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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2000
Commission file number 0-23598
NATIONAL WIRELESS HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3735316
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
156 West 56th Street, Suite 2001, New York, New York 10019
(Address of principal executive offices and zip code)
(212) 582-1212
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 Par Value
Rights to Purchase Series A Junior Preferred Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $36,646,000 as of January 24, 2001, based upon
the last sales price per share of the Registrant's Common Stock, as reported on
the Nasdaq Small Cap Market on such date. As of January 24, 2001, 3,333,000
shares of Common Stock, $.01 par value, of the Registrant were outstanding.
Portions of Registrant's Proxy Statement for use in connection with the
Annual Meeting of Stockholders scheduled to be held in April, 2001 are
incorporated by reference into Part III of this report, to the extent set forth
therein, if such Proxy Statement is filed with the Securities and Exchange
Commission on or before February 28, 2001. If such Proxy Statement is not filed
by such date, the information required to be presented in Part III will be filed
as an amendment to this report. The exhibits for this Form 10-K are listed on
Page 23.
NATIONAL WIRELESS HOLDINGS INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 8. Consolidated Financial Statements 21
Item 9. Changes in and Disagreements
on Accounting and Financial Disclosure 21
PART III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management 22
Item 13. Certain Relations and Related Transactions 22
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 23
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PART I
ITEM 1. BUSINESS
THE COMPANY
National Wireless Holdings Inc. ("NWH" or the "Company"), a Delaware
corporation organized on August 31, 1993, is an electronic commerce and
communications company focusing primarily on acquisition and operation of
telecommunications, e-commerce and other strategically linked businesses. The
Company currently owns and operates Electronic Data Submission Systems, Inc.
(EDSS), a business-to-business healthcare e-commerce data interchange company,
providing links between healthcare providers and payers. The Company also owns
and operates a satellite programming uplink facility. In addition to these
businesses, the Company continues its business of acquiring controlling
interests in telecommunications, healthcare and other strategically linked
areas. The Company may acquire or invest in other businesses. In June 1997, the
Company sold its wireless cable assets in Miami Florida in exchange for common
stock of BellSouth Corporation.
The Company's executive offices are located at 156 West 56th Street, Suite
2001, New York, New York 10019, telephone: (212) 582-1212.
ELECTRONIC DATA SUBMISSION SYSTEMS, INC.
GENERAL
NWH manages EDSS and owns over 80% of EDSS's outstanding stock.
EDSS is a leading healthcare transactions-processing intermediary. At
EDSS, we execute a full-cycle suite of payer-driven services and products known
as Health-e Network(TM) that establishes a transactions processing environment
for payers, physicians and other healthcare providers, including hospitals and
laboratories. Our services and products create healthcare e-commerce
connectivity between payers, physicians and other healthcare providers, (2)
significantly reduce the volume of paper healthcare transactions and processing
errors, and (3) set a clear migration path for payers, physicians and other
healthcare providers to utilize Internet and Web-based applications and services
effectively for greater operational efficiency. We believe Health-e Network(TM)
is one of very few solutions addressing the need to handle both paper and
electronic transactions on behalf of its customers, and by which, the company
greatly reduces or eliminates the inefficient paper transactions by educating
the participants and providing them with the applications and support they need
to conduct business electronically.
In excess of 15,000 providers are connected to our e-commerce and Internet
services and, through our payer contracts, we currently conduct daily paper to
e-commerce claim conversion for another 185,000 healthcare providers. Our
revenues are generated from payers, physicians,
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other providers and strategic partners through recurring subscriptions, flat or
per transaction fees and revenue sharing. As of January 10, 2001, we were
connected to over 800 commercial healthcare plans, managed care organizations
and Blue Cross/Blue Shield plans, as well as Medicare, Medicaid and CHAMPUS.
We focus on the current and future connectivity and transactions
processing requirements of the healthcare industry. We provide healthcare
providers with a secure infrastructure for web-based and private network
transactions consisting of, among others, electronic medical claims processing,
electronic claims tracking and patient eligibility verification. We also provide
health care payers e-commerce connectivity with their provider constituency as
well as paper claims conversion, pre-adjudication, reporting, education and
marketing support to increase utilization of e-commerce. Our strategy for the
future is to facilitate the migration of its provider and payer clients from
their current inefficient, non-integrated transactions processing environments
to efficient, seamlessly integrated applications utilizing the transactions
processing capabilities of Health-e Network(TM). Traditional applications linked
to on-all-the-time Internet capabilities or Application Service Provider (ASP)
environments will be able to route real-time transactions to and from all payers
utilizing Health-e Network(TM). We believe that the transition to these new
levels of integrated transactions processing capabilities will drastically
change how the business of healthcare is conducted among healthcare
participants. We plan to continue to expand this transactions infrastructure as
management believes these applications will evolve into viable and widely used
systems over the next three to five years.
PRODUCTS AND SERVICES - HEALTH-E NETWORK(TM)
Health-e Network(TM) is a full-cycle suite of e-commerce products and
services serving the transactions processing needs of payers, physicians and
other healthcare participants. The products and services include simple mailroom
services, advanced pre-adjudication software for payers, front-end data
capture/transmission software and real-time web-based e-commerce applications
for providers, all developed to enhance the provider's and payer's
administrative efficiency. Health-e Network(TM) addresses 100% of the industry's
claims clearing processes (both e-commerce and paper). As of January 10, 2001,
over 800 of our payer plans utilized the e-commerce claims component of Health-e
Network(TM) and eight payer organizations contracted for the full suite of payer
services.
Health-e Network(TM) includes the following:
o WINHECET(TM), WEBHECET(TM) AND WEBENTRY(TM) are our provider software
applications that are installed and accessed by providers to conduct
electronic healthcare transactions. WinHECET(TM) is a Windows-based system
that operates in conjunction with the majority of major provider practice
management systems. WebEntry(TM) enables direct entry of provider claims data
into our website. Both of these provider front-end products edit, translate
and provide secure transmission of claims from provider offices to our data
centers. Our WebHECET(TM) product is in the initial stages of development and
will provide a broader array of transaction types and services than the two
aforementioned products combined.
o AUTOMATED DOCUMENT SERVICES(TM) (ADS(TM)) provides payers the complete
front-end
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handling and conversion (imaging/scanning) of paper claims forms to an
e-commerce format. Paper claims still constitute from 55-60% of provider
claims volume industry-wide to commercial payers. As the claims are converted
to an electronic format, EDSS captures the names of all paper-submitting
providers in order to solicit them for other e-commerce products and services
with the payer's support. Utilization of Health-e Network(TM) (which includes
ADS(TM)) provides a payer with the opportunity to have 100% e-commerce claims
receipts. With us as their partner and core strategy implementer, payers can
increase e-commerce transactions from their provider constituency.
o PRE-ADJUDICATION SOFTWARE SYSTEM(TM) (PASS(TM)) provides a single
connectivity entry point (a software "hub") to a payer for all claims
transactions, including transactions received via the Internet, through
private e-commerce networks, and received on paper. While channeling the
claims by utilizing our customized and algorithm-based software, PASS
conducts the vital claims processing function of provider and member
matching, including real-time eligibility verification, a critical payer
requirement for increased claims paying accuracy and efficiency. Our PASS is
an open, flexible solution that is used with the vast majority of today's
payer operating environments. Expanded functionality (such as enhanced
electronic claims routing and workflow into payers claims processing systems)
is regularly added to PASS(TM) in our custom configuration of this software
application.
o INTERNET MEMBER PLAN ELIGIBILITY is a EDSS service that provides physician
practices with immediate access to the nine major industry payers plus
various regional and governmental payers for determining member plan
eligibility. This service is delivered over the Internet and receives
constant updating.
o ELECTRONIC CLAIMS TRACKING (ECT(TM)) provides immediate Internet-based
tracking of both e-commerce claims and, for those payers utilizing Health-e
Network(TM), up-dated status on the paper claims that have been converted to
an e-commerce format. We believe that this is the first product that affords
providers the opportunity to utilize an Internet application to check on the
status of "all-payer" healthcare claims.
o STRATEGIC PARTNERS SERVICES. EDSS is partnering with other related healthcare
application and service suppliers who offer a complement to the services
relevant to the provider customers currently using Health-e Network(TM).
These include practice management systems (both client/server and ASP client
models) who have integrated our transactions processing capabilities into
their applications. In the future, we may also partner with companies
offering pharmacy services, transcription, clinical messaging, continuing
medical education, medical supplies, credentialing, and other services in
order to add value to the existing offering and increase revenues.
o DIRECT-PAYER EDI provides network connectivity to payer organizations from
existing physicians and gateways. This is usually the initial step for a
payer working with us.
o CUSTOMER SERVICE. As an adjunct to its transaction processing services, we
maintain customer service facilities with help desks for real-time customer
inquiries. We offer on-line and personal technical support. Client support
employs a modern call tracking and response
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system that is directly connected to the processing center. Customer support
services, available via telephone, are frequently included in the contract
price for transaction processing services, but may also be billed separately,
depending upon the specific contract terms. We also offer other services,
such as on-site product training and installation. For example, an extensive
three-part training program facilitates a provider's transition from paper to
e-commerce.
STRATEGY
Our strategy is to continue to expand the transaction types and
transaction volumes currently being processed by the organization. We have a
strong commitment to healthcare's current transaction processing requirements
while pursuing a strong Internet strategy. We recognize the necessity to manage
and develop both environments while establishing a clear migration path that
combines the best capabilities of both. We believe that successfully managing
this dual track will result in steadily growing revenues and profitability. We
seek to establish a predictable recurring revenue base by entering into
multi-year agreements.
