U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
-------------- --------------
Commission File Number: 0-20999
---------
CHADMOORE WIRELESS GROUP, INC.
------------------------------
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1058165
- -------------------------------- --------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2875 EAST PATRICK LANE SUITE G, LAS VEGAS, NEVADA 89120
-------------------------------------------------------
(Address of principal executive offices)
(Issuer's telephone number) (702) 740-5633
----------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
-
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required by Section
12, 13 or 15(d) of the Exchange Act after the distribution of securities under a
plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
AS OF MAY 11, 1998 ISSUER HAD 34,996,566 SHARES OF COMMON STOCK, .001 PAR VALUE,
OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [ ] No [X]
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Unaudited Consolidated Financial Statements of
Chadmoore Wireless Group, Inc., and Subsidiaries
(a development stage company):
Consolidated Balance Sheets:
As of March 31, 1998 and December 31, 1997 2
Consolidated Statements of Operations:
For the Three Months Ended March 31, 1998 and 1997
and for the Period from January 1, 1994
(inception) through March 31, 1998 3
Consolidated Statement of Shareholders' Equity
For the Three Months ended March 31, 1998 4
Consolidated Statements of Cash Flows:
For the Three Months Ended March 31, 1998 and 1997
and for the Period from January 1, 1994
(inception) through March 31, 1998 5-6
Notes to Unaudited Consolidated Financial Statements 7-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION 14-21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 22-23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS 24
ITEM 5. OTHER INFORMATION 24
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K 25-26
SIGNATURES 27
2
<PAGE>
Chadmoore Wireless Group, Inc. and Subsidiaries
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
MARCH 31, DECEMBER 31,
1998 1997
UNAUDITED
Restated Restated
ASSETS
<S> <C> <C>
Current assets:
Cash $ 863,703 $ 959,390
Accounts receivable, net of allowance for doubtful accounts of $16,600 293,050 265,935
and $45,000, respectively
Other receivables 73,727 99,223
Inventory 84,762 89,133
Deposits and prepaids 300,697 130,858
------------ ------------
Total current assets 1,615,939 1,544,539
------------ ------------
Property and equipment, net 5,921,004 5,809,168
FCC licenses, net of accumulated amortization of $258,338 and $231,917, 9,281,482 6,726,954
respectively
Debt issuance costs, net of accumulated amortization of $3,598 and $0, 141,254 --
respectively
Management agreements 16,623,573 16,623,573
Investment in options to acquire licenses 7,508,358 7,156,358
Investment in license options 3,181,600 4,113,995
Non-current deposits and prepaids 56,928 32,928
------------ ------------
Total assets $ 44,330,138 $ 42,007,515
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and capital lease obligations $ 3,449,354 $ 2,638,414
Accounts payable 1,193,054 1,165,425
Accrued liabilities 1,089,889 1,106,029
Unearned revenue 197,342 107,057
Licenses - options payable 350,000 350,000
License option commission payable 3,412,000 3,412,000
Accrued interest 296,110 173,686
Other current liabilities 149,215 131,273
------------ ------------
Total current liabilities 10,136,964 9,083,884
------------ ------------
Long-term debt, excluding current installments 7,082,523 4,614,157
Minority interests 346,524 352,142
------------ ------------
Total liabilities 17,566,011 14,050,183
------------ ------------
Shareholders' equity :
Preferred Stock, $.001 par value. Authorized 40,000,000 shares:
Series A issued and canceled 250,000 shares, 0 shares outstanding
at March 31, 1998 and December 31, 1997. -- --
Series B issued and outstanding 139,481 at March 31, 1998 and
219,000 shares at December 31, 1997 139 219
Common stock, $.001 par value. Authorized 100,000,000 shares; issued
and outstanding 24,218,917 shares at March 31, 1998 and
21,163,847 shares at December 31, 1997 24,218 21,164
Additional paid-in capital 60,939,355 60,303,498
Stock subscribed -- 32,890
Deficit accumulated during the development stage (34,199,585) (32,400,439)
------------ ------------
Total shareholders' equity 26,764,127 27,957,332
------------ ------------
