<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
CHAMPION COMMUNICATION SERVICES, INC.
(Name of Small Business Issuer in its charter)
Delaware 76-0448005
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1610 Woodstead Court
Suite 330 77380
The Woodlands, Texas (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (281) 362-0144
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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TABLE OF CONTENTS
<TABLE>
<S> <C>
GLOSSARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . 24
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS . . . . . . . . . . . 26
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . 32
DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . 35
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
RECENT SALES OF UNREGISTERED SECURITIES . . . . . . . . . . . . . . . . . . . . . . 35
INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . 37
EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>
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GLOSSARY OF TERMS
Airtime Charges Charges to users of wireless communications
services based on the actual minutes of use.
Analog A transmission method employing a continuous
(rather than pulsed or digital) electrical
signal that varies in amplitude or frequency in
response to changes in sound or other input
impressed on a transducer in the sending device.
Current SMR technology primarily uses analog
transmission.
Bandwidth The relative range of frequencies that can be
passed through a transmission medium between two
defined limits without distortion. The greater
the bandwidth, the more information the medium
can carry. Bandwidth is measured in Hertz.
Base Station A station located at a specified site authorized
to communicate with mobile units.
Cellular The wireless radio telephone service licensed by
the FCC to provide services on a CMRS basis
utilizing 50 MHz of spectrum in the 800 MHz
band.
Channel A pathway for the transmission of information
between a sending point and a receiving point;
also referred to as "frequency." In SMR, a
channel refers to a set of paired send and
receive frequencies. Thus, a five-channel 800
MHz SMR actually has 10-25 kHz channels: five
send channels and five receive channels.
Co-channel Relates to the authorization or operation of two
transmitters on the same frequency, normally
separated by some defined distance. Co-channel
operators may not interfere with each other
unless separated by sufficient distance or
operated in a coordinated manner.
Commercial Mobile Mobile services that are provided for profit,
Radio Service are interconnected to the PSN and are available
("CMRS") to the general public on a non-discriminatory
basis. These CMRS providers historically have
been referred to as "common carriers."
Community Repeater ("CR") Conventional two-way radio systems consisting of
a control station, a repeater station and mobile
and/or portable radios. The repeater is shared
by otherwise unrelated users.
Conventional System A method of operation in which one or more
radio frequency channels are assigned to
mobile and base stations but are not employed as
a trunked group.
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Digital A method of storing, processing and transmitting
information through the use of distinct
electronic or optical pulses. Digital
transmission and switching technologies employ a
sequence of discrete, distinct pulses to
represent information, as opposed to the
continuously variable analog signal.
Dispatch A service provided to customers who want to
transmit and receive short messages to and from
a fleet of vehicles operating within range of
the system's repeater.
800 MHz (SMR) As a group, the 280 channels of trunked SMR
frequencies in the 800 MHz band with 25 kHz
channel bandwidth. The cellular radio
frequencies are also in the 800 MHz band.
ESMR Enhanced Specialized Mobile Radio. SMR
multi-site digital networks, which are designed
to provide integrated telecommunications
services, including wireless, telephone, paging,
data transmission and dispatch services. ESMR
generally is used as a dispatch technology,
although it also may be interconnected with the
PSN to provide mobile telephone services. The
Company does not provide ESMR services.
FCC Federal Communications Commission.
Footprint The areas in which a company provides CR
services. See Appendix I for the Company's
footprint, i.e., a list of the 23 states and
a map showing the location of the Company's
CRs.
450-512 MHz Band 450-470 MHz - A group of frequencies operating
with a narrow channel bandwidth, which is shared
with an unlimited number of users (co-channel
operation) utilizing an unlimited number of
units.
470-512 MHz - A group of frequencies operating
with a narrow channel bandwidth, an unlimited
number of users, and a limited number of units.
Thus, user exclusivity on a particular frequency
during a call is currently achievable in this
band.
Hertz The unit for measuring the frequency with which
an electromagnetic signal cycles through the
zero-value state between lowest and highest
state. One Hertz (abbreviated Hz) equals one
cycle per second; kHz (kilohertz) stands for
thousands of Hertz; MHz (megahertz) stands for
millions of Hertz.
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Loading The capacity utilization of a mobile
communications system. The FCC requires
licensees of trunked SMR systems to meet a
one-time test of 70 units per channel within
five years after receiving the license. If a
licensee does not meet this loading requirement,
the FCC may take back a proportionate number of
the licensee's unloaded channels.
Major Metropolitan Areas Metropolitan areas (as defined by the U.S.
Office of Management and Budget) with a
population of 1,000,000 or more.
Major Trading Areas Service areas based on the 47 areas
("MTAs") contained in Rand McNally's 1992 Commercial
Atlas and Marketing Guide, 123rd Edition,
except that: (1) Alaska is separate from
Seattle, (2) Guam and Northern Mariana Islands
are licensed as a single area, (3) Puerto Rico
and the United States Virgin Islands are
licensed as a single area, and (4) American
Samoa is licensed as a single MTA-like area.
These modifications by the FCC resulted in a
total of 51 MTAs.
900 MHz SMR As a group, the 200 channels of trunked SMR
frequencies in the 900 MHz band with 12.5 kHz
channel bandwidth. The FCC initially licensed
these channels only in the top 50 markets. The
FCC recently completed its auction of the
remaining 900 MHz SMR channels for the 51 MTAs.
Paging A one-way communications service, from a base
station to mobile or fixed receivers, that
provides signaling or information transfer by
such means as tone, tone-voice, tactile or
optical readout. Paging services are provided
on several bands, including the 450-512 MHz and
900 MHz bands.
PCS Personal Communications Services. The newest
technology in the wireless communication
industry, PCS operates on the 900 MHz
(narrowband) and on the 2 GHz (broadband)
frequency bands. PCSs are radio communications
that encompass mobile and ancillary fixed
communication that provide services to industry
and business and that can be integrated with a
variety of competing networks. Broadband PCSs,
with a wider channel bandwidth, provide a
greater variety of services than narrowband PCSs
(e.g., broadband can provide a full voice and
data transmission, but narrowband PCS generally
is limited to one-way services).
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Private Mobile Radio Two-way radio operations offering dispatch and
Service ("PMRS") other wireless communications services. These
services generally cannot be interconnected to
the PSN. An operator may provide such services
on a discriminatory basis. Private Land Mobile
Radio operators, which provide dispatch
services in the bands below 800 MHz, are
regulated as PMRS operators. These PMRS
providers historically have been referred to as
"private carriers."
PSN Public Switched Network. Historically referred
to as the "Public Switched Telephone Network" or
"PSTN".
Repeater A device which automatically retransmits
received signals on an outbound circuit,
generally in an amplified form.
Roam(ing) A service offered by mobile communications
providers which allows a subscriber to use a
mobile phone while in the service area of
another carrier.
Site The location of a base station or repeater in a
radiocommunications system.
Specialized Mobile Radio A radio system authorized by the FCC in which
("SMR") licensees provide mobile communications services
(other than radio location services) in the 800
MHz and 900 MHz bands on a commercial basis to
eligible entities, federal government entities
and individuals. It is generally used as a
dispatch technology. However, SMR may be
interconnected with the PSN to provide telephone
interconnect services.
Spectrum A term generally applied to radio frequencies.
Switch A device that opens or closes circuits or
selects the paths or circuits to be used for
transmission of information. Switching is the
process of interconnecting circuits to form a
transmission path between users.
T-Band The group of channels operating at 470-490 MHz
previously assigned to the television segment.
Telephone Interconnect Connection of a telecommunications device or
service to the PSN. In SMR, telephone
interconnect refers to the service provided to a
customer which allows specified customer units
to have the capability to connect directly to
the PSN and thereby communicate with any other
party that can be reached over the PSN.
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Trunked System A system that combines multiple channels with
unrestricted access in such a manner that user
demands for channels are automatically "queued"
and then allocated to the first available
channel. Compared to a conventional system,
this method allows for the use of frequencies
by more users and provides faster access than a
conventional system, thereby reducing the
likelihood of network congestion.
Unit A base, mobile or hand held radio.
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RISK FACTORS
The discussion in this Registration Statement on Form 10-SB (this
"Registration Statement") contains forward-looking statements that involve
risks and uncertainties. The actual results of the operation of Champion
Communication Services, Inc. (the "Company") could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, the factors set forth below, and those
discussed in "Description of Business," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and elsewhere in this
Registration Statement. Specifically, there can be no assurance that the
Company will be able to become profitable, compete effectively, sell its 800
MHz band systems at a profit, increase utilization on its 450-512 MHz band
systems, retain its key personnel or take any or all of the other actions
described in this Registration Statement. These factors should be considered
carefully in evaluating the Company and its business before purchasing the
securities registered hereby.
LACK OF PROFITABILITY
The Company has a limited operating history and has sustained operating
losses since its inception. The Company's cash flow from operations has not
been sufficient to meet its working capital and capital expenditure
requirements. As of September 30, 1996, the Company had an accumulated
earnings deficit (unaudited) of over $2.1 million. Unless its revenues
increase significantly, the Company will continue to experience losses.
Although the Company anticipates that its revenues will increase in the
upcoming fiscal years, there can be no assurance that this will be the case.
Accordingly, there can be no assurance that the Company will be profitable in
the future or that an investment in the Company's securities will be recouped.
NEW TECHNOLOGIES
The market for the Company's services is characterized by rapid
technological advances, changes in customer requirements and new service
introductions and enhancements. The Company's growth and future financial
performance will depend, in part, on its ability to enhance existing services,
develop new services that meet technological advances and provide its services
at competitive prices. There can be no assurance that the Company will be
successful in these endeavors. The inability of the Company to respond in a
timely manner to technological advances could have a material adverse effect on
the Company's business.
COMPETITION
The Company experiences significant competition from other dispatch
operators in the 450-512 MHz, 800 MHz and 900 MHz bands, as well as from
providers of cellular phone services. The Company also could face additional
competition from other wireless communications providers, such as PCS
operators, 220 MHz operators and paging operators in the 450-512 MHz and 900
MHz bands. Many of these providers have significantly greater resources than
the Company. There can be no assurance that the Company will be able to
compete successfully in the dispatch services industry in the future. See
"Current Business - Competition."
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Furthermore, the availability of new technologies to ESMR network
operators will allow some dispatch operators to offer enhanced dispatch
services, including PSN interconnect and features such as seamless wide area
coverage and data transmission. The Company believes these services may be
more expensive than the services the Company provides, and therefore may not
create a significant competitive threat. However, there can be no assurance
that this will be the case or that competition from ESMR service providers will
not have a materially adverse effect on the Company's business. See "Current
Business - Competition."
DEPENDENCE ON KEY PERSONNEL
The Company believes its success depends, in large part, upon the
continued services of key management personnel, including Albert F. Richmond
and David A. Terman. The Company has purchased key-man life insurance policies
in the amount of $1 million on each of Messrs. Richmond and Terman. The
Company does not have employment agreements with either of these employees.
The loss of either of these individuals could have a material adverse effect on
the Company.
CONTROL BY OFFICERS AND DIRECTORS
As of March 1, 1997, the executive officers and directors of the Company
owned approximately 63% of the issued and outstanding shares of the Company's
Common Stock. As a result of such ownership, such officers and directors have
the power effectively to control the Company, including the election of
directors, the determination of matters requiring stockholder approval and other
matters relating to corporate governance. See "Security Ownership of Certain
Beneficial Owners and Management."
RELIANCE ON KEY SUPPLIERS
The Company relies on Motorola, Inc. ("Motorola") and Kenwood
Communication Corporation ("Kenwood") as its primary equipment suppliers and on
Motorola as its primary source of antenna sites. A change or termination of
the Company's arrangements with either or both of these companies could have a
material adverse effect on the Company's business.
ABSENCE OF DIVIDENDS
The Company has never declared or paid any dividends on the Common Stock
and does not anticipate that it will pay any dividends in the foreseeable
future.
IMPACT OF REGULATORY ISSUES
The Company's dispatch business is a distinct segment of the wireless
communication industry. The wireless communications industry is subject to FCC
regulation. The FCC does not currently regulate prices for PMRS providers,
such as the Company. There can be no assurance, however, that the prices
charged by the Company for its services will not become subject to regulation.
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Additionally, pending FCC rule and policy changes, including those
relating to "refarming" (i.e., the ongoing FCC proceeding to rewrite the rules
governing licensing and operation in the 450-512 MHz band where the Company's
business is concentrated), regulatory classification, SMR and other dispatch
service provider regulation, new spectrum allocation and radio towers may not
be adopted, or may be adopted in a different form than the current proposed
version. Any regulatory changes could have a material adverse effect on the
Company.
INABILITY TO OBTAIN LICENSES
For some of its 450-512 MHz and 800 MHz band operations, the Company's
customers hold the necessary FCC licenses; for some operations, the Company
holds the requisite licenses. Each of these licenses is subject to the
licensee operating in compliance with applicable FCC rules and is subject to
renewal. Failure to obtain license renewals by either the Company or its
customers would have a material adverse effect on the Company. There can be no
assurance that the Company's customers will maintain their licenses or that the
FCC will renew the Company's or its customers' licenses.
Furthermore, the Company's strategy includes obtaining assignment of
co-channel licenses to allow trunking in the 450-512 MHz band and to prepare
for the sale of the Company's 800 MHz band systems. There can be no assurance
that the Company will be able to obtain assignments from other users or that
the FCC will approve these transactions. Failure to obtain the necessary
assignments from other users or to obtain FCC approvals for these assignments
of licenses would have a material adverse effect on the Company.
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PROVISIONS AFFECTING CONTROL
Several provisions of the Company's certificate of incorporation and
by-laws may have the effect of delaying, deferring or preventing a change in
control. See "Description of Securities -- Provisions Effecting Control."
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
The discussion in this Registration Statement contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause
or contribute to such differences include, but are not limited to, the factors
set forth below, those discussed in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and elsewhere
in this Registration Statement. Specifically, there can be no assurance that
the Company will be able to become profitable, compete effectively, sell its
800 MHz band systems at a profit, increase its utilization on its 450-512 MHz
band systems, retain its key personnel or take any or all of the other actions
in this Registration Statement. These factors should be considered carefully
in evaluating the Company and its business before purchasing the securities
registered hereby.
THE COMPANY
The Company provides high-powered CR dispatch services in the United
States, currently serving approximately 6,300 customers utilizing 33,000
subscriber units (either radio or base stations) in 22 states in the United
States. The Company's customers are principally businesses and government
agencies located in both metropolitan and rural geographic areas.
Dispatch services using CRs are offered on the 450-512 MHz, 800 MHz and
900 MHz bands. Operators of these dispatch services are regulated as PMRS
providers (i.e., private carriers) or as CMRS providers (i.e., common
carriers). A CR is operated either without an FCC license because the customer
is individually licensed to operate a conventional channel or it is operated
with a license held by the operator for either trunked or conventional
operations. A CR that is operated as a PMRS is subject to more relaxed
regulatory requirements than a CMRS provider, such as cellular and certain SMR
or ESMR licensees. See "Current Business - Regulation."
The Company primarily offers its dispatch services in the 450-512 MHz
band. It also operates a limited number of CRs in the 800 MHz band. The
Company has concentrated its business in the 450-512 MHz band because it
believes that it can exploit economies of scale by providing extensive coverage,
obtaining equipment at favorable prices and charging low rates. However, there
can be no assurance that this strategy will be effective. In both the 450-512
MHz and 800 MHz bands, the Company operates CRs without a license for
individually licensed customers and it operates conventional and trunked CRs
with its own FCC license. All the Company's CRs are operated as PMRS providers
and thus are subject to less stringent regulatory requirements than CMRS
providers.
The Company's strategy is to increase its customer base by capitalizing
on its existing infrastructure in CRs, which, on average, have approximately
50% capacity available for new, revenue-producing units; to expand its services
into geographic areas adjacent to current
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operations; to increase its number of trunked systems by consolidating
individually licensed channels and adding new systems; and to acquire
constructed systems. The Company plans to focus this growth strategy in the
450-512 MHz band because it believes that this strategy allows it to exploit
economies of scale by providing extensive coverage, obtaining equipment at
favorable prices and charging low rates. In addition, operations of CRs in this
band are less expensive than dispatch services in the 800 MHz and other bands,
thereby providing the Company with the ability to implement competitive pricing
strategies. See "The Dispatch Industry - Dispatch Frequencies" and "Current
Business - Competition." Furthermore, spectrum availability is greater and
regulatory impact on operations is less burdensome in the 450-512 MHz band than
in other dispatch service bands. See "Current Business - Regulation." Thus,
while the Company intends to construct and operate its 800 MHz band systems as
required by the FCC in order to maintain its licenses in that band, it plans to
exit this band when it can sell these systems and assign its FCC licenses for an
appropriate return.
The Company is a Delaware corporation. Its principal place of business
is 1610 Woodstead Court, Suite 330, The Woodlands, Texas 77380. The Company's
phone number is (281) 362-0144.