To accomplish the strategy, EDSS co-markets its services with payers to
physicians conducting paper claims transactions, thus leveraging its payer
client base. We are also working to establish revenue-based partnerships with
other e-health organizations serving both the provider and payer markets. On the
provider side, we are forming new partnerships with practice management software
vendors by which these vendors are integrating our transactions capabilities
programmatically into their software applications. Vendors are also adding
Health-e Network(TM), e-commerce customer service and support components into
their core service offerings to providers. With payers, new contracts are under
negotiation with additional large and small health plans for e-commerce, ADS and
PASS. These contracts will continue to increase transactions volumes and
co-marketing exposure.
In the future, EDSS may also partner with companies offering pharmacy
services, transcription, clinical messaging, continuing medical education,
medical supplies, credentialing, and others in order to add value to the
existing offering and increase revenues. The products and services of these
partners can be integrated into the EDSS offering, or certain EDSS products and
services will become a part of its partners' respective offerings. This will
further expand our sales. In addition, we will seek to establish revenue-based
relationships with other e-health organizations whose offerings will be included
on the EDSS website.
We will also seek to accelerate our growth by continuing the development
and expansion of our e-commerce and Internet offerings accompanied by the
broadening of our marketing as a result of new payer and strategic partner
relationships. We are also continually exploring growth through acquisitions
with companies that may compliment the business model. EDSS has not entered into
any agreements for acquisitions at this time.
INDUSTRY
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We believe that healthcare information services will continue to be one of
the fastest growing segments within the healthcare industry, and the use of
e-commerce and the Internet (though in their early stages) will dramatically
increase over the next 3-5 years as a major component of daily operations for
healthcare industry participants.
Demand for our services is driven by three factors. First, payer
organizations are tightening their budgets and lowering reimbursements to
providers. Payers must secure outsourcing services that bring them greater
efficiencies and support higher levels of electronic transaction processing
between them and their respective provider networks. Second, the payer community
is focusing on decreasing operating costs and increasing profit margins. Payers
have an incentive to increase the use of e-commerce and the Internet because
electronic transactions cost payers less to administer. By contracting with EDSS
for utilization of our products and services, payers have an opportunity for
fixed cost pricing and significant levels of overhead reduction. Third,
government and industry legislation and rulemaking, especially the Health
Insurance Portability and Accountability Act (HIPAA), the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO), industry accreditation groups
such as NCQA and organized lobbies representing provider groups are requiring
electronic claims reimbursement in an effort to recognize efficiencies gained by
electronic data exchange and to shorten the payment cycle. These regulations are
also driving the development and standardization of many other electronic
healthcare transaction types for additional administrative simplification. As a
result, payers are moving to outsource many primary transactions processing
functions (i.e. paper claims, imaging/scanning, e-commerce implementation,
pre-adjudication, mailroom services, etc.) to reduce their internal information
technology staffing costs, meet government regulations, as well as partnering to
achieve increased levels of provider connectivity.
EDSS presents significant opportunities, especially in the physician
market. According to the 2000 Health Data Directory, 64.5% of claims are
submitted electronically via third parties or on a direct basis to payers. The
largest share of electronic claims (including 89% of Medicaid and 84% of
Medicare) are sent to the government, which requires electronic transmission. Of
the payers, commercial and managed care organizations receive the lowest
percentage of electronic claims (45% and 18%, respectively). Of the providers,
hospitals send the most electronic claims (84.5%) and physicians send the least
(43%).
Growing interest in electronic healthcare administrative and financial
transactions has resulted from the anticipated lower costs of adopting and
utilizing the Internet. The healthcare industry's continuing reliance on paper
and manual processing is costly and inefficient, a status making it a prime
target for many of the latest workflow technologies. According to the U.S.
General Accounting Office (GAO), $0.20 of every healthcare dollar is spent on
administrative costs. The promise of the Internet has been met with a flurry of
companies offering all levels of new Internet-based services to the healthcare
industry. Although technically the efficiencies are clearly available,
healthcare as an industry moves slowly and adoption and integration of these
offerings into daily practice has so far been at a very low level.
The Administration Simplification Act (AS), Section F of HIPAA, requires
the adoption of eight standard financial and administrative formats to enable
health information to be exchanged electronically, thus improving the efficiency
and effectiveness of the health care system. HIPAA-AS should accelerate the
number of electronic claims, and related transactions,
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such as eligibility, enrollments and disenrollments, etc. As payers must develop
the capacity to accept or send HIPAA-AS mandated transaction sets, payers can
look to third parties such as Health-e Network to accept or send transaction
information on their behalf. Management believes that the combination of HIPAA,
NCQA, and other healthcare lobbying groups should drive the growth of batch
(medical) claims, real-time transactions, and claims outsourcing processes.
COMPETITION
EDSS faces potential competition in the healthcare e-commerce market not
only from other companies that are similarly specialized, but also from
companies involved in other, more highly developed sectors of the electronic
transaction processing market. Such companies could enter into, or focus more
attention on, the healthcare transaction processing market as it develops.
In the electronic data interchange business, EDSS competes against
traditional claims clearinghouses, such as ENVOY (a division of
Healtheon/WebMD), National Data Corp., Per-Se Technologies, ProxyMed, ClaimsNet
and others. EDSS also competes with legacy practice management systems vendors
offering a claims processing component. In addition, EDSS faces competition by
selected providers bypassing EDSS's electronic network and going directly to the
payers.
In newer areas of real-time connectivity, EDSS competes against entrants
such as Healtheon/WebMD, MedicaLogic, XCare.net and others. Until now there has
been lower demand in this area and fewer available buying dollars from an
industry still dealing with today's transaction processing challenges.
Factors influencing competition in the healthcare market include (i)
compatibility with the provider's software and inclusion in practice management
products and (ii) relationships with third-party payers, including managed care
organizations. EDSS believes that the most significant factors in developing and
maintaining relationships with its customers are the breadth, price and quality
of EDSS's products and services, provider level support and EDSS's ability to
address its customers' current needs effectively while facilitating the
transition to high levels of utilization of Internet applications. We seek to
establish a predictable recurring revenue stream by entering into multi-year
agreements.
SALES AND MARKETING
EDSS develops and maintains payer, provider and vendor relationships
through our sales and marketing personnel located in five geographic regions.
Our sales and marketing strategy focuses on selling our services to providers
either directly, through sales representatives and through organizations, such
as healthcare finance consulting firms, practice management software firms and
third party administrators that have relationships with or access to a large
number of providers. We develop long-term relationships with third party payers
and other large submitters of claims. In addition, we work closely with practice
management system vendors to provide an integrated solution to providers.
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Some of our payers co-sponsor marketing seminars and on-site meetings with
providers for WinHECET(TM) and HECET(TM) front-end software with providers.
These seminars are one of our most effective marketing tools, second only to our
interactive demonstration and installation CD-ROM that is mailed out or
presented by sales associates to providers. As of December 2000, approximately
15,500 physicians were actively submitting claims via Health-e Network(TM) with
scheduled installation backlog of pproximately 2,000 providers for its
WinHECET(TM) product.
CUSTOMERS
Our principal customers consist of healthcare providers, such as
physicians, hospitals, clinics and billing services, and third-party payers,
such as indemnity insurers, managed care organizations, preferred provider
organizations, claims submitters and state/federal governmental agencies. In
addition, Health-e Network markets its services indirectly to providers and
payers through third party administrators, aggregators, consultants and
accountants. QualMed, Inc. and Benesight accounted for 16% and 14%,
respectively, of total revenues during fiscal 2000. QualMed accounted for 12% of
total revenues during fiscal 1999.
We typically provide real-time services to customers under contracts that
are not exclusive and generally do not guarantee a specific transaction volume
or revenue stream. The pricing of our services both on a monthly and per-claim
basis is set under contracts typically having terms of one to seven years,
subject to a variety of early cancellation arrangements.
We enter into contracts with providers, payers and other claim submitters,
such as third party administrators, practice management system vendors,
clearinghouses and billing services. Our claim submitter contracts often contain
exclusivity provisions whereby the submitter agrees to process all claims
through us, provided that we have network access to the payer.
OPERATIONS
We deliver our services via a state-of-the-art network comprised of
multiple servers, a mixture of commercial and Health-e Network(TM) proprietary
software, high-speed Ethernet connections, and dial-up and private-line
connections to/from customers.
Our computer network provides for multi-path host access with a high
degree of accuracy and integrity. It was designed to operate continuously and
was constructed and engineered with fault tolerance and redundancy in mind.
Servers are typically configured with redundant hard drives, multiple power
supplies, and multiple processors. Power is provided via uninterruptible power
supply systems. The software and related data files that are maintained and
processed on the network are backed up nightly and stored off-site from the data
center.
Our communications network consists of redundant connections to the
Internet as well as private, direct connections to payers ranging from DSO's to
full T-1's. The communications network also includes expansive facilities for
analog transfer of data to and from providers. The
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entire network is designed to facilitate secure, electronic, real-time
communications among payers, providers and other users, of critical and
sensitive healthcare information.
PROPRIETARY RIGHTS
We own certain of the software and systems designs that we use and has a
limited, perpetual, nonexclusive, royalty-free license to use other software and
systems designs. We also license certain other software from third parties.
Our success is dependent in part upon electronic transaction processing
technology developed by us. We have not sought patents or copyright protection
for any of our software or related technology. A combination of trade secrets,
service mark and contract protection is used to establish and protect that
technology. There can be no assurance these legal protections and the
precautions will be adequate to prevent misappropriation of technology used by
us. Furthermore, the legal protections do not prevent independent third-party
development of competitive technology.
