to present fairly the Company's financial position
and the results of its operations and cash flows for the periods
presented. The results of operations for the three month period is not,
in management's opinion, indicative of the results to be expected for a
full year of operations.
Note B - Inventory:
Inventories consisted of the following:
September 30, December 31,
1999 1998
(Unaudited) (Audited)
----------- -----------
Inventory held for resale $ 24,195 $ 24,195
Installation materials 20,568 20,754
----------- -----------
$ 44,763 $ 44,949
----------- -----------
----------- -----------
Note C - Acquisitions:
On August 25, 1999, the Company purchased all of the assets of Dibbs
Internet Services, Inc., (Dibbs) an Alabama corporation, an Internet
service provider in Mobile, Alabama, for a purchase price of $225,000.
Dibbs provided Internet services to approximately 730 Internet customers
in the Mobile metropolitan area via dial-in telephone line access. The
Company will continue offering Dibbs' customers the telephonic Internet
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Note C - Acquisitions (Continued)
service that they have now, and will also offer them the opportunity to
convert the use of high speed wireless Internet service. The statement
of operations at September 30, 1999, includes the results of operations
of Dibbs after August 25, 1999.
The Company acquired the Dibbs assets used in the operation of its
Internet service, including its equipment, software, and the right to
use the Dibbs trade name, for $225,000 cash, paid in full on August
25, 1999, to Dibbs and its sole shareholder and president, Diane
Summers. The Company did not assume any liabilities of Dibbs in the
transaction. The purchase price has been allocated as follows:
Property and Equipment $ 14,495
Non-compete agreement 2,500
Goodwill 208,005
-------
Total 225,000
-------
-------
Purchased Goodwill will be amortized on the straight-line basis over 3
years.
The following unaudited pro forma information presents a summary of results
of operations of the Company and Dibbs as if the acquisition occurred
at the beginning of the fiscal year for each of the periods presented:
Nine Months Ended (Unaudited)
-----------------------------
September 30, December 31,
1999 1998
------------- ------------
Total revenues $ 233,025 $ 223,284
Net loss $(967,614) $(532,465)
Basic earnings per share $ (.22) $ (.16)
In management's opinion, the unaudited pro forma information is not
necessarily indicative of actual results that would have occurred had
the acquisition been consummated at the beginning of the fiscal periods
or of future operations of the combined activities.
Note D - Fixed Assets:
Furniture and equipment are summarized as follows:
September 30, December 31,
1999 1998
(Unaudited) (Audited)
------------ ------------
Cost:
Machinery and equipment $ 612,622 $ 566,486
Furniture and fixtures 21,801 21,801
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Autos and trucks 5,325 5,325
Subscriber premises equipment 38,160 47,700
Accumulated depreciation (563,227) (526,234)
------------ ------------
$ 114,681 $ 115,078
------------ ------------
------------ ------------
Note E - Intangibles:
Intangibles consist of the following:
September 30, December 31,
------------ -----------
1999 1998 1997
(Unaudited) (Audited) (Audited)
----------- ---------- ----------
Purchased goodwill $ 208,005 $ - $ -
Organization costs 67,926 67,926 67,926
Non-compete agreement 2,500 - -
Accumulated amortization (73,808) (57,737) (44,152)
----------- ---------- ----------
$ 204,623 $ 10,189 $ 23,774
----------- ---------- ----------
----------- ---------- ----------
Note F - Operating leases:
The company leases office and warehouse space subject to a six year lease,
expiring March 29, 2000. The lease provides for monthly lease payments of
$2,800 and extends the option to renew the lease for three successive
three-year terms. Upon execution of the lease, the Company delivered
$33,600 to the lessor as deposit for the sixth year's base payment, or as
security in the event of default. In late 1998, the Company negotiated
with the Lessor to allow the Company to apply its security deposit toward
the monthly rent at the rate of $1,500 per month, while only requiring
the Company to make monthly cash payments of the remaining $1,300.
Accordingly, the prepaid portion of the deposit has been reclassified to
a prepaid asset at the balance sheet dates, and will be amortized over
the next 12 months.