Total liabilities and shareholders' equity $ 44,330,138 $ 42,007,515
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Unaudited Consolidated Statements of Operations
For the Three Months Ended March 31, 1998 and 1997 and for the Period from
January 1, 1994 (inception) through March 31, 1998
PERIOD FROM
3 MONTHS ENDED MARCH 31, JANUARY 1, 1994
--------------------------------------- THROUGH
1998 1997 MARCH 31, 1998
Restated Restated
<S> <C> <C> <C>
Revenues:
Radio services $ 371,578 $ 141,491 $ 1,683,463
Equipment sales 85,528 251,391 1,716,485
Maintenance and installation 58,740 98,840 674,317
Management fees -- -- 472,611
Other 246 7,127 58,108
----------- ----------- ------------
516,092 498,849 4,604,984
----------- ----------- ------------
Costs and expenses:
Cost of sales 182,873 272,114 1,949,779
Salaries, wages and benefits 453,250 576,040 5,794,308
General and administrative 832,400 760,274 17,494,146
Cost of settlement of license dispute -- -- 143,625
Depreciation and amortization 194,134 160,358 1,487,347
----------- ----------- ------------
1,662,657 1,768,786 26,869,205
----------- ----------- ------------
Loss from operations (1,146,565) (1,269,937) (22,264,221)
----------- ----------- ------------
Other income (expense):
Minority interest (9,297) -- 10,069
Interest expense (net) (restated Note 1) (460,370) (305,952) (5,157,837)
Loss on reduction of management agreements and
licenses to estimated fair value -- -- (7,166,956)
Standstill agreement expense (182,914) -- (182,914)
Writedown of investment in JJ&D, LLC -- -- (443,474)
Gain on settlement of debt -- -- 887,402
Gain on sale of assets -- -- 330,643
Loss on retirement of note payable -- -- (32,404)
Other, net -- -- (179,893)
----------- ----------- ------------
(652,581) (305,952) (11,935,364)
----------- ----------- ------------
Net loss $(1,799,146) $(1,575,889) (34,199,585)
----------- ----------- -------------
Calculation of net loss applicable to common shareholders:
Preferred stock preferences -- -- (1,203,704)
Series B Preferred Stock dividends (10,732) -- (10,732)
----------- ----------- -------------
Net loss applicable to common shares $(1,809,878) $(1,575,889) $ (35,414,021)
============ =========== =============
Net loss per basic and diluted shares $ (0.08) $ (0.08) $ (3.25)
============ =========== =============
Weighted average number of commmon shares outstanding 22,339,773 19,151,200 10,892,800
============ ============ =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Unaudited Consolidated Statements of Shareholders' Equity
For the three months ended March 31, 1998
DEFICIT
PREFERRED STOCK COMMON STOCK ACCUMULATED
------------------- ---------------------- ADDITIONAL DURING TOTAL
OUTSTANDING OUTSTANDING PAID-IN DEVELOPMENT STOCK SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE SUBSCRIBED EQUITY
------- ------ ------------ ------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997,
as restated 219,000 $219 21,163,847 $21,164 $60,303,498 $(32,400,439) $ 32,890 $27,957,332
Shares issued under employee
compensation plan -- -- 108,500 108 55,879 -- -- 55,987
Shares issued for subscribed
stock -- -- 11,400 11 32,879 -- (32,890) --
Shares issued for exercise of
license option -- -- 800,000 800 351,200 -- -- 352,000
Shares issued for conversion of
preferred stock (79,519) (80) 1,803,052 1,803 (1,723) -- -- --
Shares issued for preferred
stock dividend -- -- 22,095 22 (22) -- -- --
Shares issued for
standstill agreement -- -- 310,023 310 182,604 -- -- 182,914
Compensation expense for
options issued -- -- -- -- 15,040 -- -- 15,040
Net loss -- -- -- -- -- (1,799,146) -- (1,799,146)
------- ------ ------------ ------- ----------- ------------- ---------- -------------
Balance at March 31, 1998,
as restated 139,481 $ 139 24,218,917 $24,218 $60,939,355 $( 34,199,585) $ -- $26,764,127
======= ====== ============ ======= ============ ============= ========== =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1998 and 1997 and for the Period from
January 1, 1994 (inception) through March 31, 1998
3 MONTHS ENDED MARCH 31, PERIOD FROM
------------------------------------------- 1/1/94 THROUGH
1998 1997 March 31, 1998
Restated Restated
--------------------- --------------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,799,146) $(1,575,889) $(34,199,585)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest 9,297 -- (10,069)
Depreciation and amortization 194,134 160,358 1,487,347
Non-cash interest expense (restated Note 1) -- 242,281 3,802,469