NAME CHANGE
Electronic Data Systems (EDS) recently filed an opposition to our
application for trademark protection for our logo, EDSS, allegedly because
use of the mark is likely to cause confusion with its products and services.
Although we continue to dispute EDS' claim, we expect to settle the matter
with them. We plan to change our name and logo within the next year to
reflect the expansion of our healthcare and e-commerce services beyond the
clearinghouse functionality.
GOVERNMENT REGULATION AND HEALTHCARE REFORM
The healthcare industry is highly regulated and subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operation of healthcare organizations. Our products are designed
to function within the structure of the healthcare financing and reimbursement
system currently being used in the United States. Changes in such systems could
result in the need for unplanned product enhancements, delays or cancellations
of product orders or shipments, or the revocation of endorsement of our products
and services by hospital associations or other customers. Any of such
occurrences could have a materially adverse effect on our business, financial
condition and results of operations.
During the past several years, the United States healthcare industry has
been subject to an increase in governmental regulation of, among other things,
reimbursement rates. Certain proposals to reform the U.S. healthcare system are
periodically considered by Congress and certain state legislatures. These
programs may contain proposals to increase governmental involvement in
healthcare or otherwise change the operating environment for our current and
potential customers. Healthcare organizations may react to these proposals and
the uncertainty surrounding such proposals by curtailing or deferring
investments, including those for our products and services. On the other hand,
changes in the regulatory environment have increased
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and may continue to increase the needs of healthcare organizations for
cost-effective information management and thereby enhance the marketability of
our products and services.
We cannot predict with any certainty what impact, if any, such proposals
or reforms might have on EDSS's business, results of operations and financial
condition. In addition, many providers are consolidating to create integrated
healthcare delivery systems with greater regional market power. As a result,
these emerging systems could have greater bargaining power, which may lead to
price erosion of our products and services. The failure of EDSS to maintain
adequate price levels would have a materially adverse effect on our business,
financial condition and results of operations. Other legislative or
market-driven reforms could have unpredictable effects on our business,
financial condition and results of operations.
Recent government and industry legislation and rulemaking, especially the
Health Insurance Portability and Accountability Act (HIPAA), the Joint
Commission on Accreditation of Healthcare Organizations (JCAHO), industry
accreditation groups such as NCQA and organized lobbies representing physician
groups are requiring electronic claims reimbursement to shorten the payment
cycle. HIPAA should accelerate the number of electronic claims and related
real-time transactions, such as eligibility, verification, enrollment, etc. A
section of HIPAA, The Administrative Simplification Act, requires payers to
receive medical claims electronically in order to lower transaction costs. The
Administrative Simplification Act also requires payers to use eight standardized
real-time transactions, including eligibility. Payers should be able to meet
these requirements by outsourcing the claims processing function to third
parties such as Health-e Network.
The United States Food and Drug Administration (FDA) is responsible for
assuring the safety and effectiveness of medical devices under the Federal Food,
Drug and Cosmetic Act. Computer products are subject to regulation when they are
used or are intended to be used in the diagnosis of disease or other conditions,
or in the cure, mitigation, treatment or prevention of disease, or are intended
to affect the structure or function of the body. The FDA could determine in the
future that any predictive aspects of our products and services make them
clinical decision tools subject to FDA regulation. Compliance with these
regulations could be burdensome, time-consuming and expensive. We also could
become subject to future legislation and regulations concerning the development
and marketing of healthcare software systems. These could increase the cost and
time necessary to market new products and could affect us in other respects not
presently foreseeable. We cannot predict the effect of possible future
legislation and regulation.
The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in our databases are subject to
substantial regulation by state and federal governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Although compliance with these laws and regulations
is at present principally the responsibility of the hospital, physician or other
provider, regulations governing patient confidentiality rights are evolving
rapidly. Additional legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by EDSS. There can be no
assurance that
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changes to state or federal laws will not materially restrict the ability of
providers to submit information from patient records using our products.
FACILITIES
Our executive and corporate offices are located in Colorado Springs,
Colorado in approximately 20,000 square feet of office space under a lease that
expires June 14, 2003. EDSS has a processing center in Pueblo, Colorado that
occupies approximately 11,000 square feet. EDSS also maintains offices in Cooper
City, FL, Jacksonville, FL, Philadelphia, PA and Chicago, IL. We believe that
our facilities are adequate for our current operations.
EMPLOYEES
As of January 10, 2001, EDSS had approximately 451 employees, including
approximately 89 salaried and 362 hourly employees (including temporary
employees). None of these employees is represented by a union or other
collective bargaining group. Health-e Network believes its relationship with its
employees is good.
LITIGATION
EDSS is not currently party to any litigation.
TELECOMMUNICATIONS
The Company has sold or otherwise disposed of all its telecommunications
businesses, but continues actively to seek acquisitions in the area. Management
believes that the prices of telecommunications businesses have only recently
been reduced sufficiently to offer again attractive opportunities. The Company
invested over $280,000 in 1999 in connection with an abandoned acquisition of a
telecommunications company. Some of the Company's telecommunications operations
are described below.
WIRELESS CABLE. In June 1997 the Company completed the sale of its
subsidiary, South Florida Television Inc., which held its rights to provide
wireless cable TV service in Miami, to BellSouth Corporation (NYSE: BLS) for
1,048,321 shares of BellSouth common stock, based on a $48 million purchase
price. The company does not currently own any wireless cable systems or
channels, and, while the Company continues to seek and review opportunities in
this area, it has no specific agreements or understandings to acquire any such
assets.
STRATEGIC ALLIANCES AND INVESTMENTS
DEVELOPING TECHNOLOGY. The Company is reviewing on a preliminary basis
acquisitions of healthcare, telecommunications and strategically linked
companies.
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TLC PRODUCTIONS. TLC Productions, Inc. ("TLC"), acquired by the Company in
1995, is a teleport and uplink facility located in North Miami, Florida, that
provided satellite uplink services to clients who then are able to rebroadcast
signals to video programming distributors. TLC's television studio is used for
live teleconferencing and special interviews for such networks as CNN and ESPN.
OTHER OPERATIONS
ACQUISITIONS.The Company is actively seeking to acquire other businesses
in telecommunications, e-health, e-commerce, media and unrelated areas, but
currently has no specific agreements or arrangements to acquire any such
businesses.
ANAGRAM INTERNATIONAL COMMUNICATIONS LTD. Anagram was organized in 1995 to
engage in, among other things, the business of acquiring television programming
for distribution in the United States and abroad. The Company invested an
aggregate of $636,875 in Anagram. Anagram wound down most of its business in
2000.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K,
including, without limitation, statements containing the words "believes,"
"anticipates," "expects" and words of similar import, constitute
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995 or by the Securities and Exchange Commission in its rules,
regulations and releases, regarding the Company's financial and business
prospects and capital requirements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: the limited nature of the Company's operations and
the risk of the Company's failure to acquire additional businesses; Health-e
Network's history of losses; the uncertain acceptance of Health-e Network;
competition; existing government regulations and changes in, or the failure to
comply with, government regulations; the ability of the Company to sustain,
manage or forecast its growth; dependence on significant customers and the
potential loss thereof; the ability to attract and retain qualified personnel;
and other factors referenced in this Annual Report on Form 10-K. Certain of
these factors are discussed in more detail elsewhere in this Annual Report on
Form 10-K, including, without limitation, under the captions "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations", "Business" and Exhibit 99 hereto. Given these uncertainties,
undue reliance should not be placed on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained or incorporated by reference herein to reflect future events or
developments.
ITEM 2. PROPERTIES
The Company generally leases the real estate where its business, offices
and wireless
13
cable transmitters are located. In June 1994, a subsidiary of the Company
entered into an 8-year operating lease of office space for its offices in New
York at a rate of $7,892 plus escalation charges per month. The Company and
certain subsidiaries lease office space in Rantoul, Illinois, from a company
owned by an officer and the former Chairman of the Company. The lease agreement
is on a month-to-month basis based on the needs of the Company. The Company's
subsidiary, EDSS, leases approximately 20,000 square feet of office space under
a lease that expires June 14, 2003. EDSS also maintains offices at Ft.
Lauderdale, FL, Jacksonville, FL, Tampa, FL, Philadelphia, PA and Chicago, IL.
The Company's subsidiary, TLC, leases approximately 6,500 square feet of office
space on a month to month basis. The total lease payments for the year ended
October 31, 2000 were approximately $604,000 (net of $36,000 of rental income)
as compared to approximately $395,000 (net of $62,000 of rental income) for the
year ended October 31, 1999. The Company believes its properties are adequate
for its current needs.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.01 par value, is traded on the Nasdaq
National Market ("Nasdaq") under the symbol "NWIR". The following table sets
forth the range of high and low sale price information for the Common Stock
for each full fiscal quarterly period for the last two years as reported by
Nasdaq.
1999 2000
-------------- --------------
Quarter High Low High Low
- ------- ---- --- ---- ---
First 19-5/8 14 29-1/4 14-3/4
Second 20 13-1/4 35-3/4 19
Third 17-5/8 15-1/8 25-1/2 18-1/4
Fourth 16 13 23-15/16 14-1/2
As of January 24, 2001, there were approximately 1,000 beneficial holders
of Common Stock.