HISTORY
The Company was incorporated under the laws of the State of Delaware on
September 29, 1994, by Albert F. Richmond and David A. Terman. Pursuant to a
September 14, 1994, agreement with Motorola, the Company acquired 1,238 CRs in
November 1994. In December 1994, the Company acquired an additional 263 CRs
from Motorola through several agreements. The Company acquired these CRs from
Motorola on an "as is - where is" basis for an aggregate purchase price of $5.29
million, which was paid partly in cash and partly by proceeds due from Motorola
to Champion Communications Company, in exchange for the issuance of Common Stock
to Messrs. Richmond and Terman and the delivery of a promissory note to Champion
Communications Company in the amount of $3,177,505, as further discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Since acquiring the CRs from Motorola, the Company has evaluated its
total mix of dispatch services; sold, acquired or consolidated various dispatch
operations (after obtaining any necessary FCC consent); and established required
support systems, such as providing equipment rental and maintenance, licensing
and related services for customers. In particular, in an effort to increase its
subscriber capacity, overall network control and revenue potential, the Company
has been consolidating its systems. In both the 450-512 MHz band and the 800
MHz band, the Company, after obtaining any necessary FCC consents, has been
converting many of the individual licenses used by its subscribers to trunked
channels on its own licensed systems. However, consistent with its overall
strategy of concentrating on CR operations in the 450-512 MHz band, the
Company's acquisitions of 800 MHz band systems have been made to obtain
exclusive control of frequencies in order to maximize marketability of its
systems in this band. The Company recently acquired two constructed 800 MHz
band systems in California and received assignments of the related licenses from
the FCC. Additionally, the FCC granted the Company licenses to construct and
operate 800 MHz band systems in Phoenix, Arizona. As of March 1, 1997, the
Company owned 1,500 CRs, 77 of which, or 5%, were in the 800 MHz band; the
Company had 128 exclusive licenses, of which 50 licenses, or 39%, were in the
800 MHz band, and 356 co-channeled licenses, of which 49 licenses, or 14%, were
in the 800 MHz band. Until the Company determines that it no longer wants to
operate systems in the 800 MHz band, it will seek to fulfill all FCC
requirements to retain its licenses with the maximum number of channels,
including continuing operations on these systems.
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In October 1994, the Company issued 658,000 shares to its employees,
officers and directors for $.50 per share, raising $329,000. In October 1995,
the Company entered into a letter of engagement with Britwirth Investment
Company, Ltd. ("Britwirth") pursuant to which Britwirth agreed to assist the
Company in raising capital. In November 1995, the Company raised $810,000
(resulting in net proceeds to the Company of $729,000 after payment of fees and
commissions) through the sale in Canada of warrants (the "Special Warrants") to
acquire Common Stock at $1.35 per Special Warrant. Britwirth received fees of
$81,000 and options to acquire up to 60,000 shares of Common Stock at CDN $3.70
per share exercisable until September 25, 1999. All of the Special Warrants
were converted automatically to Common Stock upon consummation of the Company's
initial public offering in Canada. No additional consideration was due on
conversion. In December 1995, the Company raised an additional $102,000 through
sales of its Common Stock to its existing stockholders, consultants and
employees at $1.35 per share and issued an additional 400,000 shares to Messrs.
Richmond and Terman in exchange for the November 15, 1995 cancellation of
$540,000 of the $3,177,505 indebtedness to Champion Communications Company,
which was incurred by the Company to finance the Company's acquisition of CRs
from Motorola. In September 1996, the Company raised approximately $1.7 million
in an underwritten public offering in Canada of 619,350 shares of its Common
Stock and warrants to acquire 619,350 shares of its Common Stock. In connection
with such offering, the Company registered its Common Stock for trading on the
Toronto CDN Stock Exchange. Also in connection with this offering, the Company
granted IPO Capital Corp. an Agent's Warrant entitling IPO Capital Corp. to
receive options to acquire 50,000 shares of Common Stock at CDN $3.70 per share
for a period of 18 months after completion of the initial public offering. The
Company exercised the Agent's Warrant on behalf of IPO Capital Corp. upon the
Ontario Securities Commission's issuance of a receipt for the Company's
prospectus. In September 1996, the Company raised $410,865 through a private
placement in the United States.
Since establishing its business in 1994, the Company has experienced
operating losses for each fiscal year and currently has a negative working
capital position. In addition, on August 19, 1996, the Company sold the
portion of its business that serviced customer units for $33,000. The Company
recognized a loss of approximately $86,000 on this transaction.
THE DISPATCH INDUSTRY
OVERVIEW
Most businesses or service organizations with mobile work forces require
the ability to communicate with employees in order to conduct their operations
efficiently. They rely on radiocommunications as a tool to control resources,
personnel, materials and equipment in a cost-effective manner. Dispatch
services improve the efficiency and response time of such businesses and
organizations.
The dispatch industry is a distinct segment of the wireless
communications industry, which also includes wireless telephone (cellular, PCS
and satellite), paging and data transmission services. Wireless telephone
services are designed for personal communications by providing bi-directional
communication between two individuals. This segment of the industry refers to
its radios as "telephones" and is viewed as an extension of the traditional
wireline telephone network. Wireless
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telephones require a minimum seven digit dial-up procedure and wireless
telephone conversations typically average more than one minute in duration.
Paging services enable subscribers to contact an individual or group of
portable receivers which emit an audible, visual or tactile alert and can
sometimes record a numeric or alpha-numeric message. Paging systems allow only
the transmission of a limited amount of information and generally only provide
one-way communication. Data transmission services are, at present, primarily
offered on data-only (non-voice) packet switched networks. Dispatch services
provide for the transmission of information, whether voice messages or data, to
groups of mobile or portable radio users for the purpose of task assignment and
coordination. Dispatch services are designed to provide bi-directional group
communications and to allow the user to address either entire groups,
sub-groups or individuals with simple and rapid push-to-talk call set-up
procedures. Dispatch conversations are typically short and allow for all
participants to communicate with each other simultaneously. Dispatch services
are less expensive than other wireless communications services, such as 800 MHz
and 900 MHz SMR, cellular and PCS.
New applications in the wireless communications industry are also
emerging. These new technologies include broadband PCS and narrowband PCS
(advanced paging). Both broadband PCS and narrowband PCS are subject to
comprehensive FCC regulation and are available in the United States.
Each segment of the wireless communications industry relies on a
different technology and serves distinct customer needs. The Company believes
that these segments address separate markets and generally do not compete
effectively against each other. The Company believes the wireless
communications industry will continue to grow with the emergence of new
technologies and applications. There can be no assurance, however, that this
growth will continue. A decrease in the growth rate of the industry would have
a material adverse effect on the Company's ability to expand.
HISTORY OF DISPATCH NETWORKS
The dispatch industry is comprised of operator-licensed networks and
user-licensed systems served by unlicensed CR operators. The Company currently
provides both of these dispatch services. In the 800 MHz and 900 MHz bands,
dispatch networks are referred to as SMRs or ESMRs. These networks are
operated by licensees that provide dispatch services to others for a monthly
fee. Providers of CR dispatch services, such as the Company, derive revenues
from the sale, rental and servicing of end-user equipment and from dispatch
air-time charges.
The development of military wireless communications in the 1940s led to
the first dispatch systems for business and industrial use. Shared repeater
services, the predecessors to SMR networks, developed in the early 1970s as
available radio spectrum became increasingly scarce. By the mid-1980s, the
number of commercial users in major urban areas was surpassing the capacity of
shared repeater services, and trunked SMR networks were introduced to satisfy
the increasing demand for dispatch services.
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Implementation of emerging, spectrum-efficient digital switching and
transmission technologies will increase dispatch system capacity even further.
These new technologies are currently being implemented on ESMR networks.
However, the Company has no current plans to operate ESMR networks.
DISPATCH FREQUENCIES
Under international agreements, specific bands of frequencies may be
used for radiocommunications: low band (which includes low ("LF"), medium
("MF") and high ("HF") frequencies), Very High Frequency ("VHF"), Ultra High
Frequency ("UHF") and Super High Frequencies ("SHF").
In the United States, the FCC has exclusive responsibility for
allocating radio frequencies assigned to non-government use and for
establishing rules governing the licensing of, and operations on, such
frequencies. It receives formal applications from prospective users or
operators and grants licenses to provide the proposed services. The dispatch
industry is allowed to operate in the various band segments, including the
450-512 MHz and 800 MHz bands. Within each band, channels are created by the
allocation of specified bandwidths. See "Current Business - Regulation." The
wireless mobile communications industry operates primarily within the UHF
frequencies and can be categorized by operations in the following frequency
ranges:
450-512 MHZ. Dispatch communications services are provided in the
450-512 MHz band to vehicle-mounted and hand-held portable two-way radio
units. These services operate at a higher transmitter power level than other
wireless services, such as cellular and PCS. This band, which was developed in
the 1950s, is populated by PMRS licensees, such as the Company and its
customers.
Users of the 450-512 MHz band have begun to experience channel
congestion and spectrum crowding, especially in metropolitan areas. This
spectrum is frequently incapable of handling the demands placed upon it, and
users are often unable to find a clear channel. To remedy this situation, the
FCC recently adopted rules, and is considering additional rules, to promote more
effective and efficient use of the bands below 512 MHz. These actions, which
have been implemented as part of the FCC's ongoing "refarming proceeding,"
increased opportunities for the Company to use higher capacity trunking
technology in these bands. See "Current Business - Regulation."
800 MHZ (SMR). Dispatch services are provided not only in the 450-512
MHz band, but also in the 800 MHz band. Due to recent technological
developments, 800 MHz band operators now may elect to convert their systems
from analog to digital. Conversion of systems to digital technology may make
this band more appropriate for services other than dispatch. See "Current
Business - Competition." Although the Company operates 800 MHz band systems,
its current plan is to sell these systems if it gains exclusive control over
channels. The Company's long-term plan is to withdraw from the 800 MHz band
market.
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900 MHZ. The 900 MHz band (SMR) analog operating format is almost
identical to the 800 MHz band format. Initially, the FCC issued 900 MHz band
SMR licenses in the top 50 markets in the United States. In 1996, the FCC
completed auctions for the remaining 900 MHz band licenses to operate in 51
MTAs in the United States, Puerto Rico, United States Virgin Islands, Guam -
Northern Mariana Islands and American Samoa. Specifically, 1,020 licenses were
offered in these 51 MTAs, or 20 channels per MTA. The Company was not
successful in its participation in these auctions.
NEW TECHNOLOGIES
The limited number of available frequencies, particularly in urban
areas, has led to the introduction of new and advanced technologies and
applications that allow for better spectrum utilization. The first technology
developed for that purpose was "trunking," which was developed in the late
1970s and which uses microprocessors to allow many users to share frequencies.
In non-trunked conventional systems, the channels assigned to each group of
users are independent. If a channel is occupied by another conversation, the
user has to wait, even though another channel in the system may be idle. The
user may have to try several times before the channel is free. In contrast,
trunking allocates messages to various frequencies in the most efficient way.
In a "trunked" system, user calls are assigned to the first available channel
and a different channel may be assigned for each transmission during the same
conversation. The trunked system therefore can handle more call traffic with a
given number of channels. In addition, the channel "switching" on a trunked
system makes eavesdropping more difficult and therefore enhances the privacy of
conversations.
More recently, digital technology was developed to improve spectrum
efficiency and provide for additional loading (the use of a channel by
subscriber radios). Use of digital rather than analog transmission expands
channel capacity by a factor of two, three or more times.
The Company is currently using trunking technology to serve more
customers with its existing equipment. Depending upon cost and competitive
factors, the Company also might implement digital technology to increase its
customer base even further. However, the Company has no current plans to
convert to digital technology.
CURRENT BUSINESS
GENERAL
The Company provides high-powered CR dispatch services in 22 states in
the United States. The Company currently serves 6,300 customers utilizing
33,000 two-way radio units. The Company provides its customers, primarily
business and governmental agencies, with equipment, equipment rentals and
dispatch services. Under applicable FCC rules, the Company is not required to
obtain FCC licenses for those of its CR systems serving individually-licensed
customers. However, the Company is licensed by the FCC to operate its trunked
dispatch systems serving customers which do not have their own licenses.
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Pursuant to several contracts with Motorola executed in September,
October, November and December 1994 (the "Motorola Agreements"), the Company
acquired 1,501 CRs. The Company historically has used its CRs exclusively for
dispatch purposes and plans to continue such use. Each CR is housed in a small
structure at the base of a communications tower. The antenna is affixed to the
tower structure and is connected to the CR by coaxial cable. Currently, the
Company owns one tower where one of its CRs is located and leases space on the
other towers it uses for CRs. The Company plans to acquire additional towers.
See "Business Strategy - Towers." However, there can be no assurance that the
Company will be able to locate suitable towers for acquisition.
Equipment products for the 450-512 MHz band frequencies, where the
Company provides most of its services, and for the 800 MHz band, are available
from numerous manufacturers. Prices for this equipment range from $300 to $900
per unit, depending on the features offered and the warranty provided. The
Company's principal equipment suppliers are Motorola and Kenwood, and the
Company has entered into dealer agreements with both companies. Both dealer
agreements, however, may be terminated at any time by either party without
cost. Termination of either of these agreements would have a materially
adverse effect on the Company.
The Company operates its dispatch CRs primarily in the 450-512 MHz
frequency band of the wireless communications industry. The Company also has
limited operations in the 800 MHz (SMR) band. However, the Company is not
active in the 220 MHz band, 900 MHz band, cellular or PCS segments of the
wireless communications industry and it currently does not intend to become
active in those segments.
450-512 MHZ CR OPERATIONS. The Company conducts the majority of its
operations in the 450-512 MHz frequency band. The Company is actively pursuing
widespread utilization of trunking technology for its systems in this band. A
trunked 450-512 MHz band CR is superior to a conventional CR in that trunked
systems make more channels available to handle calls and thus provide greater
capacity than conventional systems. See "The Dispatch Industry - New
Technologies." The trunked CR format also provides the customer with more and
faster calls than a conventional system. See "The Dispatch Industry - New
Technologies." These factors, in turn, allow a greater number of users to make
more calls than a conventional system, which should generate more revenues to
the Company. The trunked 450-512 MHz band CRs function similarly to 800 MHz
band trunked SMR systems. If the service is interconnected to the PSN, it is
comparable to cellular telephone technology.
To exploit the trunking format, the Company has begun converting its
450-512 MHz band CRs to this format. Over time, the Company plans to convert
substantially all its CRs to the same format. This conversion to a trunked CR
generally involves obtaining FCC approval for the assignment of licenses by the
individual users or to claim licenses for unused channels. There can be no
assurance, however, that the Company will be able to obtain requisite licenses
or take the other steps necessary to complete this conversion process.
The 470-490 MHz portion of the 450-512 MHz band is available in the top
13 U.S. major metropolitan areas and is known as the T-Band. Operation on the
T-Band is particularly
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advantageous as the T-Band contains the only frequencies in the 450-512 MHz band
on which exclusive channels are available. Exclusive channels are superior to
co-channel operations because an operator, such as the Company, has more
available capacity and less restrictions on service provision. As of March 1,
1997, the Company had filed applications with the FCC for approximately 220
T-Band licenses in the Dallas, Houston, San Francisco, Washington D.C. and
Baltimore areas and approximately 180 of those licenses have been granted and
are in good standing. Through this effort, the Company has made progress in its
efforts to gain exclusive control of channels in these areas, and has begun
installation of CRs in Houston, Dallas and Chicago. However, there can be no
assurance that the Company will gain exclusive control over all or substantially
all of these channels.
800 MHZ CR OPERATIONS. Under the Motorola Agreements, the Company
acquired 92 CRs in the 800 MHz band. As with the 450-512 MHz band CRs, the 800
MHz band CR licenses are typically held by the users, but the Company has a
limited number of its own licensed systems in this band. The FCC has imposed a
partial freeze on issuing new 800 MHz band SMR licenses. Although the Company
has filed for additional 800 MHz band SMR licenses prior to the freeze, it
anticipates operating in the 800 MHz band dispatch market on a limited basis
only. Instead, with appropriate FCC approvals, the Company is attempting (i) to
acquire existing 800 MHz band systems (including assignments of licenses
relating to those systems), (ii) to convert any 800 MHz band co-channel
frequencies to exclusive frequencies by obtaining assignments of co-channel
users' licenses, and then (iii) to seek to exit the 800 MHz market by selling
its 800 MHz band systems. There can be no assurance, however, that the Company
will be successful in acquiring 800 MHz band systems, converting 800 MHz band
co-channel frequencies to exclusive frequencies, obtaining FCC approval for
license assignments or selling any of its 800 MHz band systems at a profit. The
Company's inability to carry out this strategy could have a material adverse
effect on its business. To maintain the 800 MHz band licenses the Company now
holds, it will continue to load and operate these channels until it sells the
systems.
