SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 Number)
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 143,793 115,078
------------------ -------------------
Other assets
Deposits 11,400 15,900
License Acquisition Costs,
net 178,781 256,962
Intangibles, net 180,119 10,189
------------------ -------------------
Total Other Assets 370,300 283,051
------------------ -------------------
TOTAL ASSETS $671,458 $519,854
------------------ -------------------
------------------ -------------------
(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 54,034 438,847
------------------ ------------------
TOTAL LIABILITIES 239,958 300,078
------------------ ------------------
Stockholders' Equity:
Common stock, $.01 par value,
50,000,000 shares authorized;
4,761,230 and 3,658,518 shares
issued and outstanding at
September 30, 1999 and December
31, 1998, respectively 47,612 38,320
Additional paid in capital 2,922,616 2,059,284
Accumulated deficit (2,538,728) (1,877,828)
------------------ ------------------
Total Stockholders' equity 431,500 219,776
------------------ ------------------
Total Liabilities and
Stockholders' Equity $ 671,458 $ 519,854
------------------ ------------------
------------------ ------------------
(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 41,569 51,177 136,477 189,297
---------- ----------- -------- ----------
Total costs and
expenses 251,716 172,653 736,401 552,113
---------- ----------- -------- ----------
Net loss from
operations (203,517) (137,314) (645,712) (475,963)
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 (207,455) (142,426) (660,900) (489,068)
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Basic Loss Per Share $ (.04) $ (.04) $ (.14) $ (.14)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Weighted Average Number
of Shares Outstanding 4,665,480 3,433,518 4,665,480 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 $ (660,900) $ (489,068)
Adjustments to reconcile
net loss to net cash from
operating activities:
Depreciation and amortization 136,477 189,297
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)
--------------------- --------------------
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
--------------------- --------------------
(Continued)
(See Notes to Financial Statements)
- 5 -
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,
December 31, 1998 3,832,009 $ 38,320 $ 2,059,284 $ (1,877,828)$219,776
(Audited)
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 - - - (660,900)(660,900)
Balance, June 30,
1999 (Unaudited) 4,761,228 $ 47,612 $ 2,922,616 $ (2,538,728)$ 431,500
----------- ---------- ----------- ---------- --------
----------- ---------- ----------- ---------- --------
(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). 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, and the legal
reorganization and asset transfer have been presented at December 31,
1997, in order to produce comparative statements consistent with
principles applicable to pooling accounting. 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
- 8 -
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 - As discussed in Note I,
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 15 years
Organization costs 5 years
Non-compete agreement 2 years
Amortization expense related to these assets totaled $9,820 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
Commissions (FCC), including channel lease acquisition costs. These
costs are deferred and are amortized ratably over 15 years. In 1997, the
Company recorded a prior period adjustment to reduce the carrying value
by $303,797 because an impairment of the assets existed at December 31,
1997, but had not been recorded in accordance with the provisions of
SFAS 121. 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 $49,000 and
$.02 per share, respectively. Accumulated amortization related to these
costs was $342,421 at September 30, 1999 (unaudited), and $264,241 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.
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 outstanding
warrants had original expirations of May 31, 1999, but were subsequently
extended until January 14, 2000.
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Note A - Significant accounting policies - (continued):
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:
During the third quarter of 1999, the Company entered into an agreement to
purchase certain equipment, customer base, Internet domain registrations,
and other assets of an Internet service provider. The total purchase
price was $225,000. The price was allocated as follows: $45,250 for the
equipment, $177,250 for the goodwill; and $2,500 for the two year non-
compete agreement.
Note D - Fixed Assets:
Furniture and equipment are summarized as follows:
- 11 -
Note D - Fixed Assets - (continued)
September 30, December 31,
1999 1998
(Unaudited) (Audited)
---------------- -----------------
Cost:
Machinery and equipment $ 643,377 $ 566,486
Furniture and fixtures 21,801 21,801
Autos and trucks 5,325 5,325
Subscriber premises equipment 38,160 47,700
Accumulated depreciation (565,170) (526,234)
---------------- -----------------
$ 143,793 $ 115,078
---------------- -----------------
---------------- -----------------
Note E - Intangibles:
Intangibles consist of the following:
September 30, December 31,
1999 1998 1997
(Unaudited) (Audited) (Audited)
-------------- ---------- ---------
Purchase goodwill $ 177,250 $ - $ -
Organization costs 67,926 67,926 67,926
Non-compete agreement 2,500 - -
Accumulated amortization (67,557) (57,737) (44,152)
-------------- ---------- ---------
$ 180,119 $ 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.
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Note F - Operating leases - (continued):
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.
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
- 13 -
Note H - Debtor certificates - (continued):
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.
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.
- 14 -
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.
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.
- 15 -
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.
- 16 -
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
transaction.
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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 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, including a statement of historical revenues
and direct operating expenses of 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, file with the
SEC on December 14, 1999.
Impairment of Long-Lived Assets
After considering the Company's history of operating losses and the
uncertainty of a continuation 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 $620,848 had been
impaired at December 31, 1997, according to the provisions of SFAS No.
121, recorded a prior period adjustment and wrote down the carrying value
of such assets by $303,797 as of December 31, 1997, 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 from 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 $645,712, which was a $169,749
(36%) increase from our operating loss of $475,963 in the first six months of
1998. Our basic loss per share was $.14 in the first nine months of 1999,
the same basic loss per share as 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
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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 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 $52,820 to $136,477 in the
first nine months of 1999, a 28% drop from depreciation and amortization
charges of $189,297 in the first nine months of 1998, primarily because some
short-lived equipment became fully depreciated by the
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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 $177,250 as goodwill, to be
amortized over the next 15 years. This is the first such acquisition since
we emerged from bankruptcy.
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.
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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 $156,986 from the sale of warrants
and we received a $75,000 loan from one of our directors. In July 1999, we
repaid this 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
(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: /s/ 12/14/99
---------------------- -------------------------------
Monte Julius, President
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