14
The Company paid a cash dividend of $1.30 on the Common Stock in fiscal
1997; however, the Company does not anticipate paying cash dividends on the
Common Stock in the foreseeable future. The payment of cash dividends on shares
of Common Stock will be within the discretion of the Company's Board of
Directors and will depend upon the earnings of the Company, the Company's
capital requirements and other financial factors which are considered relevant
by the Company's Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data for the Company presented below
under the captions "Operating Data" and "Balance Sheet Data" as of October 31,
1996, 1997, 1998, 1999 and 2000, and for the years ended October 31, 1996, 1997,
1998, 1999 and 2000 are derived from the Company's consolidated financial
statements. The selected financial data should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
15
Year Ended Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31, October 31,
------------ ------------ ------------ ------------ ------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
Operating Data:
Total Revenue $ 11,211,363 $ 6,992,256 $ 6,801,632 $ 4,717,681 $ 2,317,734
Service Revenue 9,031,402 5,325,505 4,492,991 3,308,080 1,223,561
Expenses 13,418,334 8,585,068 7,699,825 6,055,033 3,334,558
Net Gain (Loss) on securities transactions 4,040,583 (1,283,451) (4,116,031) -- --
Gain on Sale of SFTV(1) -- -- -- 44,196,516 --
Net Income (Loss) 1,782,612 (1,376,263) (3,314,224) 25,969,164 (1,016,824)
Net Income (Loss) per common share-
Basic (2) 0.53 (0.42) (1.01) 7.96 (0.31)
Weighted average number of common
Shares outstanding-Basic (2) 3,333,000 3,293,274 3,283,000 3,259,923 3,253,000
Balance Sheet Data:
Cash and cash equivalents 11,520,876 24,754,663 $ 27,359,353 $ 21,256,356 $ 14,788,765
Marketable securities 52,476,079 30,988,890 32,541,020 49,598,687 0
Total assets 72,549,284 64,226,219 66,628,350 79,085,656 21,583,552
Total liabilities 25,262,484 16,898,016 20,273,317 36,016,130 1,391,064
Total stockholders' equity 47,286,800 47,328,203 46,355,033 43,069,526 20,192,488
(1) See Note 4 to Consolidated Financial Statements
(2) See Note 2 to Consolidated Financial Statements
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
National Wireless Holdings Inc. ("NWH" or the "Company"), a Delaware
corporation organized on August 31, 1993, is an electronic commerce and
communications company focussing primarily on acquisition and operation of
telecommunications, e-commerce and other strategically linked businesses. The
Company currently owns and operates Electronic Data Submission Systems, Inc.
(EDSS), a business-to-business healthcare e-commerce data interchange company,
providing links between healthcare providers and payers. The Company also owns
and operates a satellite programming uplink facility. In addition to these
businesses, the Company continues its business of acquiring controlling
interests in telecommunications, healthcare and other strategically linked
areas. The Company may acquire or invest in other businesses. In June 1997, the
Company sold its wireless cable assets in Miami Florida in exchange for common
stock of BellSouth Corporation.
The Company was incorporated in Delaware on August 31, 1993. The Company's
fiscal year ends on October 31.
Certain statements contained in this Annual Report on Form 10-K constitute
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995 or by the Securities and Exchange Commission in its rules,
regulations and releases, regarding the Company's financial and business
prospects and capital requirements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors as described in Exhibit
99 to this Annual Report on Form 10-K that may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. See "Business--Special Note Regarding
Forward-Looking Statements" and the Financial Statements.
RESULTS OF OPERATIONS
2000 AS COMPARED TO 1999:
Services Revenue:
Services revenue increased from $5,325,505 in 1999 to $9,031,402 in 2000,
primarily reflecting increased revenues of EDSS, the Company's subsidiary.
Interest and Dividend Income:
Interest income increased from $1,079,128 in 1999 to $1,729,998 in 2000,
primarily as a result of increased cash, cash equivalents and marketable
securities balances and higher interest rates. Dividend income decreased from
$587,623 in 1999 to $449,963 in 2000, due to lower dividends received on
BellSouth common stock as shares were sold during the year.
17
Cost of Services:
Cost of services increased from $2,918,976 in 1999 to $5,468,001 in 2000 as a
result of increased business levels of EDSS.
Professional Fees:
Professional fees decreased from $725,708 in 1999 to $624,969 in 2000, as a
result of lower activity relating to tax and corporate actions in 2000.
Professional fees included approximately $181,000 in 1999 for a successful
defense of an Internal Revenue Service audit.
General and Administrative:
General and administrative expense increased from $3,783,442 in 1999 to
$6,190,496 in 2000, primarily as a result of increased business levels at EDSS.
Depreciation and Amortization:
Depreciation and amortization decreased from $1,087,386 in 1999 to $1,044,944 in
2000, primarily because assets of our satellite programming uplink facility were
fully depreciated and have not been replaced.
Interest Expense:
Interest expense increased from $69,556 in 1999 to $89,524 in 2000, due to
higher debt of EDSS and miscellaneous tax charges.
(Loss) from Operations:
As a result of the foregoing events, loss from operations was ($1,592,812) in
1999 as compared to a loss from operations of ($2,206,971) in 2000.
Gain/(Loss) on Securities Transactions, Net:
We realized a net gain on securities transactions for 2000 of $4,040,583, as
compared to net loss for 1999 of ($1,283,451), primarily as a result of closing
option positions on, and the sale of, BellSouth common stock. The effect of
unrealized gains on marketable securities as reflected in Other Comprehensive
Income (Loss) amounts to ($1,824,015), net of related income taxes, in 2000 and
$1,924,433 in 1999.
Income (loss) before provision for income taxes:
We realized income before provision for income taxes of $1,833,612 for 2000, as
compared to a loss before provision for income taxes of ($2,876,263) for 1999,
primarily as a result of increased gain on securities transactions.
Provision (benefit) for income taxes:
The provision (benefit) for income taxes was $51,000 for 2000, as compared to a
benefit for income taxes of ($1,500,000) for 1999.
Net Income (Loss):
Net income increased from a net loss of ($1,376,263) in 1999 to a net income of
$1,782,612 for 2000, as a result of the foregoing events.
18
1999 AS COMPARED TO 1998:
Service Revenue:
Service revenue increased from $4,492,991 in 1998 to $5,325,505 in 1999
primarily reflecting increased revenues of EDSS.
Interest and Dividend Income:
Interest income decreased from $1,829,378 in 1998 to $1,079,128 in 1999 as a
result of a reduction in funds invested in interest bearing instruments due to
net cash used in operating activities. Dividend income increased from 479,263 in
1998 to 587,623 in 1999 as a result of a dividend increase by Bell South.
Cost of Services:
Cost of services increased from $2,606,475 in 1998 to $2,918,976 in 1999 as a
result of increased business levels of EDSS.
Wireless Market and Technology Development:
Wireless market and technology development expenses decreased from $858,000 in
1998 to $0 in 1999 as a result of sale of its wireless assets in the Miami
market.
Professional Fees:
Professional fees decreased from $735,491 in 1998 to $725,708 in 1999 as a
result of less transaction activity in 1999. Professional fees included
approximately $55,134 in 1998 and $181,000 in 1999 for a successful defense of
an Internal Revenue Service audit.
General and Administrative:
General and administrative expense increased from $2,664,329 in 1998 to
$3,783,442 in 1999 primarily as a result of increased business levels at EDSS.
Depreciation and Amortization:
Depreciation and amortization increased from $777,823 in 1998 to $1,087,386 in
1999 as a result of additional capital expenditures, principally at EDSS.
Interest Expense:
Interest expense increased from $57,707 in 1998 to $69,556 in 1999, reflecting
borrowings by EDSS.
Loss from Operations:
As a result of the foregoing events, loss from operations was ($1,592,812) in
1999 as compared to a loss from operations of ($898,193) in 1998.
Realized Loss on Securities Transactions, Net:
The Company realized a net loss for 1999 of ($1,283,451), as compared to
($4,116,031) in 1998. The effect of unrealized gains on marketable securities as
reflected in Other Comprehensive Income amounts to $1,924,433, net of related
income taxes, in 1999 and $6,599,731 for 1998.
19
Provision (benefit) for income taxes:
The 1999 benefit for income taxes includes the reversal of prior year income
taxes of approximately $391,000 as a result of settlement of a tax examination.
Net Loss
As a result of each of the foregoing events, net loss decreased from
($3,314,224) in 1998 to ($1,376,263) in 1999.
EDSS RESULTS OF OPERATIONS:
EDSS, on a stand-alone basis, has incurred operating losses of
($5,978,155) on a cumulative basis through September 30, 2000, including
($2,304,386) of loss in 2000, and ($637,312) of loss in 1999. (See note 3 to the
Financial Statements). Such losses have been financed principally through equity
investments by the Company, including $1,000,000 in October 2000, and $5,035,000
(including accrued interest) of loans from the Company pursuant to a loan
agreement, which provides for a line of credit of up to $4,800,000. Based upon
existing contracts with physicians, other providers, payers and management
companies, ramp up expenses associated with rapid revenue growth and current
expense levels, management believes that EDSS will need to obtain additional
financing to achieve its strategic business plan. Although we may seek
additional outside financing for EDSS, we plan to continue to provide financing
necessary to support EDSS's growth.
LIQUIDITY AND CAPITAL RESOURCES
We fund our operations with the net proceeds from our initial public
offering in 1994 of 2,000,000 shares of Common Stock aggregating, after payment
of offering costs, approximately $22,000,000 and the June 1997 sale of its South
Florida wireless cable subsidiary for $48 million in BellSouth common stock. The
proceeds have been used for, and are currently reserved to fund acquisitions of,
healthcare e-commerce investments, telecommunications assets, media businesses,
development of our other businesses and development and acquisition of new
technologies and businesses in other areas. Such amount, with earnings thereon,
is expected to be sufficient to implement this business plan through October
2001, or for a shorter period if we determine to invest a substantial portion of
our assets in major acquisitions or equity investments.