After obtaining FCC consent in November 1995, the Company successfully
concluded the sale of three 800 MHz band systems for $300,000, recognizing a
gain of $280,000. As of March 1, 1997, the Company had executed several
contracts for the sale of other 800 MHz band systems and the Company anticipates
that these sales will be consummated upon receipt of FCC approval. The Company
expects that the FCC will approve $70,000 in sales of such systems by the
Company in 1996, approximately $4 million in the first quarter of 1997 and
another $200,000 in the second quarter of 1997. The Company anticipates the tax
gain on these sales will be approximately $3.5 million. If consummated, these
transactions will exhaust the Company's existing net operating loss carryforward
for federal income tax purposes. There can be no assurance, however, that the
Company will be able to obtain exclusive licenses, will obtain FCC approval for
these sales, will be successful in concluding additional sales or will conclude
sales at a profit. Through this process, the Company's focus as a communications
carrier will remain on the 450-512 MHz band trunked systems.
BUSINESS STRATEGY
The Company's business strategy includes the following:
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EXPANSION OF FOOTPRINT. The Company seeks to expand within existing
markets and into nearby markets through the FCC-approved acquisition of
operating and start-up 450-512 MHz band dispatch systems. The Company is not
only focusing on metropolitan areas, but also on rural communities where
dispatch is a major form of communication. Because of the Company's size, it
believes it can offer greater and expanded product and infrastructure coverage
than 450-512 MHz band operators that operate fewer systems.
DEVELOPMENT OF EXISTING INTRINSIC VALUE. At the time the Company
acquired its original assets from Motorola, the CRs were loaded only to 45% of
their capacity. As the Company installs trunking technology, the Company
anticipates that available system capacity for additional income-producing
units will increase from approximately 55% to 75%. Thus, the Company may be
able to achieve a substantial growth rate with a minimum capital investment,
other than the costs of trunking. However, there can be no assurance that this
will be the case.
Under the Motorola Agreements, the Company also purchased 92 unlicensed
800 MHz band CRs. At that time, the Company believed that if it acquired FCC
consent to assignments of a sufficient number of 800 MHz band licenses, it
could obtain exclusivity over the related channels and could then sell the
trunked 800 MHz band systems at a much greater price than their original
purchase price. The Company has entered into contracts for approximately $4.3
million of such sales, of which sales of approximately $50,000 have closed and
sales of approximately $4.25 million are expected to close in early 1997. If
the FCC gives the Company the requisite consent and if the Company obtains
exclusive control of the remaining 800 MHz band channels, it believes that such
systems may be sold at a substantial profit. However, there can be no
assurance that the Company will obtain control of these channels, or that the
systems will be sold for the amount the Company now estimates.
SPECTRUM. Spectrum is critical in the communications business. Without
spectrum on which to operate, the best communications equipment is worthless.
The Company is spending considerable funds to obtain assignments of FCC
licenses to provide dispatch services. The Company is receiving assignments of
these licenses, and the corollary right to use the spectrum, through purchase
of existing systems and through applications to the FCC for the grant of
additional licenses. The Company anticipates that these efforts will be
ongoing. However, there can be no assurance that the Company will be
successful in any or all of these efforts to obtain the rights to use the
spectrum.
Specifically, the Company is actively pursuing additional licenses from
the FCC to operate on the 470-490 MHz T-Band channels. If the FCC grants
these licenses, the Company plans to construct such T-Band systems. The
Company anticipates that, after constructing T-Band systems, its next licensing
project will involve obtaining FCC consent to convert the individual 450-470
MHz band customer licenses using the Company's CRs to FB-6 (Private Carrier)
Classification, which would result in the Company becoming the licensee of a
trunked system using the formerly individually-licensed channels. Finally, the
Company intends to seek FCC authority to operate "offset" channels (i.e., new
narrowband channels located adjacent to existing channels) when the partial
450-512 MHz band licensing freeze on such channels is removed.
The FCC recently announced the adoption of a consolidation plan and
related rules for the PMRS bands below 800 MHz. These new rules change how the
frequencies are assigned, establish a method for PMRS users to implement highly
efficient trunked systems in the bands below 800 MHz and provide for operation
of offset channels in the 450-470 MHz band. However, until the full text of this
decision is released by the FCC, which is expected to occur shortly, the actual
impact of the new rules on the Company's operations cannot be determined. See
"Regulation."
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Although the Company does not intend to operate 800 MHz band networks on
a long-term basis, it currently is consolidating operations in this band so it
will be able to sell its licensed systems for favorable prices. The Company
thus is attempting to purchase 800 MHz band conventional systems in Chicago and
San Francisco, where the Company currently operates CRs. If the Company
reaches agreements for those acquisitions and obtains FCC consent, it intends
to consummate those transactions. Upon further FCC consent, the Company plans
to sell some of these 800 MHz band conventional systems and to convert others
to 800 MHz trunked SMRs prior to selling them.
EQUIPMENT RENTAL. To augment its sales activities, the Company has
established a Rental Division. This division currently rents approximately 500
units. The Company provides equipment rental directly to customers, as well as
through approved dealers.
TOWERS. The Company leases space from a variety of lessors for all its
CRs, except one CR, which is located on a tower that the Company owns. With the
success of spectrum auctions in the PCS, 220 MHz, 800 MHz, and 900 MHz bands,
towers are in high demand because these new licensees need facilities for their
transmitting and related equipment. To be in a position to take advantage of
this increasing demand for tower space, the Company is considering acquiring
additional towers to generate revenues by leasing space to other licensees and
to decrease its own leasing costs. To implement this strategy, the Company is
considering the creation of a tower division, possibly in late 1997 or early
1998. However, there can be no assurance that the Company will be in a position
to create a tower division, or, if created, that the tower division will be able
to locate suitable towers at a price acceptable to the Company.
COMPETITION
The Company has intense competition from the following types of
operations:
OTHER 450-512 MHZ BAND CR OPERATORS. The Company currently competes with
other 450-512 MHz band CR operators. The Company's primary competitors in this
category are Nextel and Pittencrief Communications, Inc. ("Pittencrief"), each
of which has approximately 400-600 CRs operating in the 450-512 MHz band.
Because the Company is expanding its 450-512 MHz band CR operations and because
Nextel and Pittencrief have national footprints, the competition with these
companies could increase. With FCC approval, the Company has begun converting
its 450-512 MHz band CRs from user-licensed conventional operations to the
trunked multi-channel format. This process began in metropolitan areas and the
Company eventually plans to extend it to suburban markets. Although the Company
believes that
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this conversion will help distinguish it from the 450-512 MHz conventional CR
operators, there can be no assurance that the Company will be able to expand
its conversion to the trunked multi-channel format or that such conversion will
indeed distinguish the Company from conventional CR operators. In addition, a
limited number of paging operations are provided in the 450-512 MHz band, but
the Company does not anticipate that these services will compete with its CR
dispatch services in this band.
CELLULAR TELEPHONE SYSTEMS. The Company currently competes, and believes
that it will continue to compete, with cellular telephone systems to a great
extent. The Company charges a flat monthly rate for its services. By contrast,
cellular charges are primarily based on air time. Additionally, cellular
service providers typically charge for a call whether the user placed or
received the call. Because many dispatch calls are mobile-to-mobile, cellular
calls from one user to another result in two air time charges, one charge for
the caller and one charge for the receiver. Large fleet operators may find
cellular costs prohibitive, although extremely small fleets may be in a position
to justify the cost of cellular service. The Company believes that cellular
telephones are not an economical solution for medium to large dispatch users,
and that CRs offer a cost-effective alternative for high volume users of
cellular telephone services.
800 MHZ BAND SMR OPERATORS. Due to recent technological developments,
800 MHz band SMR operators may now elect to convert their systems from analog to
digital. Nextel, the largest SMR operator in the United States, is in the
process of converting its analog technology to digital, beginning with its major
metropolitan area systems. Conversion to the digital technology requires
capital investment, and the Company believes that companies that convert may be
required to increase their prices to recoup their capital costs. These factors
may price digital 800 MHz band operators out of the dispatch market and into the
cellular telephone market. For this reason, the Company believes 800 MHz band
SMR digital operators will not represent a significant competitive threat.
However, there can be no assurance that this will be the case.
The 800 MHz band SMR operators that retain analog technology probably
will continue to concentrate on dispatch services and therefore will continue
to compete with the Company. The Company believes that eventually many of
these 800 MHz band SMR analog providers may be acquired by large digital
operators, interested in obtaining additional spectrum to maximize their
loading capacity. However, there can be no assurance that such acquisitions
will take place or that the 800 MHz band SMR operators will not continue to
create significant competition for the Company.
900 MHZ BAND SMR OPERATORS. Operators of 900 MHz band SMR systems
currently provide the greatest dispatch service competition to the Company.
Many of these 900 MHz band system operators are using analog technology,
thereby minimizing capital costs so they can maintain rates at competitive
levels. Rates for these services could increase, however, because
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of higher capital costs for auctioned systems and because of the costs of any
conversion to digital technology. However, there can be no assurance that
these rates will increase or that operation of 900 MHz band SMR systems will
not continue to provide significant competition to the Company.
In addition to the existing 900 MHz band SMRs in the top 50 markets, the
FCC auctioned 900 MHz band systems in 51 MTAs during 1996. The Company
unsuccessfully participated in this auction. Per channel costs for the 900 MHz
band systems averaged in excess of $10,000 each in the auction. In contrast,
many licenses that the Company holds in the 450-512 MHz band cost less than
$1,000 per channel. There can be no assurance, however, that the Company will
be able to continue obtaining licenses for this price.
Initially, the Company expects that the auctioned 900 MHz band licensees
will operate using analog technology. In some cases, the auction price paid by
the 900 MHz licensees per channel indicates that a higher rate may be charged
to each subscriber to produce a desired rate of return on the investment. The
Company believes that the comparative low cost of the Company's dispatch
services may result in lower, more competitive rates for its subscribers. In
addition, because of the high prices paid for spectrum in the recent 900 MHz
band auction, the Company believes it is unlikely that analog technology based
services, such as dispatch services, will be offered on the 900 MHz band on a
long-term basis. However, there can be no assurance that 900 MHz band services
will be more expensive than the Company's services or that dispatch will not
continue to be offered by 900 MHz band operators. Competition from 900 MHz
band operators could have a material adverse effect on the Company.
220 MHZ OPERATORS. The 220 MHz band has been available to potential
dispatch operators for several years. Although the Company is not aware of any
major equipment manufacturer that currently provides a full array of
communications equipment to operate at this frequency level, as spectrum
becomes more scarce, manufacturers will probably begin providing equipment for
the 220 MHz band. If this occurs, 220 MHz band operators could become dispatch
competitors to the Company.
PCS OPERATORS. PCS is the newest technology to enter the wireless
communications industry. Broadband PCS systems will operate at 1.8 to 2.2 GHz
and will provide PSN interconnection, paging, voice mail and data transfer
capabilities. While conventional paging services historically have been
provided in the 900 MHz band, recently, narrowband PCS licensees, which are
expected to provide paging and other data transmission services, also have
begun operating in different segments of the 900 MHz band. PCS services are
now available on a limited scope and the Company expects to face competition
from these operators.
The first broadband PCS auction, in which the FCC awarded two 30 MHz
licenses in each MTA, began in December 1994 and ended in March 1995. A
substantial number of the companies awarded 30 MHz PCS licenses in this auction
were current cellular communications providers and joint ventures of current and
potential wireless communications service providers. The FCC completed PCS
auctions in early 1997.
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In addition, the FCC has auctioned national and regional narrowband PCS
licenses, and it plans to complete this licensing process in 1997.
At this time, the impact of PCS on the Company's business is uncertain
for several reasons. First, PCS is a new service and little, if any, empirical
or other market data are available for either broadband or narrowband
operations. Second, given the high entry costs for PCS licensees, it is
difficult to forecast how soon systems will be operational, what prices will be
charged and how successful the systems will be in providing viable competitive
services. Third, it is unknown to what extent PCS operators will provide
dispatch service in markets where the Company is operating. Although the
Company believes that the PCS operators are going to be susceptible to the same
higher pricing as cellular operators, as compared to the pricing of the
Company's services, there can be no assurance that this will be the case.
REGULATION
The FCC regulates the construction, operation and acquisition of wireless
communications systems under the Communications Act of 1934, as amended (the
"Communications Act"), and pursuant to the FCC's rules and policies adopted
thereunder. The FCC rules governing wireless communications are highly
technical and subject to change. The Company believes it is in material
compliance with FCC licensing, loading and operating requirements. The Company
has not received any notification of problems or material deficiencies from the
FCC.
Under the Communications Act, dispatch operators, such as the Company,
generally are regulated as PMRS providers (i.e., private carriers) rather than
as CMRS providers (i.e., common carriers). A PMRS provider is subject to less
stringent regulations, both by the FCC and individual states, than a CMRS
provider. In contrast, cellular telephone, most paging services and those SMR
operators providing PSN telephone interconnect are, or will be, regulated as
CMRS providers. Generally, CMRS providers must provide services under the same
terms and conditions to any subscriber requesting services. These CMRS
providers also may be required to file tariffs and their revenues from
services may be regulated. As PMRS providers, dispatch operators, such as the
Company, may decline service to certain subscribers and may negotiate different
prices with each customer for "like" services. Certain changes to the
Communications Act and to the related FCC rules and policies could result in
minimizing or eliminating this distinction between PMRS and CMRS providers.
These changes could have a material adverse effect on the Company. See
"Regulatory Developments."
LICENSING. In order to provide CR services, the Company does not need
an FCC license if its customers are licensed. Most licenses in the 450-512
MHz, 800 MHz and 900 MHz bands are granted for 5-year or 10-year terms.
License renewals are generally pro forma, absent material licensee misconduct
or failure to meet applicable construction and loading requirements. To the
extent that the Company operates its own systems in the 450-512 MHz or 800 MHz
bands, it is subject to the same licensing and related requirements as its
customers.
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Prior FCC approval is a prerequisite to any license assignment or to the
transfer of control over a licensee. In certain instances, the FCC conditions
the assignment of a license or transfer of control over a licensee upon meeting
certain loading requirements. For its licensed systems, the Company believes
that it is in compliance with all applicable FCC rules, including any loading
requirements.
SYSTEM CONSTRUCTION. Licensees in the 450-512 MHz, 800 MHz and 900 MHz
bands are subject to certain deadlines for completing construction and
commencing operation. If the licensee does not meet these deadlines and does
not obtain an extension from the FCC, the license is subject to cancellation or
modification. The Company continually monitors its compliance with FCC
requirements for its licenses. This ongoing review assists the Company in
ensuring that it completes construction within the FCC's deadlines.
CHANNEL LOADING REQUIREMENTS. Presently, the FCC does not require that
a 450-470 MHz band PMRS system operator load a system with a specified number
of radio units within a prescribed time frame. However, the 470-490 MHz T-Band
is subject to loading requirements. Loading requirements also apply to 800 MHz
and 900 MHz band SMR licensees. If a licensee does not meet loading levels,
the FCC may take back channels or cancel the license. A licensee that loses
channels cannot reapply for any channels at that location for six months. As
discussed above under "System Construction," the Company continually monitors
its compliance with general FCC requirements, including loading requirements.
SYSTEM OPERATION. Licensees in the 450-512 MHz, 800 MHz and 900 MHz
bands are subject to certain technical and other operating requirements. If a
licensee does not comply with these requirements, the FCC may impose a fine or,
if the violations are substantial, the FCC may revoke its license. For its
licensed systems, the Company continually monitors its operations and believes
that it is in material compliance with the FCC's requirements.
INTERCONNECTION WITH PUBLIC SWITCHED NETWORK. Under the Communications
Act, wireless communications operators can provide their customers with mobile
radio services interconnected to the PSN. Because these operators have access
to the local telephone carrier, subscribers communicate with non-subscribers.
If the operator provides such interconnection to the PSN, the FCC likely will
regulate the operator as a CMRS provider.
REGULATORY DEVELOPMENTS. The FCC is considering the following
regulatory changes that may affect the Company's businesses. However, it is
uncertain at this time what impact, if any, these changes could have on the
Company's operations.
Refarming Proceeding. In its "refarming" proceeding, the FCC
recently adopted rules to relieve congestion in the land mobile bands below 800
MHz. These new rules became effective August 1, 1996. The rules (i) increase
the number of channels available on an exclusive basis by requiring conversion
to narrowband technologies; (ii) provide a phased-in 10-year transition for
operators and manufacturers to comply fully with the new requirements; (iii)
permit narrowband licensees to aggregate channels so they can provide service on
a wide area basis; and (iv) protect existing operators from harmful
interference. On February 14, 1997, additional "refarming" rules became
effective which clarify certain initial rules, modify the transition plan for
compliance with the new rules and provide coordinators greater flexibility in
assigning frequencies. In addition, the FCC recently announced the adoption of
rules providing for consolidation of operations in the bands below 800 MHz,
implementation of highly efficient trunked systems, and disposition of offset
channels in the 450-470 MHz band; but the impact of these rules cannot be
evaluated until the text of the FCC's decision is released. See "Business
Strategy--Spectrum."
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In addition, as part of the "refarming" proceeding, the FCC proposed
additional rules that, if adopted, could result in further regulatory
consolidation, imposition of user fees or implementation of license auctions.
These new proposed rules could make it easier for the Company to expand its
footprint and scope of operations. In particular, if the FCC holds auctions in
the 450-512 MHz band, the Company, as an established provider of services in
this band, may be able to secure exclusive license status in some of its
markets. However, there can be no assurance that the proposed rules will be
adopted, that the Company would be able to secure exclusive licenses if they
were made available, that the Company will be able to expand its footprint or
that the Company would be successful in any FCC auction. In addition, the
"refarming" proceeding has been controversial and could take several years to
complete. Thus, the impact this proposal may have on the Company's operations
is uncertain.