The Company leases the site for its transmitter subject to a five-year
lease expiring March 13, 2000. The lease provides for monthly payments
of $1,000.
The Company leases four Instructional Television Fixed Service (ITFS)
programing channels, referred to as the E Block, subject to a five-year
lease term expiring on May 9, 1999. The base provides for monthly lease
payments of $2,000 and extends the option to renew the lease for
successive five-year terms. In May 1999, the Company renewed the lease at
a reduced lease rate of $1,200 per month for an additional five years.
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Note F - Operating leases (Continued)
The Company leases four Multipoint Distribution Service (MDS) programming
channels, referred to as the G Block, subject to an initial five-year
term, with an automatic five year renewal term, having been renewed on
March 22, 1996, and expiring on March 22, 2001. The base provides for
monthly lease payments of $1,000. At lease expiration, the Company has
the first right of refusal to negotiate a new lease agreement for the
channels. Amounts paid by the Company to acquire the channel leases have
been capitalized as license acquisition costs and are being amortized
over 5 years. The monthly lease payments are expensed.
Future minimum lease payments under the Company's operating leases are as
follows:
Remainder of 1999 $ 13,500
2000 37,800
2001 17,400
2002 14,400
2003 14,400
Thereafter 3,600
-----------
$ 101,100
-----------
-----------
Note G - Notes payable:
Notes payable consists of two notes from two individuals who are each
officers and directors of the Company. The notes total $175,000 and are
secured by liens on all license agreements, channel leases, contracts,
accounts receivable, equipment leases, and all additions, replacements,
machinery, parts and goods used by the Company in the operations of its
business. The notes bear an interest rate at 9.0% APR and are payable upon
demand. The balance sheet at September 30, 1999, reflects accrued interest
payable on these notes of $54,034.
Note H - Debtor certificates:
As discussed in Note A, on October 18, 1997, the Bankruptcy Court authorized
the issuance and sales of up to $1 million in Certificates of Indebtedness
to raise new capital for the reorganized debtor pursuant to Section 364 of
the Code. The Certificates were due two years from the Effective Date of
the Plan, and bore interest at 10% annually. On May 27, 1998, the
Bankruptcy Court Clerk disbursed $242,043, representing proceeds from
sales of the Certificates of $239,000, and interest income of $3,043 to
Sid Diamond, Esq. (the disbursing agent) who in turn wired the funds to
the Company. A total of 120 individuals participated in the program. The
Plan of Reorganization provided that the Debtor Certificate holders
could, at their exclusive option, convert their debt at a conversion rate
of one unit of equity for each $1 lent. A unit of equity consists of two
shares of Common Stock and two Class A Warrants allowing the holder to
purchase additional shares at $0.75 each. 118 holders opted to convert
their certificates and two opted not to convert. On July 31, 1998,
466,000 shares of Common Stock and 466,000 A Warrants were issued to the
118 Certificate holders. Stock and Warrants issued to this group have no
restrictions.
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Note H - Debtor certificates (Continued)
As discussed in Note A, the Plan of Reorganization also provided that the
Debtor would purchase from Mobile Wireless Partners certain MMDS licenses
issued by the FCC and owned by the Partnership. The Company agreed to
purchase these licenses, referred to as the H Block for $225,000, which
represents the Partners' historical cost basis. The Plan of
Reorganization also provided that the Company would issue a Debtor
Certificate to Mobile Partners in a like amount of the purchase price
pursuant to Section 364 of the Bankruptcy Code. The plan further provided
that the Debtor Certificate could be converted into 3,192,518 shares of
Common shares at a stated value of $1 each, and 3,068,066 Class B
Warrants allowing the holder to purchase additional shares at $1.00 each
for a period of 1 year. In the event of conversion of the Debtor
Certificate into the stock and warrants, the Partnership agreed by
contract not to assign, pledge, transfer or otherwise dispose of the
3,192,518 shares of Common Stock and 3,068,066 Warrants for one year from
the date of conversion. 126,000 shares of Common Stock held no such
restriction. Further the shares and warrants to be issued could only be
issued to the partners upon dissolution of the Partnership. The
Partnership was dissolved on July 15, 1998 and pursuant to the winding up
of the partnership, the shares and warrants were issued and distributed
to the Partners.