Writedown of management agreements and licenses to
estimated fair value -- -- 7,166,956
Writedown of investment in JJ&D, LLC -- -- 443,474
Release of license options -- -- 330,882
Writedown of prepaid management rights -- -- 81,563
Gain on extinguishment of debt (839,952)
Gain on sale of assets held for resale -- -- (330,643)
Shares issued for settlement of license dispute -- -- 127,125
Standstill agreement 182,914 -- 182,914
Amortization of debt discount 310,392 37,289 576,904
Equity in losses from minority investments -- -- 1,322
Expenses associated with:
Stock issued for services -- -- 2,605,036
Options issued for services 15,040 -- 4,052,504
Changes in operating assets and liabilities:
Increase in accounts receivable and other receivables (1,621) (63,527) (198,315)
Decrease (increase) in inventory 4,371 (16,688) (6,781)
(Increase) decrease in deposits and prepaid expenses (193,839) 15,439 (314,833)
Increase in accounts payable and accrued liabilities 67,474 79,548 2,340,557
Increase in unearned revenue 90,285 -- 197,522
Increase in license options commission payable -- -- 524,800
Increase in accrued interest 122,424 1,849 614,373
Increase in other current liabilities 18,500 3,439 170,193
----------- ----------- -----------
Net cash used in operating activities (979,775) (1,115,901) (11,194,237)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of assets from General Communications, Inc. -- -- (352,101)
Investment in JJ&D, LLC -- -- (100,000)
Purchase of Airtel Communications, Inc. assets -- -- (50,000)
Purchase of CMRS and 800 SMR Network, Inc. -- -- (3,547,000)
Purchase of SMR station licenses -- -- (1,398,575)
Purchase of license options (99,999) (191,700) (1,786,444)
Sale of management agreements and options to acquire
licenses -- -- 500,000
Purchase of property and equipment (293,297) (212,090) (4,917,472)
Sale of property and equipment -- -- 827,841
Purchase of assets held for resale -- -- (219,707)
Sale of assets held for resale -- -- 700,000
Increase in other non-current assets -- -- (11,123)
----------- ----------- -----------
Net cash used in investing activities (393,296) (403,790) (10,354,581)
----------- ----------- -----------
</TABLE>
(Continued)
6
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Condensed Consolidated Statements of Cash Flows, Continued For the Three Months
Ended March 31, 1998 and 1997 and for the Period from January 1, 1994
(inception) through March 31, 1998
3 MONTHS ENDED MARCH 31, PERIOD FROM
------------------------------------------- 1/1/94 THROUGH
1998 1997 03/31/98
Restated Restated
--------------------- --------------------- ---------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds upon issuance of common stock $ -- $ -- $ 4,316,543
Proceeds upon issuance of preferred stock -- -- 3,848,895
Proceeds upon exercise of options - related parties -- -- 62,500
Decrease in stock subscriptions receivable, net -- -- (637,193)
of stock subscribed
Proceeds upon exercise of options - unrelated parties -- -- 3,075,258
Purchase and conversion of CCI stock -- -- 45,000
Advances from related parties -- -- 767,734
Payment of advances from related parties -- -- (73,000)
Debt issuance costs (144,852) -- (144,852)
Payments of long-term debt and capital lease obligations (190,784) (120,081) (1,160,050)
Proceeds from issuance of notes payable -- -- 375,000
Proceeds from issuance of long-term debt 1,613,020 1,530,000 11,936,686
----------- ----------- -----------
Net cash provided by financing activities 1,277,384 1,409,919 22,412,521
----------- ----------- -----------
Net (decrease) increase in cash (95,687) (109,772) 863,703
Cash at beginning of period 959,390 1,463,300 --
----------- ----------- -----------
Cash at end of period $ 863,703 $ 1,353,528 $ 863,703
=========== =========== ===========
Supplemental disclosure of cash paid for:
Taxes $ -- $ -- $ --
Interest $ 27,578 $ 7,332 $ 432,557
=========== =========== ===========
</TABLE>
Supplemental disclosure for non-cash investing and financing activities:
1998
* The Company issued 108,500 shares of Common Stock to employees.
* Issuance of $1,548,555 of note payables, net of discount, to exercise options
to purchase FCC licenses.
* Conversion of 79,519 shares of convertible preferred stock into 1,803,052
shares of common stock.
* Issuance of 22,095 shares of common stock for preferred stock dividends.
* Issuance of 11,400 shares of common stock for $32,890 of common stock
previously subscribed.