Regulatory Reclassification. Under the Omnibus Budget
Reconciliation Act of 1993, the Communications Act was amended to establish two
new regulatory categories that involve certain Company businesses. Instead of
distinguishing between private carriers and common carriers, the FCC now must
distinguish between PMRS providers and CMRS providers. In general, CMRS
providers will be subject to regulatory requirements comparable to the
requirements for common carriers and PMRS providers will be subject to
regulatory requirements comparable to the requirements for private carriers.
The FCC has classified all private carrier licensees within the 450-512 MHz
refarming bands, except Business Radio Service licensees, as PMRS providers.
One of the criteria for determining if a carrier is subject to CMRS regulation,
however, is if it provides interconnection to the PSN. The Company is
currently classified as a PMRS provider and is generally free from the uniform
rules applicable to CMRS providers. If the Company decided to upgrade its
services and provide interconnection to the PSN, it likely then would be
classified as a CMRS provider. The interconnection to PSN, if deemed
appropriate in the Company's business strategy, could provide another source of
revenue.
SMR. The FCC has ruled that 800 MHz band SMR systems, to the
extent possible, should be licensed on a wide-area basis and should be subject
to auctions. Similar licensing requirements have been imposed upon 900 MHz
band SMR licensees. In addition, certain limits on aggregate spectrum held by
CMRS licensees, including SMR operators, have been imposed. As a result of
these changes, the Company believes that its licensed 800 MHz band systems may
be attractive to prospective purchasers. The Company plans to sell these
systems, upon FCC consent, without affecting its core business in the 450-512
MHz band segment.
New Allocations. The FCC has proposals pending from time to time
seeking the allocation of additional spectrum for wireless communications
services. The Company cannot predict whether or when any such allocation might
be made or the extent to which any future allocation of additional spectrum
would affect the Company's existing operations or its opportunity to expand.
State Regulation. State and local governments may exercise their
traditional regulatory powers (e.g., health, safety, consumer protection and
zoning regulation) over wireless communications systems. The Communications
Act, however, specifically preempts state and local government regulation of
CMRS and PMRS provider rate offerings and market entry.
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<PAGE> 27
Regulation of Radio Towers. The FCC and the Federal Aviation
Administration regulate radio towers with respect to geographic location,
height, construction standards and tower maintenance. Failure to maintain
radio towers in compliance with regulations can result in penalties to the
tower owner or operator. Compliance with lighting and painting requirements is
particularly important. The Company believes each tower it uses is in material
compliance with applicable regulations. The Company maintains liability
insurance to protect it from third party claims relating to non-compliance with
tower regulations.
OPERATIONS
The Company performs billing, maintenance of subscriber records, FCC
licensing activities and equipment leasing at its Woodlands, Texas
headquarters. A separate department is responsible for all FCC licensing
activities, including subscriber load reporting. An independent service
company provides 24-hour customer service for the Company.
The Company's operations are divided into five business regions, as
follows: the Western Region, which includes Arizona, New Mexico and El Paso,
Texas; the California Region, which includes California; the Midwest Region,
which includes Colorado, Kansas, Nebraska, Wyoming, Iowa, Montana, South Dakota
and North Dakota; the North Central Region, which includes Illinois, Indiana,
Kentucky, Minnesota, Missouri, Ohio, Wisconsin and West Virginia; and the South
Central Region, which includes Texas (except El Paso), Louisiana and Arkansas. A
business manager oversees each region or, in some cases, two regions. The
primary responsibility of the business manager is to recruit local dealers to
become agents for the Company. The agent's responsibility is to load the
Company's infrastructure with subscriber units. Each agent shares in the gross
revenue he brings to the Company. Each business manager is also responsible for
eliminating unprofitable CRs, adding new CRs in areas where loading is heavy and
expanding the Company's service territory.
EMPLOYEES
As of March 1, 1997, the Company employed 25 people of whom 24 are
employed on a full-time basis. None of the Company's employees belongs to a
union.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this Registration Statement contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause
or contribute to such differences include, but are not limited to, the factors
set forth below, those discussed in "Description of Business," "Risk Factors,"
and elsewhere in this Registration Statement. Specifically, there can be no
assurance that the Company will be able to become profitable, compete
effectively, sell its 800 MHz band systems at a profit, increase its
utilization on its 450-512 MHz band systems, retain its key personnel or take
any or all of the other actions in this Registration Statement. These factors
should be considered carefully in evaluating the Company and its business
before purchasing the securities registered hereby.
The following is a discussion of the financial condition and results of
Company operations for the nine-month periods ended September 30, 1996 and
1995, and the year ended December 1995, including certain factors the Company
believes are likely to affect its financial condition. The Company has not
presented comparative information for the year ended December 31, 1995,
20
<PAGE> 28
to the year ended December 31, 1994, since the Company only began operations in
September 1994 and the data are not comparable. The following should be read in
conjunction with the Company's financial statements and the notes thereto
appearing elsewhere in this document. The Company believes that such
consolidated financial statements are not indicative of its future operation
and financial performance because they do not reflect the Company's business
strategy entailing the implementation of trunking technology for the 450-512
MHz band CRs, the consolidation or sale of less profitable installations, the
increased loading of repeaters which are presently 45% utilized, and finally,
the sale of non-strategic 800 MHz band systems. Also, the Company's operations
are expected to include the sale of subscriber units on a lease purchase plan
beginning January 1997. However, there can be no assurance that the Company
will be able to implement all or any part of its business strategy.
OVERVIEW
The Company's revenues consist of air time billing, wireless equipment
sales and rentals and dispatch system sales. Air time accounted for the
majority of revenues in each of the nine-month periods ended September 30, 1996
and 1995, and the year ended December 31, 1995.
Air time revenues consist of fixed monthly charges which increase in
direct proportion to the number of subscriber units. Antenna site rental, the
Company's largest operating expense, is fixed for each tower lease for the term
of the lease. Accordingly, any increase in air time revenues results in a high
incremental contribution to operating income. Equipment revenues were
generated by the in-house sales department's sale of wireless equipment. In
August 1996, the Company discontinued the direct sales approach and sold its
service department. The sale of the service department resulted in a loss to
the Company of $86,000. In the future, revenues from equipment sales will be
generated by a Call Center in Scottsbluff, Nebraska, with which the Company
contracts to perform sales and customer services. Equipment rentals are
derived from short-term (less than one year) contracts, while equipment leases
represent financing contracts with multi-year duration.
The Company's customers are billed on an annual, semi-annual,
quarterly or monthly basis, creating deferred revenue for the advance portion
of each billing. The largest customer billing is November 1 of each year, which
includes the majority of each billing cycle, therefore, a material amount of
deferred revenue has been recognized at September 30 of each year.
GROWTH TREND
In early 1996, with appropriate FCC approvals, the Company began
trunking its 450-512 MHz band systems in Houston, Dallas, San Francisco and
Chicago. During the next several years, the Company plans to expand this
process to Phoenix/Tucson, St. Louis, Cleveland, Cincinnati, Dayton, Toledo,
Columbus, New Orleans, Wichita, Fort Smith and Little Rock by upgrading the CR
to a trunking format to increase the loading capacity by approximately 50%. As
a result of the trunking technology, which increases subscriber unit capacity,
the Company hopes to significantly increase air time revenue. However, there
can be no assurance that the Company will be able to expand its trunking
activities in a timely manner or actually significantly increase its load.
The Company has substantially increased the scope of its CR dispatch
operations. Since January 1995, the FCC has granted the Company 78 exclusive
licenses in the 470-512 MHz band and 50 exclusive licenses in the 800 MHz band.
Additionally, with FCC consent, the Company
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<PAGE> 29
has acquired 307 licenses in the 450-512 MHz band and 49 licenses in the 800
MHz band, all of which are co-channeled with other users. The Company will
endeavor to gain FCC approval for its exclusive control of these licensed
systems. However, there can be no assurance that the Company will receive the
required FCC approval.
During 1996, the Company executed contracts to sell some of the 800 MHz
band systems. To date, three of the transactions have closed after obtaining
FCC consent, with an additional contract to close with FCC consent during the
second quarter of 1997. The Company believes that the remaining contracts
should close during the first and second quarters of 1997. The Company expects
gross proceeds from these transactions to exceed $4 million. Assuming the
transactions all close, the Company plans to use $3.5 million of the net
proceeds from these transactions to retire long-term debt and the remainder to
purchase additional dispatch systems. There can be no assurance, however, that
these transactions will close or that the proceeds will equal the amount
anticipated.
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
In the first nine months of 1996, the Company continued to consolidate
its CRs by locating operations on fewer towers and terminating service from
unprofitable sites. Through this process the Company has terminated operations
on 58 unprofitable repeaters and sold 21 others. The Company plans to complete
this process during 1997, although there can be no assurance that it will be
able to do so. The Company continued to build its spectrum inventory by
contracting to acquire 22 channels. The Company has begun trunking of its
450-512 MHz band channels in Houston, Dallas, San Francisco and Chicago. The
Company plans to begin construction of 450-512 MHz band systems in Phoenix and
Tucson in early 1997, although there can be no assurance that it will be able
to do so.
In August 1996, the Company decided to withdraw from direct sales and
from service operations. Accordingly, the service division was sold in August
1996 and the direct sales staff was placed with other sales and service
organizations. The Company plans to focus on development of its dealer network
and the Call Center in Nebraska to load its infrastructure.
Total revenues for the first nine months of 1996 increased 25% from $4.4
million for the period ended September 30, 1995 to $5.5 million for the period
ended September 30, 1996. Equipment sales increased $707,000 from $250,000 for
the period ended September 30, 1995 to $957,000 for the period ended September
30, 1996. Radio rentals increased $143,000 from $94,000 for the period ended
September 30, 1995 to $237,000 for the period ended September 30, 1996.
Revenues from service were $234,000 in 1996 with no revenues for this category
in 1995. The first nine months of 1996 also reflect $50,000 in spectrum sales,
whereas the Company had no such sales in the first nine months of 1995.
Costs of sales were $4.1 million for the period ended September 30, 1996
compared with $3.3 million for 1995. Network Service costs decreased $286,000
from the period ended September 30, 1995 to the period ended September 30, 1996
to $2.8 million due primarily to
22
<PAGE> 30
reduced antenna site rent. The Company renegotiated most of its multiple site
contracts to obtain more favorable rentals. Radio rental expenses increased
from the period ended September 30, 1995 to the period ended September 30, 1996
from $32,000 to $37,000 and the cost of equipment sales increased for the same
periods from $610,000 to $792,000. Service costs were $442,000 in 1996, and
there were no service expenses in 1995.
Depreciation and amortization expense increased 16% from approximately
$503,000 to $583,000 for the period ended September 30, 1996 compared to the
same period in 1995 due to increased capital assets.
General and administrative expenses increased $585,000 to $1.8 million
from the period ended September 30, 1995 to the period ended September 30,
1996. The 49% increase resulted from discontinuation in August 1996 of the
Company's sales and service division ($185,000); establishing regional offices
in Phoenix, Arizona, Chicago and Nebraska ($180,000); network services
($139,000); and personnel additions in the Corporate division ($90,000).
The Company incurred a loss on the sale of its service-related division
in 1996 in the amount of $86,000. For the period ended September 30, 1996, the
Company's gain on the removal and sale of repeaters was $7,000 greater than in
the comparable 1995 period, due to additional repeater removals and sales.
Interest expense in 1996 was $17,000 less for the period ended September 30,
1996 due to the reduction of principal on the note payable to Champion
Communications Company in an exchange for stock in November 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash and cash equivalents of
approximately $851,000.
The working capital of the Company was a negative $491,000 as of
September 30, 1996. The Company bills in advance for its services on a
quarterly, semiannual or annual basis and the Company's largest customer
billing is on November 1. Cash flows from operating activities were
approximately $1.466 million for the period September 29, 1994 (date of
inception) through December 31, 1994 and a negative $436,000 for twelve months
ended December 31, 1995.
The Company's negative working capital balance and negative cash flows
have occurred as a result of the start-up of various divisions in connection
with the operation of the assets acquired from Motorola under the Motorola
Agreements. In addition, the Company has used funds for the acquisition of
licensed systems that complement the CRs the Company acquired under the
Motorola Agreements. The Company raised $1.9 million in its public offering in
Canada of Common Stock and warrants to acquire Common Stock, which was
completed in September 1996. The Company anticipates that it will generate
additional funds from the sale of 16 800 MHz band systems, exercise of the
Common Share Purchase Warrants issued in the 1996 public offering and
additional issuances of equity. There can be no assurance, however, that the
Company will be able to raise additional funds in this way. Failure to do so
would have a material adverse effect on the Company's cash flow and available
working capital. The Company
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<PAGE> 31
has granted Britwirth Investment Company, Ltd. a right of first refusal with
respect to acting as underwriter in any offerings by the Company of Common
Stock or other equity securities prior to March 31, 1997.
During 1994, capital expenditures of approximately $5.4 million were
made on communication and related equipment and capital expenditures of $76,000
were made on office equipment. These expenditures were funded by $1.8 million
of equity and an advance from a stockholder of approximately $3.2 million. For
the twelve months ended December 31, 1995, $670,000 was spent on communications
and related equipment and $263,000 on office equipment.
For the nine months ended September 30, 1996, expenses for
communications and related equipment increased $435,000 and office equipment
expenses increased by $65,000. The Company financed its operations for the
nine month period ended September 30, 1996 with borrowings from commercial
financing institutions, the remaining private placement funds of approximately
$205,000 and proceeds of the Company's initial public offering in Canada. As
of September 30, 1996, the Company owed $366,092 to three commercial lenders
with varying repayment terms.
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases 5,550 square feet of office space and 1,525 square
feet of warehouse space in The Woodlands, Texas, a suburb of Houston, Texas,
where its principal offices are located.
The Company owns one tower and leases antenna and repeater space on
approximately 750 tower sites. Other than its lease on the Sears Tower in
Chicago, Illinois, no one lease is material to the business of the Company. The
leases are generally for terms of one year and month-to-month thereafter,
although the lease on the Sears Tower is for a three-year term.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of November 1, 1996, by (i) each
director of the Company; (ii) each Named Executive Officer (as hereinafter
defined); (iii) each person known to be a beneficial owner of 5% or more of the
Common Stock, and (iv) all directors and executive officers as a group. Unless
otherwise indicated, each person has sole voting and dispositive power with
respect to the shares.
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<PAGE> 32
<TABLE>
<CAPTION>
Name of Percent
Beneficial Owner Number of Shares Beneficially Owned
-------------------------------- ---------------- ------------------
<S> <C> <C>
Albert F. Richmond 1,720,000(1) 28.18%
1610 Woodstead Ct., Suite 330
The Woodlands, Texas 77380
David A. Terman 1,892,000(2) 31.00%
1610 Woodstead Ct., Suite 330
The Woodlands, Texas 77380
Mary F. Garner 30,000(3) *
Pamela R. Cooper 12,700(4) *
Peter F. Dicks 161,500(5) 2.64%
Randel R. Young 24,313(6) *
All executive officers and 3,840,513 62.69%
directors as a group
</TABLE>
- ----------------------
*Less than 1%
(1) Shares held by Albert F. Richmond and his wife, Linda L. Richmond, as
joint tenants with right of survivorship.
(2) Includes 1,272,000 shares held by a Marital Trust of which David A. Terman
is trustee and his wife, Maura B. Terman, is beneficiary, and 620,000 shares
held by a Marital Trust of which Maura B. Terman is trustee and David A Terman
is beneficiary. Mr. and Mrs. Terman each disclaim beneficial ownership of
shares held by them as trustee.
(3) Shares held by Mary F. Garner and her husband, James M. Dobson, III, as
joint tenants with the right of survivorship. Does not include options to
acquire 10,000 shares granted on February 1, 1996, as such options are not
exercisable until February 1, 1998.
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<PAGE> 33
(4) Includes 4,700 shares held by Smith Barney, as Custodian of IRA. Does not
include options to acquire 10,000 shares granted on February 1, 1996, as such
options are not exercisable until February 1, 1998.
(5) Includes options to acquire 11,500 shares of Common Stock exercisable
within 60 days.