Note I - Stock option plan:
On December 11, 1997, the Company's Board of Directors approved an
Incentive Stock Option Plan for employees, officers, and directors. The
plan provides for the issuance of a maximum of 1,000,000 shares of the
company's common stock, issuable at the discretion of the Board of
Directors, as indicated in the Plan. As of December 31, 1998, no common
stock had been issued under the Company's stock option plan.
Also on December 11, 1997, the Board of Directors authorized the issuance
of 365,600 options to officers and directors of the Company, exercisable
at $.25 per share for an option term of two years. At December 31, 1998,
none of these options had been issued or exercised.
The Plan further reserved 350,000 shares of common stock to be granted in
the future at an exercise price of $.25 per share.
Note J - Subsequent Events:
As of November 30, 1999, shareholders had exercised a total of 1,308,036
Warrants issued pursuant to the Plan of Reorganization. The exercised
warrants included 409,955 A Warrants, and 898,082 B Warrants for a
total of $1,205,548.
- 15 -
In the first quarter of 1999, management made the decision to suspend new
installations of wireless cable television service based on the current
costs of these installations, which management believes exceed the
anticipated subscriber revenues. This suspension will remain in effect
until management can evaluate alternatives for performing the
installations in a more cost effective manner.
Note K - Going concern:
The Company has emerged from Chapter 11 Bankruptcy. The Company's ability
to continue as a going concern depends, in part, on its ability to develop
new markets for its MMDS frequencies including, but not limited to, high
speed Internet access, and to raise new capital through public offerings
of the Company's stock. There can be no assurance that the Company will
successfully develop new markets for its services, or that sales of the
Company stock will generate sufficient working capital to offset operating
losses.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following information should be read in conjunction with our financial
statements and notes appearing elsewhere in this registration statement. This
registration statement contains forward-looking statements. The words,
anticipate, believe, expect, plan, intend, estimate, project,
could, may, foresee, and similar expressions are intended to identify
forward-looking statements. These statements include information regarding
expected development of our business and development of the wireless cable TV
and Internet access service business where we will focus our marketing
efforts. These statements reflect our current views about future events and
financial performance and involve risks and uncertainties, including without
limitation the risks described in Risk Factors. Should one or more of these
risks or uncertainties occur, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated.
Among the factors that could cause actual results to differ materially are
the following: a lack of sufficient capital to finance our business strategy
on terms satisfactory to us; pricing pressures which could affect demand for
our services; changes in labor, equipment and capital costs; our inability to
develop and implement new services such as wireless broadband access and
high-speed Internet access; our inability to obtain the necessary
authorizations from the FCC for such new services; competitive factors, such
as the introduction of new technologies and competitors into the wireless
communications business; or our Company's failure to attract strategic
partners; general business and economic conditions; inexperience of
management in deploying a wireless broadband access business.
The information in this quarterly report should be read in conjunction with
the detailed description of the Company contained in Amendment No. 2 to our
Form 10-SB filed with the Securities and Exchange Commission on December 14,
1999.
On June 3, 1999, the U.S. District Court for the District of Oregon ruled
that the City of Portland and Multnomah County could adopt open access
ordinances, requiring AT&T Corp to allow ISPs who are unaffiliated with AT&T
to connect their equipment directly to AT&T's cable modem platform, bypassing
AT&T's own proprietary cable ISP. The court ruled that the city and county
ordinances are not preempted by federal laws, including the FCC's regulation
of cable television. The court's decision would allow local governments to
mandate existing cable TV operators to permit unaffiliated, competing ISP's
to use the cable lines to provide service to homes and businesses. Coaxial
cable permits Internet access at much higher speeds than can be had over
telephone lines including ISDN lines.
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AT&T has appealed the Oregon court's decision, and on August 16, 1999, the
FCC filed a friend of the court brief with the ninth circuit which also urged
the court to overturn the district court decision. The decision raises major
uncertainties for the future of wireless Internet access services like ours.