* Issuance of 800,000 shares of common stock for exercise of license option.
* Reclassification of minority interest of approximately $14,915 into property
and equipment.
1997
* Conversion of $1,050,000 of convertible debt to equity.
* Issuance of 231,744 shares of common stock for $255,945 of common stock
subscribed.
* Exercise of 323,857 options which had $161,929 of prepayment associated with
them.
* Reclassified $108,027 of deposits to property and equipment.
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
March 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Chadmoore Wireless Group, Inc. and subsidiaries and consolidated
partnerships (the "Company"), (a development stage company), and have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission Form 10-QSB. All material adjustments, consisting of normal
recurring accruals which are, in the opinion of management, necessary to present
fairly the financial condition and related results of operations, cash flows and
shareholders' equity for the respective interim periods presented are reflected.
The current period results of operations are not necessarily indicative of the
results for any other interim period or for the full year ended December 31,
1998. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Annual Report on Form 10-KSB and 10-KSB/A for the years ended December 31, 1997.
As discussed in Note 4, the Company has restated its previously issued Form
10-QSB for the three months ended March 31, 1997 in its March 31, 1998 Form
10-QSB/A to comply with a SEC announcement with respect to issuing convertible
debentures which are convertible into common stock at a discount.
B. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires companies to
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position and is effective for financial
statements issued for fiscal years beginning after December 15, 1997. The
Company adopted SFAS 130 for the quarter ended March 31, 1998. As of March 31,
1998 the Company has no other comprehensive income amounts.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 establishes additional standards for segment reporting in
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company is currently assessing the impact of implementation.
Statement of Position 98-5 "Reporting on Costs of Start-Up Activities" (SOP
98-5) requires the costs of start-up activities and organizational costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The adoption of SOP 98-5 is not expected to have a material
effect on the Company's financial position or results from operations.
C. RECLASSIFICATIONS
Certain amounts in the first quarter 1997 Unaudited Consolidated Financial
Statements have been reclassified to conform to the 1998 presentation.
D. LOSS PER SHARE
Basic and diluted loss per share were computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). Prior
years have been restated to reflect the application of SFAS 128. As discussed in
Note 4, earnings per share for the quarter ended March 31, 1997 was restated to
comply with the SEC announcement regarding beneficial conversion features
embedded in convertible securities.
E. CUSTOMER ACQUISITION COSTS
Customer acquisition costs are expensed in the period they are incurred.
(2) FCC LICENSES AND LICENSE OPTIONS
The Company has entered into various option agreements to acquire FCC licenses
for SMR channels ("Option Agreements"). These Option Agreements allow the
Company to purchase licenses, subject to FCC approval, within a specified period
of time after the agreement is signed. During the three months ended March 31,
1998, the Company had exercised Option Agreements for approximately 220 channels
for consideration of cash, notes payable and Chadmoore Wireless Group's common
stock ("Common Stock") totaling approximately $2,024,593. In relation to the
exercise of the options for the channels, the Company has also incurred
commission costs totaling approximately $503,000, which are included in FCC
licenses.
In addition to the above mentioned licenses, in a single transaction dated
January 12, 1998, the Company exercised its options to acquire approximately
3,220 FCC licenses for SMR channels with 32 license holders. As of March 31,
1998, all of the approximately 3,220 licenses were in the process of being
transferred to the Company, pending FCC approval.
As of March 31, 1998, of the approximately 4,800 licenses under the Company's
control, approximately 670 licenses had transferred to the Company and
approximately 3,360 were in the process of being transferred to the Company,
pending FCC approval. The remaining approximately 770 licenses continue to be
maintained under Option and/or Management Agreements (defined below), for which
the Company has decided to delay exercise based on economic considerations.
The Company amended several Option Agreements whereby the Company would make
quarterly installment payments toward the purchase of channels. With respect to
these agreements, the Company is in default thereof. Approximately $350,000 of
accrued installment payments has been recorded at March 31, 1998 in "Licenses -
options payable". If the holder requests remedy, in writing, the Company has
thirty days to remedy any deficiency by sending monies totaling all outstanding
installment payments due such holder. The Company addresses each request on a
case by case basis and determines, based on various factors, whether to pay the
outstanding installment payments, purchase the license in full with a promissory
note or cancel the Option Agreement. As of March 31, 1998, holders of such
amended Option Agreements have not elected to terminate the options or exercise
other available remedies. If the Company elects to cancel the Option Agreement
all consideration paid is retained by the licensee and expensed by the Company.