(6) Includes 5,491 shares held by Randel R. Young, Trustee for Brian C. Young
Trust; 7,322 shares held by Randel R. Young, Trustee for Shannon E. Young
Trust; and options to acquire 11,500 shares of Common Stock exercisable within
60 days. Mr. Young disclaims beneficial ownership of the shares held in trust.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and executive officers of the Company and their respective
ages and positions are as follows:
<TABLE>
<CAPTION>
Principal
Occupation If
Different From
Name Age Position Position Held
-------------------------- ------- ------------------------- ----------------------
<S> <C> <C> <C>
Albert F. Richmond 55 Chairman of the Board and N/A
Spring, Texas Chief Executive Officer
David A. Terman 53 President N/A
The Woodlands, Texas Director
Mary F. Garner 42 Secretary N/A
The Woodlands, Texas
Pamela R. Cooper 44 Chief Financial Officer, N/A
Spring, Texas Treasurer and Controller
Peter F. Dicks(1)(2) 54 Director Investments
London, England
Randel R. Young(1)(2) 40 Director Attorney
Houston, Texas
</TABLE>
- ---------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
26
<PAGE> 34
ALBERT F. RICHMOND has served as Chairman of the Board, Chief Executive
Officer and a director of the Company since September 29, 1994. From May 1986
to February 1996, he was Chairman of the Board of Olympic Natural Gas Company,
and from 1981 to 1986, he served as Chief Financial Officer and a director of
American Oil and Gas Corporation. Mr. Richmond is also a director of Standco
Industries, Inc., a privately held manufacturer of oil field equipment based in
Houston, Texas. Mr. Richmond received a Bachelor of Business Administration
degree from Texas Christian University in 1965.
DAVID A. TERMAN has been President of the Company since November 1, 1994
and a director since September 29, 1994. Mr. Terman was employed by Motorola
from 1970 to 1994 where he held several management positions, including
positions in direct sales, indirect distribution and network services
operations, all of which are directly related to the wireless radio
communications industry. Mr. Terman received his Bachelor of Science degree in
Aviation Management from Auburn University in 1968.
MARY F. GARNER has served as Corporate Secretary of the Company since
September 29, 1994, and has been human resources manager of the Company since
August 1995. From January 1990 to February 1996, she was Corporate Secretary
of Olympic Natural Gas Company, and also served as Office Manager of Olympic
Natural Gas Company from June 1986 to July 1995.
PAMELA R. COOPER has been Treasurer and Controller of the Company since
April 1, 1995, and Chief Financial Officer since March 1996. From 1988 to
1995, she was the owner of PRC Consulting, an accounting firm in Dallas, Texas.
Ms. Cooper graduated from Southern Methodist University in 1974 with a Bachelor
of Business Administration degree.
PETER F. DICKS has been a director of the Company since October 24,
1994. He has also served as a director of Standard Microsystems Corporation, a
publicly-traded company, since June 1992. Mr. Dicks serves as director for
several companies in the United Kingdom, including Second Consolidated Trust,
The East German Investment Trust PLC, The Hoare Govett Smaller Companies
Investment Trust PLC, Action Computer Supplies Holdings PLC, The Hoare Govett
1000 Index Investment Trust PLC, Save & Prosper Linked Investment Trust PLC,
The Personal Number Company PLC and Second London American Growth Trust PLC,
all of which are publicly traded companies. From 1973 to 1991, he was a
founder and director of Abingworth Management Holdings, Ltd., a company that
provided venture capital investment management services.
RANDEL R. YOUNG has been a director since May 7, 1996. Mr. Young
currently serves as senior legal counsel for an NYSE energy company, based in
Houston, Texas. From April 1991 to October 1993, Mr. Young was an attorney in
his own Houston law firm. From October 1993
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<PAGE> 35
to December 1995, he was a partner with the New York-based law firm of Haight
Gardner Poor & Havens, resident in its Houston office. From December 1995 to
April 1996, he was a partner with the law firm of Gardere & Wynne, L.L.P.,
resident in its Houston office. Mr. Young received his Bachelor of Arts
degree, with highest honors, from the University of Houston in 1977. Mr. Young
received his law degree, with honors, from the University of Houston Law Center
in 1980.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established standing Audit and Compensation
Committees. The Audit Committee will annually recommend to the Board the
appointment of independent certified accountants as auditors for the Company,
discuss and review the scope of and fees for the prospective annual audit and
review the results with the auditors, review the Company's compliance with its
existing accounting and financial policies, review the adequacy of the
financial organization of the Company and consider comments by the auditors
regarding internal controls and accounting procedures and management's response
to those comments. The Audit Committee currently is comprised of Messrs. Dicks
and Young.
The Compensation Committee reviews and makes recommendations to the
Board regarding salaries, compensation and benefits of executive officers and
employees of the Company and administers the Company's 1996 Incentive Plan.
The Compensation Committee currently is comprised of Messrs. Dicks and Young.
ITEM 6. EXECUTIVE COMPENSATION
The following tables sets forth certain information with respect to the
compensation paid to the Company's Chief Executive Officer and each other
executive officer who received compensation in excess of $100,000 for the year
ended December 31, 1996 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
------------ ------------
Fiscal Year Securities
Name and Principal Ended Salary Underlying Options/
Position Dec. 31 ($) SARs(#)
- ---------------------------------- ------- ----------- -----------
<S> <C> <C> <C>
Albert F. Richmond, 1996 $ 125,000 --
Chairman of the Board and Chief
Executive Officer
David A. Terman, 1996 $ 125,000 --
President and Director
</TABLE>
28
<PAGE> 36
A total of 500,000 shares of the Company's Common Stock have been
reserved for issuance under the Company's 1996 Incentive Plan (the "1996 Plan")
which was adopted in February 1996. At March 1, 1997, options to acquire
362,000 shares of Common Stock had been granted under the 1996 Plan, of which
79,000 have expired because of employee termination, and all remaining options
issuable thereunder were available for future grant.
The 1996 Plan provides for the grant to employees, including officers of
the Company, of "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), nonstatutory stock
options, stock appreciation rights and restricted shares of Common Stock
(collectively, "Awards"). In addition, non-employee directors ("Outside
Directors") and consultants are eligible to receive nonstatutory stock options.
The 1996 Plan is currently administered by the Compensation Committee of
the Board of Directors. Subject to special provisions relating to Outside
Directors, the Compensation Committee selects the employees to which Awards may
be granted and the type of Award to be granted and determines, as applicable,
the number of shares to be subject to each Award, the exercise price and the
vesting. In making such determination, the Compensation Committee takes into
account the employees' present and potential contributions to the success of
the Company and other relevant factors.
The exercise price of all incentive stock options granted under the 1996
Plan must be at least equal to the fair market value of the shares of Common
Stock on the date of grant. With respect to any participant who owns stock
representing more than 10% of the voting rights of the Company's outstanding
capital stock, the exercise price of any incentive stock option granted under
the 1996 Plan must equal at least 110% of the fair market value of the shares
of Common Stock subject to such option on the date of grant, and the term of
the option must not exceed five years. To the extent that the aggregate fair
market value of the shares with respect to which options designated as
"incentive stock options" are exercisable for the first time by any optionee
during any calendar year exceeds $100,000, such options will be reclassified in
accordance with the Code. The 1996 Plan is not a qualified deferred
compensation plan under Section 401(a) of the Code and is not subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended.
Options granted under the 1996 Plan vest pursuant to terms determined by the
Board of Directors or its designated committee. The terms of all incentive
stock options and nonstatutory stock options granted under the 1996 Plan may
not exceed ten years. However, the terms of all incentive stock options
granted to an optionee who, at the time of grant, owns stock representing more
than 10% of the voting rights of the Company's outstanding capital stock may
not exceed five years.
Under the 1996 Plan, options are automatically granted to current and
future Outside Directors of the Company. Each person who was an Outside
Director of the Company on
29
<PAGE> 37
February 1, 1996, the effective date of the 1996 Plan ("Current Directors"),
received an option to purchase 10,000 shares of Common Stock of the Company at
a purchase price of $2.00 per share, the fair market value of the Common Stock
on that date. Such options vested immediately on the date of their grant, are
exercisable for 10 years and may be exercised at any time during the option
term.
Under the 1996 Plan, individuals who are not directors, but subsequently
become Outside Directors of the Company after the adoption of the 1996 Plan (a
"Future Director"), will automatically receive an option to purchase 10,000
shares of Common Stock of the Company at a purchase price equal to the fair
market value of the stock at the date of grant. Such shares vest immediately
and are exercisable for a period of ten years. Once the Company becomes a
reporting company under the Securities Exchange Act of 1934, each Outside
Director will automatically receive an annual grant of options to acquire 1,500
shares of Common Stock at the fair market value of the Common Stock on the date
of the grant, vested immediately upon grant, and exercisable at any time during
the 10-year term of the option.
Under the 1996 Plan, restricted shares of Common Stock ("Restricted
Stock") may be granted to employees pursuant to terms determined by the Board
of Directors or its designated committee. Restricted Stock may not be
transferred until the restrictions are removed or have expired. Conditions to
the removal of restrictions may include, but are not required to be limited to,
continuing employment or service to the Company or the achievement of certain
performance objectives.
Stock appreciation rights ("SARs") may be granted to employees, either
independent of, or in connection with, options. SARs granted in connection
with an option are subject to the terms of the Award agreement granting the
option. Upon exercise of SARs granted in connection with an option, the
holder shall receive payment (in cash, Common Stock or a combination of both at
the discretion of the Board of Directors or its designated committee) in an
amount equal to the product of (i) the fair market value of a share of Common
Stock on the date of exercise minus the exercise price per share of the option,
multiplied by (ii) the number of shares of Common Stock as to which the SAR is
being exercised. SARs granted independent of an option are exercisable in the
manner, and pursuant to the terms, determined by the Board of Directors or its
designated committee. Terms to be determined by the Board of Directors or its
designated committee include the number of shares to which the SAR applies, the
vesting schedule for the exercise of such right and the expiration date of the
right. Upon exercise of an SAR, the holder shall receive payment (in cash,
Common Stock or a combination of both at the discretion of the Board of
Directors or its designated committee) in an amount equal to the product of (i)
the fair market value of a share of Common Stock as of the date of exercise,
minus the fair market value of a share of Common Stock as of the date the SAR
was granted, multiplied by (ii) the number of shares as to which the SAR is
being exercised. The exercise of SARs granted in connection with options
requires the holder to surrender the related option (or any portion thereof, to
the extent unexercised). No SAR granted under the 1996 Plan is transferable by
the employee other than by will or by the laws of descent and distribution, and
each SAR is exercisable during the lifetime of the employee only by such
employee.
30
<PAGE> 38
Under the 1996 Plan, if any change is made in the Company's
capitalization, such as a stock split or stock dividend, which results in a
greater or lesser number of shares of outstanding Common Stock, appropriate
adjustment shall be made in the exercise price and the number of shares subject
to options, Restricted Stock Awards and SARs.
Award agreements under the 1996 Plan may, as determined by the Board of
Directors or its designated committee, provide that, in the event of a "change
in control" of the Company, (i) the holder of a stock option will be granted a
corresponding SAR, (ii) all outstanding SARs and stock options will become
immediately and fully vested and exercisable in full and (iii) the restriction
period on any Restricted Stock will be accelerated and the restrictions will
expire. In general, a "change in control" of the Company occurs in any of five
situations: (i) a person other than (a) the Company, (b) certain affiliated
companies or benefit plans, or (c) a company a majority of which is owned
directly or indirectly by the stockholders of the Company, becomes the
beneficial owner of 50% or more of the voting power of the Company's
outstanding voting securities; (ii) a majority of the Board of Directors is not
comprised of the members of the Board of Directors at the effective date of the
1996 Plan and persons whose elections as directors were approved by those
original directors or their approved successors; (iii) a person described in
clause (i) announces a tender offer for 50% or more of the Company's
outstanding voting securities and the Board of Directors approves or does not
oppose the tender offer; (iv) the Company merges or consolidates, other than
mergers or consolidations in which the Company's voting securities are
converted into securities having the majority of voting power in the surviving
company; or (v) the Company liquidates or sells all or substantially all of its
assets, or the Company's stockholders approve such a liquidation or sale,
except sales to corporations having substantially the same ownership as the
Company.
If a "restructuring" of the Company occurs that does not constitute a
change in control of the Company, the Board of Directors or the committee
administering the 1996 Plan may (but need not) cause the Company to take any
one or more of the following actions: (i) accelerate in whole or in part the
time of vesting and exercisability of any outstanding stock options and SARs to
permit those stock options and SARs to be exercisable before, upon or after the
completion of the restructure; (ii) grant each option holder corresponding
SARs; (iii) accelerate in whole or in part the expiration of some or all of the
restrictions on any Restricted Stock; (iv) if the restructuring involves a
transaction in which the Company is not the surviving entity, cause the
surviving entity to assume in whole or in part any one or more of the
outstanding Awards upon such terms and provisions as the Board of Directors or
its designated committee deems desirable; or (v) redeem in whole or in part any
one or more of the outstanding Awards (whether or not then exercisable) in
consideration of a cash payment, adjusted for withholding obligations. A
restructuring generally is a merger of the Company or the direct or indirect
transfer of all or substantially all of the Company's assets (whether by sale,
merger, consolidation, liquidation or otherwise) in one transaction or a series
of transactions.
401(K) PLAN
In January 1996, the Company adopted a 401(k) Plan (the "401(k) Plan")
under which all employees of the Company who have completed three months of
service are eligible to participate.
31
<PAGE> 39
Participants may elect to defer the receipt of up to 15% of their annual
compensation (up to a maximum dollar amount established in accordance with
Section 401(k) of the Internal Revenue Code) and have such deferred amounts
contributed to the 401(k) Plan. The Company may, in its discretion, make
matching contributions to the extent it deems appropriate. The Board of
Directors has not made a decision regarding matching contributions for the
fiscal year ending December 31, 1996. The Company's matching contributions
vest over a four-year period beginning when an employee has completed two years
of service.
OUTSTANDING OPTIONS
As of March 1, 1997, the Company had granted options to 24 of its
employees to purchase 362,000 shares of its Common Stock under its 1996 Plan.
Of these, options to purchase 79,000 shares expired when employees' employment
with the Company terminated.
Incentive stock options granted to officers and employee directors are
exercisable at $2.00 per share and vest over a five-year period beginning
February 1, 1998. These options expire 10 years after the date they are
granted or 90 days following termination of the optionee's employment with the
Company.
The Company has issued 23,000 non-qualified options to Messrs. Dicks and
Young, its Outside Directors. The options vest immediately, are exercisable at
$2.00 per share and expire 10 years after the date of grant.
COMPENSATION OF DIRECTORS
Through June 20, 1996, Outside Directors received $750 per meeting. On
June 20, 1996, the Board increased this fee to $1,000. The Company also pays
directors $500 for each committee meeting that they attend.
Under the 1996 Plan, Peter F. Dicks, on February 1, 1996 and
December 31, 1996, and Randel R. Young, on May 7, 1996 and December 31, 1996, as
Outside Directors, each received options to purchase 11,500 shares of the
Company's Common Stock at $2.00 per share, the fair market value of the Common
Stock on the dates the Company issued these options. Such options vested
immediately, are exercisable for 10 years, and may be exercised at any time
during the option term.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At the Company's inception, the Company issued 1,800,000 shares of
Common Stock to each of Albert F. Richmond and David A. Terman for $.50 per
share. This amount was paid through reduction of indebtedness on loans from
Champion Communications Company, a company wholly owned by Mr. Richmond, to the
Company. Mr. Richmond is the Company's Chairman of the Board and Chief
Executive Officer and Mr. Terman is the Company's President. Mr. Richmond
acquired an additional 200,000 shares of Common Stock for $1.35 per share in
December 1995. Also, in December 1995, David A. Terman, as trustee of a
marital trust, his wife, Maura B. Terman, as trustee of a marital trust, and
Elisa and Eileen Terman, the daughters
32
<PAGE> 40
of David Terman, acquired 72,000, 100,000, 14,000 and 14,000 shares of Common
Stock, respectively, all at $1.35 per share, as more fully discussed below.
In October 1994, the Company issued 150,000 shares of Common Stock to
Peter Dicks, one of the directors of the Company, for $.50 per share.
On January 2, 1995, the Company documented past advances from Champion
Communications Company made to the Company in 1994 for the acquisition of base
stations and related customers by executing and delivering a note in the amount
of $3,177,505 at the prime interest rate as published in the Wall Street
Journal, and granting a security interest in 1,499 community repeaters secured
by a security agreement. On November 15, 1995, $377,925 of the amount payable
and $162,075 of accrued interest payable was converted into 400,000 shares of
Common Stock at $1.35 per share, which shares were issued on December 15, 1995
to Mr. Richmond and his wife, Linda L. Richmond, David A. Terman and his wife,
Maura B. Terman, as trustees of marital trusts, and Elisa and Eileen Terman, the
daughters of David Terman. On November 15, 1995, the Company executed a
promissory note to Champion Communications Company for the remaining balance of
$2,799,581.26 (which amount remains outstanding), payable in 20 quarterly
installments commencing June 30, 1996. An endorsement to the promissory note
signed on August 15, 1996 extends the maturity date to September 30, 2001. The
Company also executed a security agreement on November 15, 1995, granting
Champion Communications Company a first lien security interest in the Company's
equipment, including its CRs, its insurance and rights thereunder and any
proceeds from the sale, lease or assignment of CR spectrum or spectrum licenses.
Pamela R. Cooper, Chief Financial Officer, Controller and Treasurer of the
Company, also serves as an officer of Champion Communications Company.