For instance, open access to cable lines could greatly increase the
competitiveness of ISP's in high speed access, because they could provide
high speed access over existing cable lines without making the capital
investment required for a cable system. In addition, the court's ruling may
mean that state and local governments have authority impose a variety of
additional regulations on the Internet. We are uncertain how the Oregon
decision may affect our business. If the decision is allowed to stand, it may
adversely affect our business in many unforeseen ways, including greatly
increasing high speed Internet competition or by permitting additional local
regulations that restrict our business or raise our cost of doing business.
Recent Events
Debt Repayment
On July 1, 1999, we paid Oscar Hayes, one of our directors, $75,000 to repay
the outstanding principal amount of a secured loan that Mr. Hayes made to us
in 1997. We did not pay the accrued, unpaid interest on the debt to Mr.
Hayes, and the accrued interest remains due and unpaid, secured by a lien on
our FCC licenses, contracts, accounts receivable, equipment leases and other
assets. Mr. Hayes has not demanded payment of the unpaid interest, but
neither has he waived his right to demand payment or declare a default. We
are negotiating with Mr. Hayes about the terms of our interest payment.
Acquisition of Dibbs Internet
On August 25, 1999, Advanced Wireless Systems, Inc. (the Company) purchased
all of the assets of Dibbs Internet Services, Inc. (Dibbs), an Alabama
corporation, an Internet service provider in Mobile, Alabama, for a purchase
price of $225,000. Dibbs provides Internet services to approximately 730
Internet customers in the Mobile metropolitan area via dial-in telephone line
access. We will continue offering Dibbs customers the telephonic Internet
service that they have now, and we will also offer them the opportunity to
convert to use of our high speed wireless Internet service.
We acquired the Dibbs assets used in the operation of its Internet service,
including its equipment, software, and the right to use the Dibbs trade name,
for $225,000 cash, paid in full on August 25, 1999, to Dibbs and its sole
shareholder and president, Diane Summers. We negotiated the purchase price
with Ms. Summers, who is not affiliated with our Company, in arms-length
negotiations. We used cash from our working capital reserves to pay the
purchase price. We did not assume any liabilities of Dibbs in the
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transaction. The assets purchased include the equipment necessary to service
the Dibbs subscribers, including three computers, two network hubs, a Cisco
2500 router, software, a backup power supply and other network accessories.
Dibbs services 730 subscribers, who use 56k, 64k or 128k ISDN telephone
services and e-mail dial-up services. The Dibbs basic service begins at
$19.95 per month. The subscriber base includes 58 domains and 47 commercial
websites. In the first three
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months of 1999, Dibbs had average net income of $6,179 per month based on
average revenues of $16,795 per month.
The asset purchase agreement includes a two year non-competition clause in
which Dibbs and Ms. Summers agree not to compete with our Company in
providing Internet services within a 75 mile radius of Mobile for two years.
Ms. Summers provided consulting services to us, to help us take over and
operate the Dibbs business, for two months after the purchase, for $1,200 per
week.
Financial statements for Dibbs and a pro forma consolidated balance
sheet and pro forma consolidated statement of operations of Advanced
Wireless, are included in Amendment No. 2 to our Form 10-SB, filed with the
SEC on December 14, 1999.
Impairment of Long-Lived Assets
In the second quarter of 1999, after considering our history of operating
losses and the uncertainty of future operating losses, changes in the
Company's strategic direction, and certain industry factors, the Company
determined that assets with a carrying value of $465,500 had been impaired
according to the provisions of SFAS No. 121. The Company recorded an
impairment loss of $303,797 as of June 30, 1999, to write down the carrying
value of such assets to their estimated fair value. Fair value was based
on recent transactions in the wireless cable industry, including changes
in the Company's use of these assets, and estimates of the future earnings
form alternative uses for these assets.