As of October 31, 2000, we had approximately $64 million in cash and
marketable securities, as well as our interest in EDSS, our full-service
teleport and satellite uplink facility in Miami, an educational video
programming distributor and investments in other early stage companies.
During the year ended October 31, 2000, we closed portions of our option
position in BellSouth common stock and sold shares of BellSouth common stock.
While we continue to review our position in BellSouth common stock and from time
to time have sold and purchased shares and options on the position, we have not
yet determined whether we will sell or hedge our remaining BellSouth securities
in the near future or how we will invest the proceeds of any such sale.
20
In October, 2000, we purchased additional shares of Common Stock of EDSS
for $1,000,000, and we currently own over 80% of the outstanding diluted common
stock and, with additional voting rights, 97% control of EDSS. In the year ended
October 31, 2000, the Company advanced an additional $2,967,000 to EDSS, for a
total outstanding loan of $5,168,855, including accrued interest. Interest
receivable increased by $273,855 to $413,855. The outstanding balance under this
loan agreement has been eliminated from the balance sheet in consolidation. We
plan to invest additional amounts in EDSS to finance its sales growth.
Operating overhead costs of EDSS have increased in order to support its
continued growth. We anticipate related increased revenues at EDSS in the near
future.
Following completion of the sale of its South Florida wireless cable
assets, we allocated our capital to development of its other businesses and to
acquisitions; and we actively seek to acquire or invest in other businesses in
telecommunications, media or in unrelated areas. We have no specific
arrangements with respect to any such acquisitions or investments at the present
time. There can be no assurance that any such acquisitions or investments will
be made.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to this item is contained in the financial
statements appearing in Item 14 of this report. Such information is incorporated
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the executive
officers and directors of the Company is incorporated herein by reference to the
sections entitled "Executive Officers of the Company and Election of Directors"
in the Company's definitive proxy statement for its Annual Meeting of
Stockholders to be held in April, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item with respect to executive
compensation is incorporated herein by reference to the section entitled
"Executive Compensation" in the Company's definitive proxy statement for its
Annual Meeting of Stockholders to be held in April, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item with respect to executive
compensation is incorporated herein by reference to the section entitled
"Security Ownership of Directors and Executive Officers" in the Company's
definitive proxy statement for its Annual Meeting of Stockholders to be held in
April, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the section entitled "Certain Transactions" in the Company's definitive proxy
statement for its Annual Meeting of Stockholders to be held in April, 2001.
22
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The financial statements:
The consolidated financial statements included in this item are
indexed on page F - 1 "Index to Financial Statements".
2. Financial Statement schedules:
None
3. Exhibit list.
The following exhibits were previously filed as indicated or are filed
herewith.
3.1(1) Certificate of Incorporation and By-laws of Company.
3.1(a)(3) Amendment, dated June 29, 1995, to the Company's By-Laws.
3.1(a)(9) Amendment to Certificate of Incorporation, dated June 10, 1997.
3.1(b)(9) Amendment to Company's By Laws, dated June 10, 1997.
3.1(d)(14) Amendment to Company's Bylaws, dated June 2, 2000.
4(6) Rights Agreement, dated as of December 12, 1996, between National
Wireless Holdings Inc. and Continental Stock Transfer and Trust
Company, as Rights Agent, which includes as Exhibit A the Form of
Certificate of Designations designating the relative rights,
preferences and limitations of the Series A Junior Preferred Stock,
as Exhibit B the Form of Right Certificate, and as Exhibit C the
Summary of Rights to Purchase Preferred Shares.
4(a)(14) Amendment to Rights Agreement, dated as of December 12, 1996.
4.1(2) Specimen of Common Stock Certificate.
4.2(1) Form of Representative Warrant Agreement with form of
Representative's Warrant attached.
10.1(15) Restated and Amended Employment Agreement with Terrence S. Cassidy,
dated June 26, 2000
10.4(1) Company's 1993 Stock Option Plan.
10.37(a)(5) Withdrawn.
10.37(b)(5) Withdrawn.
10.38(6) Press Release, dated February 27, 1997.
10.38(7) Withdrawn.
10.39(8) Withdrawn.
10.40(9) Form of Director Indemnification Agreement.
10.42(9) 1997 Equity Incentive Plan.
10.43(9) Restated Stockholders Agreement, dated September 10, 1997, between
the Company, Joseph D. Truscelli and Electronic Data Submission
Systems, Inc.
10.45(11) Withdrawn.
23
10.47 Loan Documentation relating to the EDSS Credit Facility.
(a) Restated Loan Agreement(12).
(b) Note(12).
(c) Withdrawn.
(d) Amendment No. 4(16).
(e) Bridge Note(16)
99(16) Factors That May Affect Future Results of Operation
(b) Reports on Form 8-K: Not applicable.
A Definitive Proxy Statement for the Annual Meeting of Stockholders to be held
in April 2001 will be filed by amendment.
- ---------------------------
(1) - Filed with the initial filing of the Company's Registration Statement on
Form S-1, File No. 33-7914.
(2) - Filed with Amendment No. 3 to the Company's Registration Statement.
(3) - Filed with Form 10-Q for the Quarter ended July 31, 1995.
(5) - Filed with Form 8-K dated December 12, 1996.
(6) - Filed with Form 8-K dated February 26, 1997.
(7) - Filed with Form 10-Q for the Quarter ended January 31, 1997.
(8) - Filed with Form 10-Q for the Quarter ended April 30, 1997.
(9) - Filed with Form 10-Q for the Quarter ended July 31, 1997.
(11) - Filed with Form 10-Q for the Quarter ended January 31, 1998.
(12) - Filed with Form 10-Q for the Quarter ended April 30, 1999.
(14) - Filed with Form 10-Q for the Quarter ended April 30, 2000.
(15) - Filed with Form 10-Q for the Quarter ended July 31, 2000.
(16) - Filed herewith
24
NATIONAL WIRELESS HOLDINGS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
PAGE
Report of Independent Accountants F-2
Consolidated Balance Sheets as of October 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended October 31,
2000, 1999 and 1998 F-4
Consolidated Statements of Comprehensive (Loss) Income for the years
ended October 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows for the years ended October 31,
2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF NATIONAL WIRELESS HOLDINGS INC.:
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) on page 25 present fairly, in all material
respects, the financial position of National Wireless Holdings Inc. and its
subsidiaries at October 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended October 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
December 20, 2000
F-2
NATIONAL WIRELESS HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 2000 AND 1999
- ------------------------------------------------------------------------------
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $11,520,876 $24,754,663
Marketable securities 52,476,079 30,988,890
Trade and other receivables 1,867,238 1,921,497
Refundable income taxes -- 556,870
Prepaid expenses and other current assets 395,204 114,841
----------- -----------
TOTAL CURRENT ASSETS 66,259,397 58,336,761
Transmission and related equipment, net of accumulated depreciation
of $958,707 and $754,544, respectively 536,277 802,107
Leasehold improvements, office equipment and service vehicles, net of
accumulated amortization of $1,428,305 and $970,099, respectively 1,560,198 1,022,693
Wireless frequency license and acquisition costs, net of accumulated
amortization of $220,578 and $182,507, respectively 161,133 199,204
Intangible assets, net of accumulated amortization of $1,287,592 and
$1,004,755, respectively 3,379,872 3,662,709
Investments and other assets 652,407 202,745
----------- -----------
TOTAL ASSETS $72,549,284 $64,226,219
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $15,404,140 $ 4,725,898
Current maturities of long-term debt 109,556 79,472
Current income taxes 278,130 --
Deferred income taxes 9,100,000 11,750,000
----------- -----------
TOTAL CURRENT LIABILITIES 24,891,826 16,555,370
Note payable to related party 140,000 140,000
Long-term debt 230,658 202,646
----------- -----------
TOTAL LIABILITIES 25,262,484 16,898,016
----------- -----------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.01 par value; 20,000,000 shares authorized;
3,333,000 shares issued and outstanding, respectively 33,330 33,330
Additional paid-in capital 23,071,872 23,071,872
Retained earnings 16,522,174 14,739,562
Accumulated other comprehensive income 7,659,424 9,483,439
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 47,286,800 47,328,203
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $72,549,284 $64,226,219
----------- -----------
See accompanying notes to consolidated financial statements.
F-3
NATIONAL WIRELESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
- ------------------------------------------------------------------------------
2000 1999 1998
Revenue:
Service revenue $ 9,031,402 $ 5,325,505 $ 4,492,991
Interest income 1,729,998 1,079,128 1,829,378
Dividend income 449,963 587,623 479,263
----------- ----------- -----------
TOTAL REVENUE 11,211,363 6,992,256 6,801,632
----------- ----------- -----------
Expenses:
Cost of services 5,468,401 2,918,976 2,606,475
Wireless market and technology development -- -- 858,000
Professional fees 624,969 725,708 735,491
General and administrative 6,190,496 3,783,442 2,664,329
Depreciation and amortization 1,044,944 1,087,386 777,823
Interest 89,524 69,556 57,707
----------- ----------- -----------
TOTAL EXPENSES 13,418,334 8,585,068 7,699,825
----------- ----------- -----------
Loss from operations (2,206,971) (1,592,812) (898,193)
Gain (loss) on securities transactions, net 4,040,583 (1,283,451) (4,116,031)
----------- ----------- ------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 1,833,612 (2,876,263) (5,014,224)
Provision (benefit) for income taxes 51,000 (1,500,000) (1,700,000)
----------- ----------- ------------
NET INCOME (LOSS) $ 1,782,612 $(1,376,263 $(3,314,224)
=========== =========== ============
Net income (loss) per common share:
Basic $ 0.53 $ (0.42) $ (1.01)
=========== =========== ============
Diluted $ 0.53 $ (0.42) $ (1.01)
=========== =========== ============
Weighted average number of common
shares outstanding:
Basic 3,333,000 3,293,274 3,283,000
=========== =========== ============
Diluted 3,345,482 3,293,274 3,283,000
=========== =========== ============
See accompanying notes to consolidated financial statements.