In July 1995, Albert F. Richmond made a loan to the Company in the
amount of $50,000. The Company executed a promissory note in the amount of
$50,000 bearing interest at 10% per annum to Mr. Richmond on July 28, 1995,
payable in full on August 28, 1995. In connection with this loan, the Company
executed a Security Agreement granting Mr. Richmond a security interest in the
Company's accounts receivable. On August 28, 1995, Mr. Richmond advanced an
additional $25,000 and the Company executed an endorsement increasing the
principal amount of the note to $75,000 and extending the maturity date to
October 28, 1995. In October 1995, Mr. Richmond advanced an additional $35,000
and the Company executed a second endorsement increasing the principal amount of
the note to $110,000. This debt, including interest in the amount of $2,679.12,
was repaid in full in 1995.
Under a management agreement dated July 20, 1995 between the Company and
Champion Communications Company, the Company is currently operating a
five-channel 800 MHz trunking system licensed to Champion Communications
Company. Pursuant to this management agreement, Champion Communications Company
retains ultimate overall control over this licensed system but the Company
provides all management services for the system. The management agreement
expired December 31, 1996, but is continuing by verbal agreement of the parties
on a month-to-month basis. Champion Communications Company granted the Company
the option, until December 31, 1996, to purchase the system for $100,000 upon
receipt of FCC consent. The Company plans to exercise this option, but there
can be no assurance that it will be exercised.
33
<PAGE> 41
On July 29, 1996, in connection with the Company's initial public
offering in Canada, Messrs. Richmond and Terman, the Company and Equity Transfer
Services, Inc. entered into an Escrow Agreement pursuant to which Messrs.
Richmond and Terman each placed 1,555,200 shares of Common Stock held by them in
escrow with Equity Transfer Services, Inc. The securities are to be released
from escrow as follows: 10% on April 30, 1997, 20% on each of July 31, 1997,
July 31, 1998, and July 31, 1999; and 30% on July 31, 2000. These escrowed
shares are included in the Company's earnings per share calculation and are not
considered "contingent shares issuable" for accounting purposes.
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company currently has 6,103,412 shares of fully paid, nonassessable
Common Stock outstanding. The Company's Certificate of Incorporation provides
that the holders of Common Stock are entitled to vote on all matters submitted
to the stockholders for a vote. A holder of Common Stock is entitled to one
vote for each share of Common Stock held. Holders of Common Stock are entitled
to dividends as declared by the Board of Directors, subject to the prior rights
and preferences of holders of Preferred Stock. In the event of liquidation,
dissolution or winding-up of the Company, after distribution of preferential
amounts to holders of any outstanding Preferred Stock, holders of Common Stock
are entitled to receive the remaining assets available for distribution to
stockholders ratably in proportion to the number of shares held. The holders of
Common Stock have no preemptive or conversion rights.
TRANSFER AGENT
The Company's transfer agent for its securities is Equity Transfer
Services, Inc. in Toronto, Canada.
PROVISIONS EFFECTING CONTROL
Several provisions of the Company's Certificate of Incorporation and
By-laws may have the effect of delaying, deferring or preventing a change in
control.
The Company's Certificate of Incorporation and By-laws contain certain
provisions that are intended to enhance the likelihood of continuity and
stability in the Company. The Board will have the authority, without further
action by the stockholders to issue up to 1,000,000 shares of the Company's
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, and to issue authorized unissued shares of
Common Stock up to the maximum of 20,000,000 shares. The issuance of the
Company's preferred stock or additional shares of Common Stock could adversely
affect the voting power of the holders of Common Stock and could have the
effect of delaying, deferring or preventing a change in control of the Company.
The Company's Certificate of Incorporation contains certain provisions
permitted under the Delaware General Corporation Law relating to the liability
of directors. The provisions eliminate a director's liability for monetary
damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as a breach of the directors duty of loyalty or
acts or
34
<PAGE> 42
omissions which involve intentional misconduct or a knowing violation of law.
The Company's Certificate of Incorporation also contains provisions obligating
the Company to indemnify its directors and officers to the fullest extent
permitted by the Delaware General Corporation Law. The Company believes that
these provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
As an FCC licensee, the Company is subject to certain requirements
before any change in its legal or operating control can be consummated. See
"Regulation - Licensing." The Company will comply with all such requirements
before any change of control occurs.
PART II
ITEM 1. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the Toronto CDN
Exchange. Trading of the shares began on October 4, 1996, and since that time,
the high sales price was CDN $4.20 and the low sales price was CDN $4.00. As
of March 1, 1997, the Company's Common Stock was held by 152 stockholders of
record.
The Company has not declared or paid any dividends. The payment of
dividends in the future will depend on the Company's earnings, capital
requirements, operating and financial position and general business conditions.
The Company anticipates that earnings will be retained to finance future growth
and operations, including research and product development. As such,
management anticipates that no dividends will be paid on the Common Stock in
the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. To its knowledge, the Company is
not currently involved in any material legal proceedings and is not aware of
any legal proceeding threatened against it.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
35
<PAGE> 43
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Since the Company's organization, the Company has issued the following
securities in unregistered transactions:
1. On September 29, 1994, the Company issued 1,500,000 shares of
Common Stock to each of Albert F. Richmond and David A. Terman, the founders of
the Company. In October 1994, the Company issued an additional 300,000 shares
to each of Mr. Richmond and Mr. Terman. These shares were issued in
consideration of reduction of indebtedness owed by the Company to Champion
Communications Company, a company wholly owned by Mr. Richmond. The shares were
issued at $.50 per share. The Company incurred this indebtedness to finance the
acquisition of 1,501 CRs from Motorola, Inc. in November and December 1996. See
"Description of Business-History." These shares were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"). The offering was made to a limited
number of offerees, Messrs. Richmond and Terman, who are sophisticated investors
and who, as founders of the Company, had access to all information about the
Company. The Company did not engage in any public solicitation in connection
with this offering.
2. In October 1994, the Company accepted subscriptions for 658,000
shares of Common Stock to be sold to 16 of its employees, officers and directors
in a private placement at $.50 per share. These shares were issued in reliance
on the exemption from registration provided by Rule 504 of Regulation D. At the
time of the offering, the Company was not subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
aggregate offering price was less than $1 million and the Company did not make
any other offerings pursuant to Rule 504 within 12 months of the offering.
3. In November 1995, the Company issued warrants to acquire 600,000
shares of Common Stock for $1.35 per warrant to three warrantholders in a
private placement. These securities were issued in reliance on the exemption
provided by Section 4(2) of the Securities Act. The offering was made to a
limited number of sophisticated investors, i.e., the Company's three Canadian
underwriters. The underwriters had access to all information about the Company
and the Company did not engage in any general solicitation with respect to the
offering of the warrants. In connection with the sale of these warrants the
Company paid Britwirth Investment Company, Ltd. ("Britwirth") fees of $81,000
and granted Britwirth options to purchase up to 60,000 shares of Common Stock at
CDN $3.70 exercisable until September 25, 1999.
In October 1996, the warrantholders exercised their warrants and, upon
such exercise, the Company issued 600,000 shares of Common Stock to the
warrantholders, which stock was registered in the Company's initial public
offering in Canada. No additional cash was due on conversion of these warrants.
Thus, the issuance of the shares upon exercise of the warrants did not
constitute a sale for purposes of Section 2(3) of the Securities Act.
4. In December 1995, the Company issued 75,562 shares of Common Stock
to 27 of its stockholders, consultants and employees in a private placement, in
exchange for $1.35 per share or an aggregate amount of $102,008.70. These
securities were issued in reliance on the exemption from registration provided
by Rule 504 of Regulation D. At the time of the offering, the Company was not
subject to the reporting requirements of the Exchange Act. Additionally, the
aggregate offering price did not exceed $1 million.
5. In December 1995, the Company issued 400,000 shares to Messrs.
Richmond and Terman in exchange for cancellation of indebtedness owed to
Champion Communications Company in the amount of $540,000. The offering was made
only to Messrs, Richmond and Terman, each of whom is a sophisticated investor
and who, as founders and directors of the Company, had access to all information
about the Company. The Company did not engage in any public solicitation in
connection with this offering.
6. On February 1, 1996, the Company issued options to purchase
181,000 shares of Common Stock to 33 of its employees and directors pursuant to
the Company's 1996 Plan. These options were issued in reliance on the
exemptions provided by Section 4(2) of the Securities Act and Rule 701
promulgated thereunder. At the time of this issuance, the Company was not
subject to the reporting requirements of the Exchange Act. The Company issued
these securities pursuant to a written compensatory benefit plan. The aggregate
offering price of the securities issued pursuant to this exemption did not
exceed $500,000.
7. On May 7, 1996, the Company issued an option to purchase 10,000
shares of Common Stock to Randel R. Young, a Director of the Company, pursuant
to the 1996 Plan. This option was issued in reliance on the exemption provided
by Section 4(2) of the Securities Act and Rule 701 promulgated thereunder. At
the time of this issuance, the Company was not subject to the reporting
requirements of the Exchange Act. The Company issued these securities pursuant
to a written compensatory benefit plan. The aggregate offering price of the
securities issued pursuant to this exemption, together with the value of
securities sold pursuant to Rule 701 in the preceding 12 months, did not exceed
$500,000.
8. In September 1996, the Company conducted an initial public
offering in Canada through which it sold 619,350 shares of Common Stock and
619,350 Common Stock Purchase Warrants for an aggregate consideration of
$1,690,826. In July 1996, in connection with the Company's initial public
offering in Canada, the Company issued 50,000 Agents' Warrants to its
underwriters, entitling the agents to acquire options for 50,000 shares of
Common Stock at CDN $3.70 per share for 18 months for the completion of the
initial public offering. Upon completion of the initial public offering, the
Agents' Warrants were exchanged for Agents' Options. Each of these transactions
was exempt from registration as an offshore distribution of securities pursuant
to Rule 901 of Regulation S. The securities were sold in an "offshore
transaction," as defined in Regulation S, and did not involve any directed
selling efforts in the United States. The share certificates issued in the
Canadian offering included a restrictive legend relating to the Securities Act.
After the conclusion of the offering, the Company learned by examining the
transfer records that 16,500 shares, or 2.7% of the shares sold in the offering,
were transferred to six persons in the United States within 28 to 36 days of the
offering.
9. In September 1996, the Company issued 150,500 shares of Common
Stock and warrants to acquire 150,500 shares of Common Stock to 41 investors for
an aggregate purchase price of $410,865. These shares were issued in reliance on
the exemption from registration provided by Rule 504 of Regulation D. The
aggregate offering price, together with the aggregate offering price of other
offerings made pursuant to Regulation D in the previous 12 months, did not
exceed $1 million. Additionally, the Company was not a reporting company under
the Exchange Act at the time of this offering.
10. On December 31, 1996, the Company issued options to acquire
1,500 shares of Common Stock to each of its two Outside Directors. These
securities were issued in reliance on the exemption provided by Section 4(2) of
the Securities Act and Rule 701 promulgated thereunder. At the time of this
issuance, the Company was not subject to the reporting requirements of the
Exchange Act. The Company issued these securities pursuant to a written
compensatory benefit plan. The aggregate offering price of the securities issued
pursuant to this exemption, together with the value of securities sold pursuant
to Rule 701 in the preceding 12 months, did not exceed $500,000.
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<PAGE> 44
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that, to the fullest
extent permitted under the Delaware General Corporation Law, the Company will
indemnify any officer or director who is, was, or is threatened to be made a
party to a proceeding because he or she (1) is or was a director or officer or
(2) while a director or officer, at the Company's request, was serving as a
director, officer, partner, venturer, proprietor, trustee, employee or agent of
another entity.
The Certificate of Incorporation also provides that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breaches of fiduciary duties, except for liability (1) for
any breach of the duty of loyalty to the Company or its stockholders; (2) for
acts or omissions not in good faith or in knowing violation of the law; (3)
under Section 174 of the Delaware General Corporation Law, which provides for
liability for unlawful dividends and unlawful stock purchases or redemptions;
or (4) for any transaction from which the director derived an improper personal
benefit.
The Company plans to enter into indemnification agreements with each of
its directors and officers which may, in some cases, be broader than the
specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements may require the Company, among
other things, to indemnify such directors and officers against certain
liabilities that may arise by reason of their status or services as directors
or officers (other than liabilities arising from wilful misconduct of a
culpable nature) and to advance such person's expenses incurred as a result of
any proceeding against him or her as to which such person could be indemnified.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company in which indemnification
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.
37
<PAGE> 45
CHAMPION COMMUNICATION SERVICES, INC.
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheets at September 30, 1996, December 31, 1995 and
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations for the nine months ended September 30, 1996
and 1995 and for the year ended December 31, 1995 and the period from
September 29, 1994 (date of inception) through December 31, 1994 . . F-4
Statements of Cash Flows for the nine months ended September 30, 1996
and 1995 and for the year ended December 31, 1995 and the period
September 29, 1994 (date of inception) through December 31, 1994 . . F-5
Statements of Stockholders' Equity for the nine months ended
September 30, 1996 and for the year ended December 31, 1995 and the
period September 29, 1994 (date of inception) through
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to financial statements . . . . . . . . . . . . . . . . . . . F-7
F-1
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Champion Communication Services Inc.:
We have audited the accompanying balance sheets as of December 31, 1995 and
1994, and the related statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1995 and the period September 29, 1994
(date of inception) through December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Champion Communication
Services, Inc. as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for the year ended December 31, 1995 and for the
period September 29, 1994 (date of inception) through December 31, 1994 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
January 19, 1996
F-2
<PAGE> 47
CHAMPION COMMUNICATION SERVICES, INC.
BALANCE SHEETS
September 30, 1996, December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1996 1995 1994
-----------------------------------------
Unaudited
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 851,050 $ 1,172,454 $ 1,027,537
Accounts receivable, net of allowance of $121,471, $50,000 and $20,115 523,883 989,620 965,040
at September 30, 1996, December 31, 1995 and 1994, respectively
Stock subscriptions receivable -- 51,944 246,760
Inventory 130,569 242,073 --
Prepaid expenses and other 32,662 155,191 16,865
-----------------------------------------
Total Current Assets 1,538,165 2,611,282 2,256,202
-----------------------------------------
Communications equipment and related assets 6,525,780 6,090,995 5,421,674
Other 404,525 339,470 76,579
-----------------------------------------
6,930,305 6,430,465 5,498,253
Accumulated depreciation (1,303,327) (754,829) (86,729)
-----------------------------------------
Communications equipment and related assets, net 5,626,978 5,675,636 5,411,524
-----------------------------------------
Other assets 555,083 208,654 82,548
-----------------------------------------
$ 7,720,225 $ 8,495,572 $ 7,750,274
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 276,202 $ 225,584 $ 63,685
Accrued expenses 605,683 873,208 661,287
Deferred revenue 523,977 1,709,169 1,731,146
Current maturities of notes payable 203,796 157,254 --
Current maturities of note payable to stockholder 419,937 419,937 3,177,506
-----------------------------------------
Total Current Liabilities 2,029,595 3,385,152 5,633,624
-----------------------------------------
Notes payable 162,296 117,097 --
Note payable to stockholder 2,379,644 2,379,644 --
-----------------------------------------
Total Long Term Liabilities 2,541,940 2,496,741 --
-----------------------------------------
Stockholders' Equity
Common stock, $0.01 par value, 20,000,000 shares authorized, 5,503,412,
4,695,085 and 3,754,000 shares issued and outstanding at
September 30, 1996, December 31, 1995 and 1994, respectively 55,034 46,951 37,540
Common stock subscribed, $0.01 par value, 38,477 and 504,000 shares
at December 31, 1995 and 1994, respectively -- 385 5,040
Additional paid-in capital 5,197,193 3,436,692 2,086,420
Accumulated deficit (2,103,538) (870,349) (12,350)
-----------------------------------------
Total Stockholders' Equity 3,148,689 2,613,679 2,116,650
-----------------------------------------
$ 7,720,225 $ 8,495,572 $ 7,750,274
=========================================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 48
CHAMPION COMMUNICATION SERVICES, INC.