Results of Operations for the Nine Months Ended September 30, 1999, as
Compared to the Nine Months Ended September 30, 1998
During the nine months of 1999, we discontinued new installations of our
cable TV service because it appeared to be unprofitable, and focused on
generation of new business from Internet access service, of both the land
based (telephonic) and microwave kinds. For the nine months ended September
30, 1999, we had a net loss from operations of $953,985, which was a $456,452
(92%) increase from our operating loss of $497,533 in the first nine months
of 1998. Much of this increased loss can be attributed to a $303,797 write
down of the carrying value of impaired wireless cable assets in 1999, to
reflect more accurately their estimated value. The write down was based on
recent transactions in the wireless cable industry, including changes in the
Company's use of these assets, and estimates of the futures earnings from
alternative uses for these assets. Our increased operating loss in the first
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nine months of 1999 also resulted in part from increased general and
administrative costs as we prepared for expansion of our Internet services.
Our basic loss per share was $.23 in the first nine months of 1999, whereas
the basic loss per share was $.14 in the first nine months of 1998.
The Dibbs acquisition increased the number of our Internet customers from
about 260 to about 1,000 and substantially increased our cash flow from
operations, though it did not increase cash flow enough to make us
profitable overall. We acquired Dibbs in August 1999. For the quarter ended
September 30, 1999, our total income was $48,199. This represents an increase
of $27,915 (137%) from total revenue of $20,284 in the quarter ended June 30,
1999 and an increase of $12,860 (36%) from total revenues of $35,339 in the
quarter ended September 30, 1998. Revenue from the Dibbs subscribers
accounted for nearly all of this increase.
In the first nine months of 1999, we ceased new cable TV installations and
improved our operating efficiency. We hired a general manager and office
manager who were much more qualified on the technical side of our business
and who were able to improve our operating efficiency in offering Internet
service. For financial statement purposes, we consider operating expenses to
be costs such as entertainment programming expense, channel lease expense,
wireless cable equipment installation, maintenance and supply expense.
Operating expenses decreased by $18,564 (13%) to $123,548, down from $142,112
in the nine months of 1998. We substantially decreased operating expenses by
negotiating a reduction of $800 per month in our monthly lease rate for one
of our channel leases (from $2,000 to $1,200 monthly).
Our loss in the first nine months of 1999 was mainly due to increased general
and adminstrative expenses, more than offset our slight increase in total
income. For financial statement purposes, we consider general and
administrative expenses to be indirect costs of running the company, such as
office rent, employee compensation, consulting and professional fees. Through
September 30, 1999, general and administrative expenses were $476,376, a
$255,672 (116%) increase from first nine months' 1998 G & A expenses of
$220,704. We attribute the increase mainly to increased salaries and
professional fees in 1999 compared to 1998, as we incurred legal and
accounting expenses in preparation of this registration statement and in
negotiating for possible acquisitions of other businesses. Professional and
consulting fees totaled $140,807 for the first nine months of 1999, compared
to 29,786 in the same period in 1998. Salaries also increased in the first
nine months of 1999 to $147,613, compared to $99,599 for the same period in
1998. We were able to achieve economies of scale in employee expenses, but an
overall increase in staff size accounted for this increase, as we hired
additional technical employees to service the Internet operations.
Our new general manager and office manager, together with our president, we
took several cost savings steps in late 1998 and early 1999. The monthly
salaries of the new general manager and office manager were $1,666 less than
the individuals they replaced. We returned some cellular telephones used in
the field, saving $200 per month. We eliminated three telephone lines saving
$180 per month. We eliminated outside contractors for installations and
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networking office personal computers and began doing that work with our own
personnel, saving about $800 per month. We changed the carrier for PRI lines,
saving $700 per month. These savings total about $4,840 monthly.
Depreciation and amortization expenses declined by $69,914 to $140,953 in the
first nine months of 1999, a 33% drop from depreciation and amortization
charges of $210,867 in the first nine months of 1998, primarily because some
short-lived equipment became fully depreciated by the end of 1998. We
depreciate substantially all of our capitalized assets using the straight-
line method.