F-4
NATIONAL WIRELESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
- ------------------------------------------------------------------------------
2000 1999 1998
Net income (loss) $ 1,782,612 $ (1,376,263) $(3,314,224)
Other comprehensive income (loss):
Net holding (loss) gain on marketable securities
arising during the period, net of income taxes of
($1,123,414), $1,010,230 and $2,952,130, respectively (1,280,073) 1,135,111 4,027,212
Reclassification adjustment for (gains)
losses recognized in net income (loss), net of income
taxes of ($476,586), $494,129 and $1,543,512,
respectively (543,942) 789,322 2,572,519
----------- ----------- -----------
Other comprehensive income (loss) (1,824,015) 1,924,433 6,599,731
----------- ----------- -----------
COMPREHENSIVE (LOSS) INCOME $ (41,403) $ 548,170 $ 3,285,507
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-5
NATIONAL WIRELESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
- ------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
Balance, October 31, 1997 $ 32,830 $ 22,647,372 $19,430,049 $ 959,275 $ 43,069,526
Net loss - - (3,314,224) - (3,314,224)
Unrealized gain on marketable
securities, net - - - 6,599,731 6,599,731
---------- ----------- ----------- ----------- ------------
BALANCE, OCTOBER 31, 1999 32,830 22,647,372 16,115,825 7,559,006 46,355,033
Net loss - - (1,376,263) - (1,376,263)
Options exercised to acquire
shares of common stock 500 424,500 - - 425,000
Unrealized gain on marketable
securities, net - - - 1,924,433 1,924,433
---------- ----------- ----------- ----------- ------------
BALANCE, OCTOBER 31, 1999 33,330 23,071,872 14,739,562 9,483,439 47,328,203
Net income - - 1,782,612 - 1,782,612
Unrealized loss on marketable
securities, net - - - (1,824,015) (1,824,015)
---------- ----------- ----------- ----------- ------------
BALANCE, OCTOBER 31, 2000 $ 33,330 $23,071,872 $16,522,174 $ 7,659,424 $ 47,286,800
========== =========== =========== =========== ============
See accompanying notes to consolidated financial statements.
F-6
NATIONAL WIRELESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
- ------------------------------------------------------------------------------
2000 1999 1998
Cash flows from operating activities:
Net income (loss) $ 1,782,612 $ (1,376,263) $ (3,314,224)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,044,944 1,087,386 777,823
Accretion of interest income (105,000) - -
(Gain) loss on securities transactions, net (4,040,583) 1,283,451 4,116,031
Deferred income taxes (1,050,000) (1,401,707) (10,470,000)
Bad debt expense - 98,753 -
Change in assets and liabilities:
Trade and other receivables 54,259 (1,268,837) 142,085
Refundable income tax 556,870 (556,870) -
Prepaid expenses and other current assets (280,363) 21,243 (83,638)
Investments and other assets (449,662) (43,932) (43,802)
Accounts payable and accrued expenses 932,425 (28,153) (441,352)
Current income taxes payable 278,130 (3,900,000) 3,900,000
Other - - 1,183,068
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,276,368) (6,084,929) (4,234,009)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of transmission and related equipment - (106,395) (276,026)
Acquisition of leasehold improvements,
office equipment and service vehicles (846,452) (587,540) (182,478)
Acquisition of marketable securities (32,626,745) (14,574,540) (33,463,975)
Proceeds from sale of marketable securities 17,004,361 18,978,461 31,439,714
Proceeds of marketable securities - short sale 4,602,580 - 12,132,048
Investments - - (94,702)
Acquisition of common stock of EDSS - (513,450) -
Repayments from (advance to) related party - - 1,100,000
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (11,866,256) 3,196,536 10,654,581
------------ ------------ ------------
Cash flows from financing activities:
Exercise of stock options - 425,000 -
Principal payments of long-term debt (91,163) (141,297) (317,575)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (91,163) 283,703 (317,575)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,233,787) (2,604,690) 6,102,997
Cash and cash equivalents, beginning of year 24,754,663 27,359,353 21,256,356
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 11,520,876 $ 24,754,663 $ 27,359,353
------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 89,524 $ 69,556 $ 57,707
Cash paid for taxes 326,000 4,306,870 4,500,000
Capital lease assets acquired and obligations incurred 149,259 26,987 505,567
Non-cash financing and investing activities:
In 1998, the Company closed 400,000 shares of its short sale position
by delivery of marketable securities
See accompanying notes to consolidated financial statements.
F-7
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. COMPANY OPERATIONS
National Wireless Holdings Inc. ("NWH" of the "Company"), a Delaware
corporation organized on August 31, 1993, is an electronic commerce and
communications company focussing primarily on acquisition and operation of
telecommunications, e-commerce and other strategically linked businesses.
The Company currently owns Electronic Data Submission Systems, Inc.
("EDSS"), a business-to-business healthcare e-commerce data interchange
company, providing links between healthcare providers and payers. The
Company also owns and operates a satellite programming uplink facility. In
addition to these businesses, the Company continues its business of
acquiring controlling interests in telecommunications, healthcare and other
strategically linked areas. The Company may acquire or invest in other
businesses. In June 1997, the Company sold its wireless cable assets in
Miami, Florida in exchange for common stock of BellSouth Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with
original maturities of three months or less. The Company routinely invests
all surplus operating funds in various money market funds. These funds
generally invest in highly liquid U.S. government and agency obligations.
MARKETABLE SECURITIES
Marketable securities include an investment in BellSouth Corporation
("BellSouth") common stock and government debt securities. The marketable
securities are classified as available for sale, and are measured at fair
value in the balance sheet. Investment income or loss, including realized
gains and losses on investments, interest and dividends, is included in
income from operations. Unrealized gains and losses on investments are
recorded, net of tax, as a separate component of stockholders' equity.
Gains and losses on securities sold are determined based on the specific
identification method.
Throughout the year the Company contracts for short sales and writes call
options against its investment in BellSouth. Short sales and options are
recorded at fair value with unrealized gains and losses recorded, net of
tax, as a separate component of stockholders' equity.
WIRELESS FREQUENCY LICENSE AND ACQUISITION COSTS
Wireless frequency license and acquisition costs are capitalized.
Amortization is provided using the straight-line method over the life of
the related agreements, which range from 5 to 10 years. Such amortization
is included in depreciation and amortization in the financial statements.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment purchases are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related
assets, which range from 5 to 10 years. Leasehold
F-8
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
improvements are recorded at cost. Amortization is provided using the
straight-line method over the shorter of the life of the improvements or
the related lease term. Such depreciation and amortization is included in
depreciation and amortization in the financial statements.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill. Goodwill represents the
excess of the purchase price over the net assets of acquired companies and
is being amortized on the straight-line method over 10 to 15 years. Such
amortization is included in depreciation and amortization in the financial
statements.
LONG-LIVED ASSETS
Based upon events or changes in circumstances, the Company assesses any
impairment in value of its long-lived assets, including intangible assets,
by making a comparison of the current and projected operating cash flows of
each of its assets over its remaining useful life, on an undiscounted
basis, to the carrying amount of the related assets. Such carrying amounts
would be adjusted, if necessary, to reflect any impairment in value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk include cash and cash equivalents and
accounts receivable. The Company holds no collateral for accounts
receivable. Cash is place into high credit worthy financial institutions.
Concentration of risks with respect to receivables is mitigated based on
the number of customers and ongoing credit evaluations of existing
customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash equivalents comprise money market funds whose carrying amounts
approximate fair value due to the short-term maturity of the instruments.
Marketable securities are reflected at fair value in the accompanying
consolidated balance sheet at October 31, 2000.
Long-term debt relates principally to equipment lease obligations and a
note payable to a related party. Interest rates on the debt approximate the
rates available at October 31, 2000 and the Company believes that their
carrying value of debt at October 31, 2000 approximates fair value.
REVENUE RECOGNITION
Service revenue is recognized as earned in the period the services are
provided. Service revenue for EDSS (see Note 3) includes revenue associated
with electronic transactions to and from physicians, hospital networks and
health insurance carriers and installation revenue. Installation revenue is
recognized over a twelve month period corresponding with the term of the
service contract.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
F-9
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
reporting and tax bases of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
STOCK-BASED COMPENSATION
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This statement encourages, but does not require, companies
to adopt a fair value based method for determining expense related to
stock-based compensation. The Company continues to account for stock-based
compensation using the intrinsic value method as prescribed under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. The Company has included pro forma
information as if the fair value-based method had been applied.
EARNINGS PER SHARE
Earnings per share are computed in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings per Share." Basic earnings per share
is computed by dividing net income (loss) by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed by adjusting weighted average number of common shares outstanding
assuming conversion of all potentially dilutive stock options.