STATEMENTS OF OPERATIONS
For the nine months ended September 30, 1996 and 1995,
the year ended December 31, 1995 and the period from
September 29, 1994(date of inception) through December 31, 1994
<TABLE>
<CAPTION>
Nine Months Ended Year ended
September 30, December 31,
-------------------------- --------------------------
Unaudited
1996 1995 1995 1994
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenues $ 5,528,759 $ 4,390,524 $ 6,418,018 $ 865,380
-------------------------- --------------------------
Costs and expenses:
Cost of sales 4,097,614 3,306,963 4,510,413 616,175
Depreciation and amortization 583,200 502,857 676,269 87,057
General and administrative expenses 1,811,368 1,226,109 1,803,700 174,498
-------------------------- --------------------------
Total Expenses 6,492,182 5,035,929 6,990,382 877,730
-------------------------- --------------------------
Operating Loss (963,423) (645,405) (572,364) (12,350)
-------------------------- --------------------------
Loss on sales of service division (82,771) -- -- --
Gain(loss) on sale of fixed assets 9,201 2,617 (284) --
Interest income 10,278 7,268 11,117 --
Interest expense (206,476) (223,023) (296,468) --
-------------------------- --------------------------
Loss before income taxes (1,233,191) (858,543) (857,999) (12,350)
Income taxes -- -- -- --
-------------------------- --------------------------
Net loss $(1,233,191) $ (858,543) $ (857,999) $ (12,350)
========================== ==========================
Weighted average common shares 4,744,101 4,059,199 4,161,165 3,497,319
========================== ==========================
Net loss per weighted average common share $ (0.26) $ (0.21) $ (0.21) $ --
========================== ==========================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 49
CHAMPION COMMUNICATION SERVICES, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1996 and 1995,
the year ended December 31, 1995 and the period from
September 29, 1996(date of inception) through December 31, 1994
<TABLE>
<CAPTION>
Nine months ended
September 30, September 30, December 31, December 31,
1996 1995 1995 1994
------------- ------------- ------------ ------------
Unaudited
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,233,191) $ (858,543) $ (857,999) $ (12,350)
Adjustments to reconcile net loss to
net cash (used in)provided by operating activities:
Depreciation and amortization 583,200 502,523 676,249 87,057
Bad debt expense 84,000 50,000 101,912 20,115
Gain on sale of licenses (280,705) --
Loss (Gain) on sale of fixed assets (9,201) (2,617) 1,655 --
Change in assets and liabilities:
Accounts receivable 394,266 557,056 (126,492) (985,155)
Inventory 111,504 (185,805) (176,840) --
Prepaid expenses 122,529 (12,880) (138,326) (16,865)
Accounts payable 50,618 626,129 161,899 63,685
Accrued expenses (267,525) (296,834) 373,996 661,287
Other assets (346,429) (64,779) (149,401) (82,876)
Deferred revenue (1,185,192) (1,174,696) (21,977) 1,731,146
------------ ------------ ------------ ------------
Net cash (used in)provided by operating activities (1,695,421) (860,446) (436,029) 1,466,044
------------ ------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment (663,673) (876,278) (960,498) (520,747)
Proceeds from sale of fixed assets 124,273 17,415 22,482 --
Proceeds from sale of licenses -- -- 300,000 --
------------ ------------ ------------ ------------
Net cash used in investing activities (539,400) (858,863) (638,016) (520,747)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sale of stock 1,768,199 -- 50,065 82,240
Proceeds from sale of warrants -- -- 719,000 --
Proceeds the issuance of subscribed stock 51,944 240,779 240,779 --
Proceeds from other borrowings 308,198 473,239 264,519 --
Repayment of notes payable (214,924) (21,143) (55,401) --
------------ ------------ ------------ ------------
Net cash provided by financing activities 1,913,417 692,875 1,218,962 82,240
------------ ------------ ------------ ------------
Net increase in cash and cash equivalents (321,404) (1,026,434) 144,917 1,027,537
Cash and cash equivalents at beginning of period 1,172,454 1,027,537 1,027,537 --
Cash and cash equivalents at end of period $ 851,050 $ 1,103 $ 1,172,454 $ 1,027,537
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 152,180 $ 70,690 $ 95,740 $ --
============ ============ ============ ============
Income taxes $ -- $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 50
CHAMPION COMMUNICATION SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 1996,
the year ended December 31, 1995 and the period
September 29, 1994 (date of inception) through December 31, 1994
<TABLE>
<CAPTION>
Common Common Additional Total
Stock Common Stock Paid-in Accumulated Stockholders'
Shares Stock Subscribed Capital Deficit Equity
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 29, 1994 -- $ -- $ -- $ -- $ -- $ --
Issuance of Common Stock 3,754,000 37,540 -- 1,844,700 -- 1,882,240
Common Stock Subscribed 504,000 -- 5,040 241,720 -- 246,760
Net Loss -- -- -- -- (12,350) (12,350)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1994 4,258,000 $ 37,540 $ 5,040 $ 2,086,420 $ (12,350) $ 2,116,650
=========== =========== =========== =========== =========== ===========
Conversion of Common Stock
Subscribed to Common Stock -- 5,040 (5,040) (5,981) -- (5,981)
Issuance of Common Stock 437,085 4,371 -- 585,694 -- 590,065
Common Stock Subscribed 38,477 -- 385 51,559 -- 51,944
Issuance of Common Stock
Warrants -- -- -- 719,000 -- 719,000
Net Loss -- -- -- -- (857,999) (857,999)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 4,733,562 $ 46,951 $ 385 $ 3,436,692 $ (870,349) $ 2,613,679
=========== =========== =========== =========== =========== ===========
Conversion of Common Stock
Subscribed to Common Stock -- 385 (385) -- -- --
(unaudited)
Issuance of Common Stock 769,850 7,698 -- 1,760,501 -- 1,768,199
(unaudited)
Net Loss(unaudited) -- -- -- -- (1,233,191) (1,233,191)
----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1996 5,503,412 $ 55,034 $ -- $ 5,197,193 $(2,103,540) $ 3,148,687
(unaudited) =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 51
CHAMPION COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(Information relating to September 30, 1996 is unaudited)
(1) Organization
Champion Communication Services, Inc. (the Company) was
incorporated under the laws of the State of Delaware on September 29,
1994 for the purpose of acquiring and operating base radio stations.
The Company acquired and began operating 1,499 base stations and the
customers related thereto in 1994. The acquisitions totaled
approximately $5,290,000, and are recorded at acquisition cost. The
Company provides radio dispatch service as well as sells, rents and
services radio equipment to the general public in the southern,
midwestern and western United States.
(2) Summary of Significant Accounting Policies
(a) Communications Equipment and Related Assets
Communications equipment and related assets are
recorded at cost. Depreciation is computed on a straight-line
basis over the estimated useful lives of the assets ranging
from five years for other fixed assets to ten years for
communications equipment.
(b) Cash and Cash Equivalents
For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents.
(c) Inventory
The Company's inventory consists primarily of two-way
radios, parts and accessories. The balance recorded at
September 30, 1996 and December 31, 1995 is the lower of cost
or market. The Company uses the average cost method of
accounting for inventory.
(d) Licenses
Fees associated with obtaining Federal Communication
Commission licenses for 450-470 MHz, 470-512 MHz and 800 MHz
are deferred by the Company. Upon disposition, such costs are
relieved based upon an average cost basis. If the licenses
are utilized by the Company, the costs are capitalized and
amortized under the straight line method for five years. No
licenses have been utilized by the Company as of December 31,
1995.
F-7
<PAGE> 52
CHAMPION COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Information relating to September 30, 1996 is unaudited)
(2) Summary of Significant Accounting Policies, continued
(e) Revenue Recognition
The standard industry billing cycle for radio
dispatch service is generally for three, six and twelve month
intervals. The Company defers amounts billed in advance and
recognizes revenue as the related services are provided.
(f) Use of Estimates
Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in
conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(g) Reclassifications
Certain reclassifications have been made to conform
with current reporting practices.
(h) Basis of Presentation
The accompanying financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States. A reconciliation of
differences between accounting principles generally accepted
in the United States and Canada is provided in note 13.
The financial statements for the nine month periods
ended September 30, 1996 and September 30, 1995 are unaudited
and, in the opinion of management, include all adjustments
necessary (which consist of only normal recurring adjustments)
for a fair presentation of the financial position, results of
operations and cash flows for the interim periods. The
financial information and results of operations for the nine
months ended September 30, 1996 are not necessarily indicative
of the financial position or results of operations that may be
expected at and for the year ended December 31, 1996 or for any
future periods.
(i) Accrued Expenses
Accrued expenses represent accrued operating costs,
including tower rental, and accrued sales and state income
taxes. Such costs are expensed in the period during which the
related services are rendered.
(j) Earnings Per Common Share
Earnings per common share are calculated by dividing
net income (loss) applicable to common stock by the weighted
average number of common stock and common stock equivalents
outstanding during the year. Fully diluted earnings per share
amounts are not presented for 1996, 1995 or 1994 because they
do not materially differ from primary earnings per share.
For the nine months ended September 30, 1996 and 1995,
the weighted average number of common shares outstanding was
4,744,101 and 4,059,199, respectively, and for the years ended
December 31, 1995 and 1994, the weighted average number of
common shares outstanding was 4,161,165 and 3,497,319,
respectively. The weighted number of common stock and common
stock equivalent shares for the nine months ended September 30,
1996 and 1995 was 4,900,853 and 4,059,199, respectively, and
for the years ended December 31, 1995 and 1994 were 4,161,165
and 3,497,319, respectively. However, in calculating earnings
per share, the common stock equivalents were ignored due to the
antidilutive effect.
(3) Communication Equipment and Assets
Communication equipment and related assets at September 30,
1996 and December 31, 1995 are composed of the following:
F-8
<PAGE> 53
CHAMPION COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Information relating to September 30, 1996 is unaudited)
(3) Communication Equipment and Assets, continued
<TABLE>
<CAPTION>
As at September 30, 1996
----------------------------------------
Accumulated Net
Cost Depreciation Balance
----------- ------------ -----------
<S> <C> <C> <C>
Base station and related equipment $ 6,110,815 $ 1,063,042 $ 5,047,773
Rental radio equipment 414,965 130,923 284,042
Other furniture, data processing and
communication equipment 404,525 109,362 295,163
----------- ----------- -----------
$ 6,930,305 $ 1,303,327 $ 5,626,978
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
As at December 31, 1995
-------------------------------------------
Accumulated Net
Cost Depreciation Balance
---------- ------------ ----------
<S> <C> <C> <C>
Base station and related equipment $5,684,041 $ 633,292 $5,050,749
Rental radio equipment 367,323 68,079 299,244
Other furniture, data processing and
communication equipment 379,101 53,458 325,643
---------- ----------- ----------
$6,430,465 $ 754,829 $5,675,636
---------- ----------- ----------
</TABLE>
(4) Installment Notes
During the period ended September 30, 1996, the Company has
incurred installment notes payable to Associates Credit Corporation,
One Leasing, and Communication Solutions in the amount of $256,982 in
addition to fourteen installment notes incurred in 1995 totaling
$264,519; at September 30, 1996 and December 31, 1995 the total
balance outstanding was $329,379 and $225,400, respectively. The
notes are payable in monthly installments and mature from 1997 to
1999. The notes bear interest rates ranging from 11% to 12.75% per
year and are secured by communications equipment. These notes are
guaranteed by Albert F. Richmond, Chief Executive Officer, and David
A. Terman, President of the Company.
During 1995, the Company also entered into a revolving note
payable to Transamerica with a maximum credit line of $100,000; at
September 30, 1996 and December 31, 1995, the balance was $36,713 and
$48,951, respectively. The note was used to finance the acquisition
of inventory and is repaid when inventory is sold or at the agreed
upon date.
F-9
<PAGE> 54
CHAMPION COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Information relating to September 30, 1996 is unaudited)
(5) Income Taxes
The Company uses the asset and liability method of accounting
for income taxes. Under this method, deferred taxes are recorded for
differences between the financial and tax bases of assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period the change occurs.
During the period September 29, 1994 (date of inception)
through December 31, 1994 and the year ended December 31, 1995, the
Company's effective income tax rate differed from the statutory tax
rate as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Statutory tax rate (34)% (34)%
Nondeductible travel
and entertainment 1 -
Valuation allowance 33 34
--- ---
Effective tax rate - % - %
--- ---
</TABLE>
As of December 31, 1995 and 1994, deferred tax assets and
liabilities were as follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Communications equipment $ 459,081 $ 60,196
--------- --------
Total deferred tax liabilities 459,081 60,196
--------- --------
Net operating loss carryforward $(741,028) $(57,354)
Allowance for doubtful accounts (10,200) (6,839)
--------- --------
Total deferred tax assets $(751,228) $(64,193)
--------- --------
Valuation allowance 292,147 3,997
--------- --------
$ - $ -
--------- --------
</TABLE>
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized and a
valuation allowance is recorded. The valuation allowance increased
$288,150 and $3,997 during the year ended 1995 and the period
September 29, 1994 (date of inception) through December 31, 1994,
respectively.
F-10
<PAGE> 55
CHAMPION COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Information relating to September 30, 1996 is unaudited)
(5) Income Taxes, continued
At December 31, 1995 and 1994, the Company had a net operating
loss carryforward of approximately $2,176,000 and $169,000,
respectively, available to offset future taxable income, which will
expire in 2010 through 2011.
(6) Related Party Transactions
Champion Communications Company advanced the Company
$3,177,506 for the acquisition of base stations and the related
customers. On November 17, 1995, $377,925 of the note and $162,075 of
accrued interest payable was converted to 400,000 shares of common
stock at $1.35 per share. The remaining balance of $2,799,581 is
payable in twenty quarterly installments commencing June 30, 1996.
The note has been amended to extend the commencement of installments
to December 31, 1996. The note bears interest at a prime rate, as
defined, and is secured by the Company's communications equipment and
spectrum. Champion Communications Company (CCC) is a Subchapter S
corporation, wholly owned by Albert F. Richmond, Chief Executive
Officer and a founding stockholder of the Company. The carrying value
of the note is considered to approximate fair value as the interest
rate is prime.
During 1994, approximately $56,000 of due diligence costs
representing services performed by CCC were capitalized to the cost of
the communications equipment
No related party general and administrative expenses were
incurred during the nine months ended September 30, 1996. During the
year ended 1995, and the period September 29, 1994 (date of inception)
through December 31, 1994, the Company incurred approximately $62,000
and $15,000, respectively, in general and administrative expenses
(primarily personnel charges) allocated from Olympic Natural Gas
Company, a company in which Albert F. Richmond served as Chief
Executive Officer during 1994 and 1995.
Additionally, during 1995 the Company allocated approximately
$23,000 in general and administrative expenses to Olympic Natural Gas
Company.
The Company is currently using an 800 MHz trunking license
belonging to CCC. The Company has the option to purchase the license
during 1995 and 1996.
F-11
<PAGE> 56
CHAMPION COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Information relating to September 30, 1996 is unaudited)
(7) Long-term Debt
The combined aggregate maturities of the installment notes
(see note 4) and the note payable to stockholder (see note 6) for each
of the five years following December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996 $ 577,191
1997 642,895
1998 583,758
1999 570,193
2000 559,916
Thereafter 139,979
----------
$3,073,932
==========
</TABLE>
(8) Stockholders' Equity
On September 25, 1996, the Company sold 619,350 shares of
common stock in the Canadian initial public offering at Cdn. $3.70 per
share. Also on September 25, 1996, the Company sold 150,500 shares of
common stock at $2.73 per share to 41 investors in a private placement.
As of September 30, 1996, 38,477 shares of common stock at
$1.35 per share, which were subscribed as of December 31, 1995, were
issued. The 504,000 shares of subscribed common stock as of December
31, 1994 were issued during early 1995.
During November 1995, 600,000 special warrants were issued to
third parties for $1.35 per share, totaling $729,000, net of offering
expenses. Ten thousand dollars of the special warrant proceeds was
retained as a deposit with Weir & Foulds, Barristers & Solicitors, for
an initial public offering. The primary terms of the special warrants
include the exchange of one special warrant for one common share in
the capital of Champion for no additional consideration.
Of the 5,503,412 issued and outstanding shares of common stock
at September 30, 1996, 3,110,400 shares owned by Messrs. Richmond and
Terman were placed in escrow with Equity Transfer Services, Inc., in
connection with the Company's initial public offering in Canada. The
securities are to be released from escrow as follows: 10% on April 30,
1997; 20% on each of July 31, 1997, July 31, 1998, and July 31, 1999;
and 30% on July 31, 2000.
(9) Statement of Cash Flows
During 1995, $377,925 of the principal balance of the notes
payable to CCC and $162,075 of accrued interest payable was converted
to 400,000 shares of common stock (see note 6).
F-12
<PAGE> 57
CHAMPION COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Information relating to September 30, 1996 is unaudited)
(9) Statement of Cash Flows, continued
Also, during 1996 and 1995, the Company acquired
communications equipment in exchange for the incurrence of $256,982
and $264,519 of debt, respectively (see note 4). In addition, the
Company acquired resale communications equipment in exchange for the
incurrence of $83,896 and $65,233 of debt in 1996 and 1995,
respectively (see note 4).
During 1994, an advance that was converted to a note payable,
in the amount of $3,177,506, was issued to finance the purchase of
communications equipment and related assets (see note 6). Also,
$1,800,000 of the purchase price of communications equipment and
related assets was contributed to the Company in exchange for the
issuance of 3,600,000 shares of common stock by the founding
stockholder.
(10) Commitments and Contingencies
At December 31, 1995, the Company has commitments under
noncancellable operating lease agreements primarily for the rental of
office space. Future minimum rental payments due under the lease are:
<TABLE>
<S> <C>
1996 $71,339
1997 66,835
1998 63,542
1999 63,542
2000 -
--------
$265,258
========
</TABLE>
During the nine months ended September 30, 1996, the year
ended December 31, 1995 and the period September 29, 1994 (date of
inception) through December 31, 1994, the Company incurred $82,156,
$95,509 and $2,675 in rental expense, respectively.
(11) Customer Accounts Receivables
Accounts receivable at September 30, 1996, December 31, 1995
and 1994 represent partial billings to the customer base. An
allowance for doubtful accounts of $121,471, $50,000 and $20,115 was
recorded as of September 30, 1996, December 31, 1995 and 1994,
respectively, representing the estimated balance which is deemed
uncollectible.