Interest expense was approximately the same the first nine months of 1999 as
in the same period in 1998 but decreased for the quarter ended September 30,
1999, compared to the quarter ended June 30, 1999. The interest charges are
from loans made to us by two of our directors during 1997 and 1998 to fund
our continued operations. On July 1, 1999, we repaid a $75,000 loan from one
of the directors. As a result, interest charges in the third quarter of 1999
were $3,938 compared to $5,625 in the second quarter. The remaining loan from
a director has matured, and the interest and principal is due and payable in
full. The lender has neither demanded repayment nor declared a default in the
loan, but he also have not waived his right to do so. The loan is secured by
nearly all of our assets, including our wireless frequency licenses. If we
are unable to renegotiate or settle thisdebt, the lender could demand
repayment of the loan and foreclose on our property, in which case we would
be unable to continue operations.
CAPITAL RESOURCES AND LIQUIDITY:
As discussed in Note K to our financial statements, our ability to continue
as a going concern depends, in part, on our ability to develop new markets
for our MMDS frequencies including, but not limited to, high speed Internet
access, and to raise new capital through public offerings of our stock. We
cannot be sure that we will successfully develop new markets for its
services, or that sales of our stock will generate sufficient working capital
to offset operating losses.
Operating Activities
In the first nine months of 1999, cash used in operating activities was
$495,907, compared to $336,382 in the first nine months of 1998. Our
operating loss rose in the first nine months of 1999 compared to 1998 as we
increased operations and hired staff to ramp up our Internet business.
Investing Activities
In the third quarter of 1999, we purchased Dibbs Internet Services, Inc.,
for $225,000 cash. Of that amount, we recorded $208,005 as goodwill, to be
amortized over the next 3 years. This is the first such acquisition since we
emerged from bankruptcy.
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For the nine months ended September 30, 1999, we spent $31,941 to purchase
additional equipment for our Internet service operations in Mobile, compared
to $27,072 spent on equipment purchases in the same period in 1998. While
first nine months' spending on equipment was up for 1999 compared to 1998, we
expect overall property and equipment purchases and investing activities to
be lower for the 1999 fiscal year than for fiscal 1998.
Financing Activities
In the first nine months of 1999, we raised another $872,624 from the
exercise of warrants issued as part of the Mobile Wireless L.L.C. Plan of
Reorganization. These funds were again used to meet operating expenses. In the
first nine months of 1998, we raised $12,000 from the sale of warrants,
$185,850 from sale of debtor certificates and $75,000 from a loan from one of
our directors. These amounts were partially offset by discharging post-
petition liabilities of $138,320. In July 1999, we repaid the director's
loan.
PART II
Item 2. Changes in Securities
During the three months ended September 30, 1999, the Company issued 201,967
shares of common stock to existing shareholders pursuant to the exercise of
warrants. The Company received total consideration of $195,202 upon exercise
of the warrants. These warrants were originally issued in 1998 pursuant to
the confirmed Plan of Reorganization of Mobile Wireless L.L.C., the Company's
predecessor. Both the warrants and the stock issued pursuant to their
exercise were issued under an exemption from the registration requirements of
the Securities Act of 1933 pursuant to Section 1145 of the U.S. Bankruptcy
Code.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement to Purchase Assets between Advanced Wireless Systems,
Inc., and Dibbs Internet Services, Inc., incorporated by reference
to Exhibit 2.1 of the Company's Form 8-K report dated August 25,
1999.
2.2 Bill of Sale from Dibbs Internet Services, Inc., to Advanced Wireless
Systems, Inc., incorporated by reference to Exhibit 2.2 of the
Company's Form 8-K report dated August 25, 1999.
27.1 Financial Data Schedule
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(b) Reports on Form 8-K
We filed a report on Form 8-K dated August 25, 1999, to report that we had
purchased Dibbs Internet Services, Inc., an Alabama corporation, an
Internet service provider in Mobile, Alabama, for a purchase price of
$225,000. We filed an amendment to this 8-K on December 1, 1999, to include
pro forma financial statements accounting for the purchase.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED WIRELESS SYSTEMS, INC.
Date: March 3, 2000 /s/
---------------------------------
Monte Julius, President
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