USE OF ESTIMATES
The presentation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Company's management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No.133, Accounting for Derivative
Instruments and Hedging Activities. This statement, effective for all
fiscal quarters of fiscal years beginning after January 1, 2000,
establishes new accounting and reporting standards for derivative financial
instruments and for hedging activities.
The effect of the future adoption of FAS 133 will be that unrealized gains
and losses on options written will be recognized in the statement of
operations. Previously gains and losses on options written were not
recognized in the statement of operations until settlement. The amount of
unrealized gains and losses is dependent upon the market price of the stock
against which the options is written. While the amount could be material,
the impact is one of timing. As of October 31, 2000, such unrealized loss,
which was balanced by a rise in the market value of the underlying stock,
amounted to $4,325,000, which will be the cumulative effect recognized upon
adoption. The Company does not believe that the adoption of FAS 133 will
have a material impact on its financial position.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to fiscal 2000
presentation.
F-10
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
3. EDSS
In August 1996, the Company exercised a portion of its option to acquire a
50% interest in EDSS by purchasing 11% of EDSS voting common stock for
$343,800 in cash. On December 13, 1996, the Company exercised a warrant and
the remainder of its option to purchase additional shares of the common
stock of EDSS. On September 10, 1997, the Company purchased an additional
5% of the common stock of EDSS from the principal stockholder for $750,000.
The aggregate purchase price for the EDSS shares was $1,887,500, of which
an aggregate of $887,500 was paid to EDSS and $1,000,000 was paid to the
principal stockholder.
The acquisition has been accounted for under the purchase method of
accounting and the results of operations from the date of purchase have
been reflected in the consolidated statement of operations. The purchase
price has been allocated principally to intangible assets (goodwill) and is
being amortized over 15 years.
On July 31, 1998, the Company completed the purchase for $1,200,000 of
shares of Series A Preferred Stock of EDSS, which when combined with its
existing share ownership represents 58% of the outstanding common stock
and, with additional voting rights, 82% control of EDSS. The Company paid
for such securities with $1,000,000 in cash and a $200,000 reduction in the
principal amount of a note outstanding pursuant to a loan agreement between
EDSS and the Company. The principal stockholder of EDSS also agreed to
convert $200,000 of indebtedness owed to him by EDSS into Series B
Convertible Preferred Stock of EDSS.
On July 15, 1999, the Company purchased for $513,450 from a stockholder an
additional 6.4% of the common stock of EDSS, which when combined with its
existing ownership represented approximately 64% of the fully diluted
common stock of EDSS, and with additional voting rights 84% of the voting
interest.
In a capital call on October 20, 2000, the Company purchased $1,000,000 of
common stock of EDSS, which when combined with its existing share ownership
represents 80% of the outstanding common stock and, with additional voting
rights, 97% control of EDSS.
During fiscal 2000, the Company agreed to amend its loan with EDSS to
increase the line of credit to $4,800,000 and advanced an additional
$2,967,000 under the amended agreement. The Company has outstanding loans
to EDSS of $5,168,855 including accrued interest as of October 31, 2000.
EDSS has incurred operating losses of $5,978,155 on a cumulative basis
through September 30, 2000. The Company has committed to support the
operations of EDSS through September 30, 2001.
F-11
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
4. MARKETABLE SECURITIES
Marketable securities consist of the following:
UNREALIZED
HOLDING FAIR
COST GAINS VALUE
As of October 31, 2000:
BellSouth common stock $ 14,964,317 $ 16,614,762 $ 31,579,079
Federal Home Loan debt securities,
maturing August 15, 2001 19,792,000 105,000 19,897,000
Other 1,000,000 - 1,000,000
------------ ------------ ------------
$ 35,756,317 $ 16,719,762 $ 52,476,079
------------ ------------ ------------
As of October 31, 1999:
BellSouth common stock $ 15,765,598 $ 15,223,292 $ 30,988,890
============ ============ ============
On February 26, 1997, the Company and its wholly-owned subsidiary, entered
into an agreement with BellSouth whereby a wholly-owned subsidiary of the
Company was exchanged for Bell South common stock. The transaction amounted
to $48,000,000 and was treated as a tax-free reorganization. The BellSouth
common stock is reflected as available for sale marketable securities.
Included in accounts payable and accrued expenses as of October 31, 2000
and 1999 are the fair value of covered call options written on Bell South
common of $8,520,468 and $3,605,900, reflecting contracts for 580,000
shares and 690,000 shares with a weighted average price of $14.69 and $5.23
and exercise date ranges of November 17, 2000 to February 16, 2001 and
November 19, 1999 to February 18, 2000, respectively. Short sales of
BellSouth common stock are also reflected in such account as of October 31,
2000 at a fair value of $4,831,250 representing 100,000 shares.
5. LONG-TERM DEBT
The Company's long-term debt is comprised of capital leases obligations
with interest rates ranging from 11.8% to 16.02%, expiring through 2003.
F-12
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
6. INCOME TAXES
The provision (benefit) for income taxes comprises:
2000 1999 1998
Federal:
Current $ 839,500 $ (80,293) $ 7,981,000
Deferred (150,000) (835,520) (9,528,000)
State and Local:
Current 68,500 (18,000) 789,000
Deferred (707,000) (175,000) (942,000)
Reversal of prior year income taxes - (391,187) -
------------ ------------ -------------
$ 51,000 $(1,500,000) $(1,700,000)
============ ============ ============
As of October 31, 2000, 1999 and 1998, the deferred income tax liability
relates to marketable securities received from BellSouth comprising the
gain not yet recognized for income tax purposes and the unrealized gain on
such securities since the sale.
During fiscal 1999, the Company completed a tax examination by the Internal
Revenue Service for fiscal years 1995 through 1997. Such examination
resulted in no material adjustments and the Company reversed tax
liabilities in 1999 of approximately $391,000 recorded in prior years for
possible adjustments from such examination.
The difference between the actual provision (benefit) for income taxes and
the provision (benefit) for income taxes computed by applying the statutory
federal rate to income (loss) before provision for income taxes is
principally attributable to state and local taxes, net of federal income
tax benefit, a change in the effective state and local tax rates, and the
reversal in 1999 of prior year taxes relating to possible IRS tax
adjustments
7. CAPITAL STOCK
The Company is authorized to issue 1,000,000 shares of Serial Preferred
Stock, par value $.01 per share with dividend and liquidation preferences
over the common stock.
F-13
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
8. LEASE COMMITMENTS
The Company leases administrative facilities and office equipment under
operating leases that expire between 2000 and 2003. Certain of the leases
contain escalation clauses providing for increased rentals based on
operating expenses or the consumer price index. Rent expense, net of rental
income, under operating leases was approximately $604,000, $395,000 and
$247,000 for the years ended October 31, 2000, 1999 and 1998, respectively.
Future annual minimum rental payments as of October 31, 2000 under
noncancellable operating leases for the next five years are as follows:
YEAR ENDING
OCTOBER 31, AMOUNT
2001 $ 402,000
2002 335,000
2003 217,000
-----------
$ 954,000
===========
9. CONSULTING AND EMPLOYMENT AGREEMENTS
On March 14, 2000, the Company entered into a Severance Agreement with
Michael J. Specchio, formerly Chairman and a director of the Company, and
Specchio Associates, LLC, pursuant to which the Consulting Agreement with
Specchio Associates was terminated and Mr. Specchio resigned as an officer
and director. Under the Severance Agreement, the Company agreed to pay
Specchio Associates an aggregate of $142,500, such amount will be paid in
equal monthly installments through September 2001.
On June 26, 2000, the Company amended its employment agreement with
Terrence S. Cassidy, President and Chief Executive Officer of the Company,
to increase his compensation to $260,000 per year, with a 15% raise after
two years, and to provide for an initial term of three years, commencing as
of June 26, 2000, with automatic extensions at the end of each year for
additional one-year periods unless either party gives notice of termination
prior to the end of such year.
During the years ended October 31, 2000, 1999 and 1998, salaries and
consulting fees of approximately $519,000, $660,000, and $641,000,
respectively, were incurred under these contracts.
10. STOCK OPTION PLAN
The 1993 Stock Option Plan, as amended, and the 1997 Equity Incentive Plan
(the "Plans") have participants which include key employees (including
officers), directors, advisors, and independent consultants to the Company
or to any of its subsidiaries. The Company has reserved 80,000 and 300,000
shares of common stock for issuance under the 1993 and 1997 Plans,
respectively. Options granted to employees may be designated as incentive
stock options ("ISO's") or non-qualified stock options ("NQSO's"), as
defined by the Internal Revenue Service. Options granted to independent
consultants and other non-employees may only be designated NQSO's.
F-14
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The exercise price of options granted under the Plans may not be less than
100% of the fair market value of the common stock on the date of grant.
Generally, options will be exercisable for a term that will not exceed ten
years from the date of grant.
During 2000, the Company granted 130,000 five-year options under the Plans,
one third of which vest immediately while the remaining vest ratably over
two years. During fiscal 1997, the Company granted 100,000 five-year
options under the Plans, one third of which vested immediately while the
remaining vest ratably over two years. 50,000 of these options expired
unexercised in June 2000.
On March 15, 2000 the Company adopted the 2000 Director Option Plan
covering an aggregate of up to 70,000 shares of Common Stock, pursuant to
which the Company shall grant 5 year options for 5,000 shares upon
appointment of an outside director and 2,500 shares annually to each
outside director on the date of each annual stockholders meeting. Any
options granted under this plan shall be exercisable at the fair market
value of the Common Stock at the date of the grant.