F-13
<PAGE> 58
CHAMPION COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Information relating to September 30, 1996 is unaudited)
(12) Spectrum Acquisition Expenses
The net loss of the Company for the nine months ended
September 30, 1996 and the year 1995 includes salary and benefits
expense in the amount of $214,274 and $128,264, respectively, incurred
for the acquisition of spectrum. Although it is impractical to
determine the value of spectrum licenses, the Company did sell three
licenses in 1995 for $300,000. To date the Company has acquired 268
licenses, many of which are co-channeled and will require further
enhancement to complete the conversion to single user licenses
dedicated to Champion Communication Services, Inc.
(13) Major Suppliers
The Company has entered into dealer agreements with two
principal equipment suppliers. Both dealer agreements may be
terminated at any time by the suppliers or the Company without cost.
Termination of either of these agreements would have a materially
adverse effect on the Company.
(14) Differences Between U.S. and Canadian Generally Accepted Accounting
Principles
The Company prepares its consolidated financial statements in
accordance with generally accepted accounting principles (GAAP) in the
United States. The differences between U.S. GAAP and Canadian GAAP
would have an immaterial impact on the reported net loss or per share
amounts. Following is a discussion of such differences between U.S.
and Canadian GAAP:
(a) Loss per Share
Consistent with Canadian GAAP, no common stock
equivalents have been included in the net loss per share
calculation.
(b) Statement of Cash Flows
The noncash transactions have been disclosed in note 9
in accordance with U.S. GAAP instead of on the face of the
statement of cash flows as required by Canadian GAAP.
F-14
<PAGE> 59
CHAMPION COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Information relating to September 30, 1996 is unaudited)
(14) Differences Between U.S. and Canadian Generally Accepted Accounting
Principles, continued
(c) Income Taxes
In accordance with U.S. GAAP, the Company uses the
asset and liability method of accounting for income taxes.
Under this method, deferred taxes are recorded for differences
between the financial and tax bases of assets and liabilities
and the effect on deferred taxes of a change in tax rates is
recognized in income in the period the change occurs. Under
Canadian GAAP, the deferred method of accounting for income
taxes is used and deferred tax assets and liabilities are
calculated through the application of historical tax rates.
Under U.S. GAAP, the benefit attributable to net
operating loss carryforwards is assessed for realizability,
and management considers whether it is more likely than not
that some portion or all of such benefits will not be realized
and a valuation allowance is recorded. Accordingly, the
Company has recorded a valuation allowance. Under Canadian
GAAP, benefits attributable to net operating loss
carryforwards cannot be recorded unless there is virtual
certainty that such net operating loss carryforwards will be
utilized. As there is no such certainty, under Canadian GAAP,
the Company would not have recognized an income tax benefit.
(d) Use of Estimates
U.S. GAAP requires that management disclose that
estimates and assumptions have been used relating to the
reporting of assets and liabilities and the disclosure of such
contingent assets and liabilities to prepare the financial
statements in conformity with generally accepted accounting
principles and that actual results could differ from those
estimates. Such disclosure is not required under Canadian
GAAP.
(15) Subsequent Events (unaudited)
During 1996, the Company adopted the "1996 Incentive Plan"
(the Incentive Plan) to provide incentive options, nonstatutory
options, restricted stock awards and stock appreciation rights to
certain key employees, non-employee directors and other persons. The
maximum number of shares that may be issued or transferred pursuant to
awards under the Incentive Plan is 500,000 shares. Options granted
under the Incentive Plan will expire after a period of ten years after
the date of grant and the exercise price shall not be less than the
greater of the par value per share of the stock or 100% of the fair
market
F-15
<PAGE> 60
CHAMPION COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Information relating to September 30, 1996 is unaudited)
(15) Subsequent Events (unaudited), continued
value of the stock on the date of grant of the option. Options
granted under the Incentive Plan terminate 90 days following the
termination of the optionee's employment, and one year after the
death, disability or retirement of the optionee; such options are not
transferable. The options, awards and rights to be granted under the
Incentive Plan will vest based on the terms of each Award Agreement.
As of December 3, 1996, options to purchase 143,000 shares of common
stock were issued by the Company; none of these options have been
exercised.
In conjunction with the 769,850 common shares issued on
September 25, 1996, each unit sold included one common share purchase
warrant. The warrants are exercisable at Cdn. $5.00 per share any
time before March 25, 1998. The Company has the right to accelerate
conversion of the warrants if the average price for the common stock
is at least Cdn. $5.80 for ten consecutive days.
The Company granted options to the underwriting agent of the
Canadian initial public offering to purchase 50,000 common shares for
a period of eighteen months from the completion of the public offering
at Cdn. $3.70 per share.
Upon the completion of the initial public offering, a third
party was granted options, in conjunction with the special warrant
offering, to purchase 60,000 common shares during the period of three
years from September 25, 1996 at a price of Cdn. $3.70 per share.
F-16
<PAGE> 61
PART III
ITEM 1. EXHIBITS
Except Exhibit 11.1, all Exhibits are incorporated by reference to the Company's
Form 10-SB filed December 13, 1996.
<TABLE>
<CAPTION>
<S> <C>
3.1 Certificate of Incorporation filed September 29, 1994.
3.2 Certificate of Amendment to Certificate of Incorporation filed January 26, 1996.
3.3 Certificate of Amendment to Certificate of Incorporation filed April 23, 1996.
3.4 By-laws dated September 29, 1994.
4.1 Specimen Common Stock share certificate.
4.2 Pages from Certificate of Incorporation and By-laws defining rights of stockholders - included in Exhibits 3.1,
3.2, 3.3 and 3.4.
10.1 Offer to Buy and Bill of Sale Agreement effective September 14, 1994, between Motorola, Inc. and the Company.
10.2 Offer to Buy and Bill of Sale Agreement effective October 13, 1994, between Motorola, Inc. and the Company.
10.3 Offer to Buy and Bill of Sale Agreement effective October 13, 1994, between Motorola, Inc. and the Company.
10.4 Offer to Buy and Bill of Sale Agreement effective November 29, 1994, between Motorola, Inc. and the Company.
10.5 Offer to Buy and Bill of Sale Agreement effective November 29, 1994, between Motorola, Inc. and the Company.
10.6 Offer to Buy and Bill of Sale Agreement effective December 8, 1994, between Motorola, Inc. and the Company.
10.7 Offer to Buy and Bill of Sale Agreement effective December 8, 1994, between Motorola, Inc. and the Company.
10.8 Offer to Buy and Bill of Sale Agreement effective December 13, 1994, between Motorola, Inc. and the Company.
10.9 Lease Agreement dated November 10, 1994, between The Woodlands Corporation and the Company.
</TABLE>
38
<PAGE> 62
<TABLE>
<S> <C>
10.10 Modification and Ratification of Lease dated April 4, 1995, between The Woodlands Corporation and the Company.
10.11 Modification and Ratification of Lease dated July 24, 1995, between The Woodlands Corporation and the Company.
10.12 Modification and Ratification of Lease dated May 1, 1996, between The Woodlands Corporation and the Company.
10.13 Radius Communication Products Reseller Agreement dated September 22, 1994, between Motorola, Inc. and the
Company; Amendment to Reseller Agreement dated September 22, 1994; and Master Amendment No. 1 dated September 30,
1996.
10.14 Motorola Authorized Two-Way Radio Dealer Agreement dated September 22, 1994, between Motorola, Inc. and the
Company; Paging Product Sales to the United States Government Amendment dated on or about January 10, 1996;
Amendment dated on or about February 13, 1996; and Per Unit Administrative Processing Charge Amendment dated
September 30, 1996.
10.15 Motorola Master Radio Service Software License Agreement dated November 8, 1994, between Motorola, Inc. and the
Company.
10.16 Master Dealer Agreement Land Mobile Radio Products, undated, between Kenwood Communications Corporation and the
Company; Product Addendum dated February 5, 1996; and Product Addendum, undated.
10.17 Systems Management Agreement dated July 20, 1995, between Champion Communications Company and the Company; and
Purchase Option dated July 20, 1995, from Champion Communications Company to the Company.
10.18 Promissory Note dated July 28, 1995, in the original principal amount of $50,000.00 from the Company to Albert
F. Richmond; Endorsement No. 1 dated August 28, 1995; and Endorsement No. 2 dated October 24, 1995.
10.19 Security Agreement dated July 28, 1995, between the Company and Albert F. Richmond.
10.20 Letter of Engagement dated October 10, 1995, from Britwirth Investment Company, Ltd. to the Company.
10.21 Antenna Site License commencing November 1, 1995, for a term of 36 months, between Motorola, Inc. and the Company
(CONFIDENTIAL)
10.22 Antenna Site License commencing November 1, 1995, for a term of 36 months, between Motorola, Inc. and the
Company. (CONFIDENTIAL)
</TABLE>
39
<PAGE> 63
<TABLE>
<S> <C>
10.23 Promissory Note dated November 15, 1995, in the original principal amount of $2,799,581.26 from the Company to
Champion Communications Company; and Endorsement No. 1 dated August 15, 1996.
10.24 Security Agreement dated November 15, 1995, between the Company and Champion Communications Company; and
Amendment No. 1 to Security Agreement dated August 15, 1996.
10.25 Services Agreement dated May 3, 1996, between K N Energy Services, Inc., d/b/a K N Services, and the Company.
(CONFIDENTIAL)
10.26 Asset Purchase Agreement dated August 30, 1996, between Nextel Communications, Inc. and the Company.
(CONFIDENTIAL)
10.27 Form of Indemnification Agreement between officers and directors of the Company and the Company.
10.28 Escrow Agreement dated July 29, 1996 between Albert F. Richmond, David A. Terman, Equity Transfer Services, Inc.
and the Company.
10.29 Note and Security Agreement dated January 2, 1995 in the original principal amount of $3,177,505, executed by the
Company, made payable to Champion Communications Company.
11.1 Statement regarding computation of per share earnings.
27 Financial Data Schedule
</TABLE>
40
<PAGE> 64
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, on this 10th day of March, 1997.
CHAMPION COMMUNICATION SERVICES, INC.
By: /s/ Albert F. Richmond
----------------------------------------------
Albert F. Richmond,
Chief Executive Officer
41
<PAGE> 65
INDEX TO EXHIBITS
Except Exhibit 11.1, all Exhibits are incorporated by reference to the Company's
Form 10-SB filed December 13, 1996.
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
3.1 Certificate of Incorporation filed September 29, 1994.
3.2 Certificate of Amendment to Certificate of Incorporation filed January 26, 1996.
3.3 Certificate of Amendment to Certificate of Incorporation filed April 23, 1996.
3.4 By-laws dated September 29, 1994.
4.1 Specimen Common Stock share certificate.
4.2 Pages from Certificate of Incorporation and By-laws defining rights of stockholders - included in Exhibits 3.1,
3.2, 3.3 and 3.4.
10.1 Offer to Buy and Bill of Sale Agreement effective September 14, 1994, between Motorola, Inc. and the Company, and Addendum
to Offer to Buy and Bill of Sale dated September 14, 1994.
10.2 Offer to Buy and Bill of Sale Agreement effective October 13, 1994, between Motorola, Inc. and the Company.
10.3 Offer to Buy and Bill of Sale Agreement effective October 13, 1994, between Motorola, Inc. and the Company.
10.4 Offer to Buy and Bill of Sale Agreement effective November 27, 1994, between Motorola, Inc. and the Company.
10.5 Offer to Buy and Bill of Sale Agreement effective November 29, 1994, between Motorola, Inc. and the Company.
10.6 Offer to Buy and Bill of Sale Agreement effective December 8, 1994, between Motorola, Inc. and the Company.
10.7 Offer to Buy and Bill of Sale Agreement effective December 8, 1994, between Motorola, Inc. and the Company.
10.8 Offer to Buy and Bill of Sale Agreement effective December 13, 1994, between Motorola, Inc. and the Company.
10.9 Lease Agreement dated November 10, 1994, between The Woodlands Corporation and the Company.
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10.10 Modification and Ratification of Lease dated April 4, 1995, between The Woodlands Corporation and the Company.
10.11 Modification and Ratification of Lease dated July 24, 1995, between The Woodlands Corporation and the Company.
10.12 Modification and Ratification of Lease dated May 1, 1996, between The Woodlands Corporation and the Company.
10.13 Radius Communication Products Reseller Agreement dated September 22, 1994, between Motorola, Inc. and the
Company; Amendment to Reseller Agreement dated September 22, 1994; and Master Amendment No. 1 dated September 30,
1996.
10.14 Motorola Authorized Two-Way Radio Dealer Agreement dated September 22, 1994, between Motorola, Inc. and the
Company; Paging Product Sales to the United States Government Amendment dated on or about January 10, 1996;
Amendment dated on or about February 13, 1996; and Per Unit Administrative Processing Charge Amendment dated
September 30, 1996.
10.15 Motorola Master Radio Service Software License Agreement dated November 8, 1994, between Motorola, Inc. and the
Company.
10.16 Master Dealer Agreement Land Mobile Radio Products, undated, between Kenwood Communications Corporation and the
Company; Product Addendum dated February 5, 1996; and Product Addendum, undated.
10.17 Systems Management Agreement dated July 20, 1995, between Champion Communications Company and the Company; and
Purchase Option dated July 20, 1995, from Champion Communications Company to the Company.
10.18 Promissory Note dated July 28, 1995, in the original principal amount of $50,000.00 from the Company to Albert
F. Richmond; Endorsement No. 1 dated August 28, 1995; and Endorsement No. 2 dated October 24, 1995.
10.19 Security Agreement dated July 28, 1995, between the Company and Albert F. Richmond.
10.20 Letter of Engagement dated October 10, 1995, from Britwirth Investment Company, Ltd. to the Company.
10.21 Antenna Site License commencing November 1, 1995, for a term of 36 months, between Motorola, Inc. and the Company
(CONFIDENTIAL)
10.22 Antenna Site License commencing November 1, 1995, for a term of 36 months, between Motorola, Inc. and the
Company. (CONFIDENTIAL)
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10.23 Promissory Note dated November 15, 1995, in the original principal amount of $2,799,581.26 from the Company to
Champion Communications Company; and Endorsement No. 1 dated August 15, 1996.
10.24 Security Agreement dated November 15, 1995, between the Company and Champion Communications Company; and
Amendment No. 1 to Security Agreement dated August 15, 1996.
10.25 Services Agreement dated May 3, 1996, between K N Energy Services, Inc., d/b/a K N Services, and the Company.
(CONFIDENTIAL)
10.26 Asset Purchase Agreement dated August 30, 1996, between Nextel Communications, Inc. and the Company.
(CONFIDENTIAL)
10.27 Form of Indemnification Agreement between officers and directors of the Company and the Company.
10.28 Escrow Agreement dated July 29, 1996 between Albert F. Richmond, David A. Terman, Equity Transfer Services, Inc.
and the Company.
10.29 Note and Security Agreement dated January 2, 1995 in the original principal amount of $3,177,505, executed by the
Company, made payable to Champion Communications Company.
11.1 Statement regarding computation of per share earnings.
27 Financial Data Schedule.
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EXHIBIT 11.1
CHAMPION COMMUNICATION SERVICES, INC.
EARNINGS PER SHARE COMPUTATIONS
For the nine months ended September 30, 1996 and 1995
the year ended December 31, 1995 and the period from
September 29, 1994 (date of inception) through December 31, 1994
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Nine Months Ended Year ended
September 30, December 31,
--------------------------- ------------------------
Unaudited
1996 1995 1995 1994
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PRIMARY EARNINGS PER SHARE
Net loss applicable to common stock ($1,233,191) ($858,543) ($857,999) ($12,350)
------------------------ -------------------------
Shares used in earnings per share computations 4,744,101 4,059,199 4,161,165 3,497,319
Net loss per weighted average common share ($0.26) ($0.21) ($0.21) ($0.00)
======================== ========================
FULLY DILUTED EARNINGS PER SHARE
Net loss applicable to common stock ($1,233,191) ($858,543) ($857,999) ($12,350)
------------------------ -----------------------
Shares used in earnings per share computations 4,744,101 4,059,199 4,161,165 3,497,319
Net loss per weighted average common share ($0.26) ($0.21) ($0.21) ($0.00)
======================== =======================
COMPUTATION OF SHARES USED IN EARNINGS PER SHARE
COMPUTATIONS - PRIMARY
Outstanding common shares at beginning of period 4,695,085 3,754,000 3,754,000 0
Weighted average common shares issued during period 49,016 305,199 407,165 3,497,319
------------------------ ------------------------
Weighted average common shares used in earnings
per share computation 4,744,101 4,059,199 4,161,165 3,497,319
======================== ========================
COMPUTATION OF SHARES USED IN EARNINGS PER SHARE
COMPUTATIONS - FULLY DILUTED
Outstanding common shares at beginning of period 4,695,085 3,754,000 3,754,000 0
Weighted average common shares issued during period 49,016 305,199 407,165 3,497,319
------------------------ ------------------------
Weighted average common shares used in earnings
per share computation 4,744,101 4,059,199 4,161,165 3,497,319
======================== ========================
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