Information with respect to shares under option is summarized below:
EXERCISE
PRICE
ISO'S NQSO'S PER SHARE
Balance, October 31, 1997 23,480 126,520 $8.50-$17.05
Granted - -
Balance, October, 31, 1998 23,480 126,520 $8.50-$17.05
Granted - -
Exercised (11,750) (38,250) $8.50
----------- -----------
Balance, October 31, 1999 11,730 88,270 $8.50-$17.05
Granted - 130,000 $30.00-$33.00
Expired (5,865) (44,135) $17.05
----------- -----------
Balance, October 31, 2000 5,865 174,135 $8.50-$33.00
----------- -----------
Exercisable, October 31, 2000 5,865 87,467
----------- -----------
No options were forfeited during any period presented. The remaining
weighted average contractual life of options outstanding at October 31,
2000 was 3.5 years.
F-15
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The Company has elected to adopt the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation". Accordingly, no compensation cost has been
recognized with regard to options granted under the Plan in the
accompanying financial statements. If stock-based compensation costs had
been recognized based on the estimated fair values at the dates of grant
for options awarded, net income (loss) and net income (loss) per share
would have been reduced to the following pro forma amounts:
2000 1999 1998
Net income (loss)
As reported $ 1,782,612 $(1,376,263) $ (3,314,224)
Pro forma $ 1,353,662 $(1,391,263) $ (3,470,224)
Earnings per share
DilBasic effect of stock options $ 0.53 $ (0.42) $ (1.01)
Diluted $ 0.53 $ (0.42) $ (1.01)
Pro forma basic $ 0.41 $ (0.43) $ (1.06)
Pro forma diluted $ 0.40 $ (0.43) $ (1.06)
These pro forma adjustments to net income and net income per common share
assume fair values of each option grant estimated using the Black-Scholes
option pricing formula. The more significant assumptions underlying the
determination of such fair value for options granted include: (i) weighted
average risk-free interest rates of 6.64%; (ii) weighted average expected
option life of 5 years; (iii) an expected volatility of 23%, and (iv) an
expected dividend yield of 0%. The per share weighted average fair value at
the dates of grant for options awarded was $9.90.
F-16
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
11. EARNINGS PER SHARE
Basic and diluted earnings per share are calculated as follows:
YEAR ENDED OCTOBER 31,
----------------------------------------------
2000 1999 1998
Net income (loss) $ 1,782,612 $ (1,376,263) $ (3,314,224)
=========== ============ ============
Weighted average common shares outstanding:
Basic 3,333,000 3,293,274 3,283,000
Dilutive effect of stock options 12,482 - -
----------- ------------ ------------
Diluted 3,345,482 3,293,274 3,283,000
=========== ============ ============
Income (loss) per share - basic $ 0.53 $ (0.42) $ (1.01)
Income (loss) per share - diluted $ 0.53 $ (0.42) $ (1.01)
12. EMPLOYEE BENEFIT PLAN
EDSS has a defined contribution plan under Section 401(k) of the Internal
Revenue Code covering substantially all employees. The plan allows
employees to make contributions up to a specified percentage of their
compensation. EDSS's matching of contributions is discretionary. No
contributions were made by the EDSS in 2000, 1999 and 1998.
13. RELATED-PARTY TRANSACTIONS
The note payable to related party of $140,000 as of October 31, 2000 and
1999 represents a loan to EDSS from a director of EDSS. The note bears
interest at 8% and is due on demand after the full payment of the
intercompany loan from EDSS to the Company.
On September 27, 2000, the Company loaned $160,000 to a director of EDSS
under a promissory note bearing interest of 8%, due July 27, 2001. The note
is collateralized by the director's stock interest in EDSS.
On August 22, 2000, the Company loaned $75,000 to a director of the
Company. The secured term loan bore interest at 10% and was collateralized
by marketable securities. The loan was repaid on October 22, 2000.
In fiscal 1999 and 1998, the Company purchased new service vehicles from an
automobile dealership which is owned by the Chairman of the Company for
approximately $24,300 and $4,500, respectively.
F-17
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The Company leases office space in Rantoul, Illinois from a company which
is owned jointly by the former Chairman and an officer of the Company, for
$1,750 per month. The lease agreement is on a month-to-month basis. The
Company also subleases office space in New York to a company owned by a
director of the Company for $800 per month which increased to $2,500 per
month in March 2000. The sublease, which commenced December 1, 1994, is on
a month-to-month.
14. OPERATING SEGMENTS
Segment information has been prepared in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information."
Segments were determined based on products and services provided by each
segment. Accounting policies of the segments are the same as those
described in the summary of significant accounting policies. Performance of
the segments is evaluated on operating income before income taxes.
The Company currently operates in two operating segments: the holding
company, which is in the business of acquiring strategically linked
businesses and which operates certain businesses which are not currently
material; and, its investment in EDSS (see Note 3). All operations are
currently conducted in the United States.
F-18
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Information with respect to the segments is as follows:
NWH AND
OTHER EDSS ELIMINATIONS TOTAL
YEAR-ENDED OCTOBER 31, 2000:
Revenues
Service $ 226,278 $ 8,805,124 $ - $ 9,031,402
Interest and dividends 2,454,246 5,715 (280,000) 2,179,961
Expenses
Interest (16,449) (353,075) 280,000 (89,524)
Depreciation and amortization (383,181) (661,763) - (1,044,944)
Other (2,043,479) (10,240,387) - (12,283,866)
------------- ------------- ------------- -------------
Loss from operations 237,415 (2,444,386) - (2,206,971)
============= ============= ============= =============
Total assets $ 70,566,174 $ 6,738,105 $ (4,755,000 $ 725,549,284
============= ============= ============= =============
Capital expenditures for leasehold
improvements, office equipment,
service vehicles and transmission
equipment $ 5,410 $ 1,033,281 $ - $ 1,038,691
============= ============= ============= =============
YEAR-ENDED OCTOBER 31, 1999:
Revenues
Service $ 639,557 $ 4,685,948 $ - $ 5,325,505
Interest and dividends 1,752,829 13,922 (100,000) 1,666,751
Expenses
Interest - (169,556) 100,000 (69,556)
Depreciation and amortization (537,510) (549,876) - (1,087,386)
Other (2,535,376) (4,892,750) - (7,428,126)
============= ============= ============= =============
Loss from operations $ (680,500) $ (912,312) $ - $ (1,592,812)
============= ============= ============= =============
Total assets $ 60,671,642 $ 5,342,577 $ (1,788,000 $ 64,226,219
============= ============= ============= =============
Capital expenditures for leasehold
improvements, office equipment,
service vehicles and transmission
equipment $ 172,185 $ 548,737 $ - $ 720,922
============= ============= ============= =============
YEAR-ENDED OCTOBER 31, 1998:
Revenues
Service $ 1,218,747 $ 3,274,244 $ - $ 4,492,991
Interest and dividends 2,383,641 - (75,000) 2,308,641
Expenses
Interest (6,823) (125,884) 75,000 (57,707)
Depreciation and amortization (394,830) (382,993) - (777,823)
Other (3,280,416) (3,583,879) - (6,864,295
------------- ------------- ------------- -------------
Loss from operations $ (79,681) $ (818,512) $ - $ (898,193)
============= ============= ============= =============
Total assets $ 62,920,622 $ 4,495,728 $ (788,000) $ 66,628,350
============= ============= ============= =============
Capital expenditures for leasehold
improvements, office equipment,
service vehicles and transmission
equipment $ 301,848 $ 662,223 $ - $ 964,071
============= ============= ============= =============
F-19
NATIONAL WIRELESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly information for 2000, 1999 and 1998 is set forth in the table
below:
QUARTER ENDED
-------------------------------------------------------
JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
---------- ---------- ---------- ----------
2000:
Revenue $ 2,346,565 $ 2,608,693 $ 2,827,379 $ 3,428,726
Net income (loss) 309,582 (93,545) 525,579 1,040,996
Net income (loss) per
common share:
Basic .09 (.03) 0.16 .31
Diluted .09 (.03) 0.16 .31
1999:
Revenue 1,551,503 1,493,203 1,861,922 2,085,628
Net (loss) income (1,920,333) (218,702) 336,425 426,347
Net (loss) income per
common share:
Basic (0.58) (0.07) 0.10 0.13
Diluted (0.58) (0.07) 0.10 0.13
1998:
Revenue 1,624,000 1,722,196 1,730,503 1,724,933
Net income (loss) 212,614 248,620 228,207 (4,003,665)
Net income (loss)
per common share:
Basic 0.06 0.08 0.07 (1.22)
Diluted 0.06 0.08 0.07 (1.22)
The sum of the quarterly net income (loss) per common share amounts do not
necessarily equal the full year amount primarily because the computations
of the denominator for basic and diluted earnings per share for each
quarter and the full year are made independently.
The loss for the quarter ended October 31, 1998 is principally attributable
to the loss on securities transactions during that quarter.
F-20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NATIONAL WIRELESS HOLDINGS INC.
(Registrant)
Date: January 29, 2001 By: /s/ Terrence S. Cassidy
Terrence S. Cassidy, Principal Executive Officer,
Principal Financial Officer and Principal Accounting
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ Terrence S. Cassidy Director January 29, 2001
Terrence S. Cassidy
/s/ Thomas R. DiBenedetto Director January 29, 2001
Thomas R. DiBenedetto
/s/ Louis B. Lloyd Director January 29, 2001
Louis B. Lloyd
/s/ Michael A. McManus, Jr. Director January 29, 2001
Michael A. McManus, Jr.
/s/ Vincent Tese Director January 29, 2001
Vincent Tese