If the Company were to exercise the remaining outstanding Option Agreements for
approximately 880 channels as of March 31, 1998, the obligations would total
approximately $17 million.
Upon entering into Option Agreements, the Company also entered into management
agreements with the licensees ("Management Agreements"). The Management
Agreements give the Company the right to manage the SMR systems, subject to the
direction of the licensees, for a period of time prior to the transfer of the
licenses to the Company as stated in the agreements, usually 2 to 5 years.
During such period, revenues received by the Company are shared with the
licensee only after certain agreed-upon costs to construct the channels have
been recovered by the Company.
(3) REVENUES AND COST OF SALES
The Company had revenues from equipment sales of $85,528 and $251,391 for the
three months ended March 31, 1998 and 1997, respectively. The cost of sales
associated with these revenues were $75,977 and $189,826 for the three months
ended March 31, 1998 and 1997, respectively.
(4) LONG-TERM DEBT
DEBT ISSUANCES
In February 1997, the Company executed a Securities Placement Agreement to place
a minimum of $1,000,000 and maximum of $4,000,000 of the Company's three year,
8% convertible Debentures. Principal and interest are convertible into shares of
the Company's common stock. In addition, the Securities Purchase Agreement calls
for the issuance of 75,000 warrants to purchase shares of the Company's common
stock at an exercise price of $2.50 per share for each $1,000,000 of 8%
convertible Debentures placed. The warrants are exercisable for three years from
date of grant. On February 19, 1997, the Company placed $1,000,000 of the 8%
Convertible Debentures and received $860,000, net of $140,000 of placement fees.
The Company granted 75,000 warrants in connection with the placement. In
addition, the Company granted 30,000 warrants at an exercise price of $1.50 per
share in connection with the placement. On February 24, 1997, the Company placed
an additional $750,000 of the 8% Convertible Debentures and received $670,000,
net of $80,000 in placement fees. The Company granted 56,250 warrants in
connection with the placement. In addition, the Company granted 22,500 warrants
at an exercise price of $1.50 per share in connection with the placement.
Principal and accrued interest are convertible at a conversion price for each
share of common stock equal to the lesser of (a) $1.37 or (b) a discount of 25%
for principal and accrued interest held up to 90 days from the closing date, a
discount of 27-1/2% for principal and accrued interest held for 91 to 130 days
from the closing date or a discount of 30-1/2% for principal and accrued
interest held for more than 131 days. The discount will apply to the average
closing bid price for the 5 trading days ending on the date before the
conversion date, as represented by the National Association of Securities
Dealers and Electronic Bulletin Board.
In a 1997 announcement, the staff of the Securities and Exchange Commission
("SEC") indicated that when convertible debentures are convertible at a discount
from the then current common stock market price, a "beneficial conversion
feature", should be recognized as a return to the debt holders. The SEC staff
believes any discount resulting from an allocation of the proceeds equal to the
intrinsic value should be allocated to additional paid-in capital and increase
the effective interest rate of the security and should be reflected as a debt
discount and amortized to interest expense over the period beginning on the date
of issuance of the notes and ending on the date the notes are first convertible.
The beneficial conversion feature of approximately $767,986 embedded in the
convertible debentures issued during February 1997 was not recorded in the
Company's previously filed March 31, 1997 Form 10-QSB. Because of the SEC
announcement, the Company has restated its March 31, 1997 Form 10-QSB unaudited
consolidated financial statements in its March 31, 1998 Form 10-QSB/A to reflect
such announcement.
The debt discount of $767,986 associated with the issuance of the convertible
debentures is being amortized to interest expense over 130 days.
Approximately $242,281 was amortized to interest expense for the quarter ended
March 31, 1997. Accordingly, interest expense for the quarter ended March 31,
1997 has been restated from $63,671 to $305,952 respectively. In addition,
earnings per share for the quarter ended March 31, 1997 has been restated from
$.07 to $.08 per share.
During the three months ended March 31, 1998 the Company entered into notes
payable with license holders for approximately $1,550,000, net of a discount of
approximately $550,000; these notes represent the final payment to exercise
license options for approximately 220 licenses. As of March 31, 1998 the Company
had approximately $4,750,000, net of a discount of approximately $1,500,000,
calculated at an imputed interest rate of 15%.
On October 30, 1997, two subsidiaries of the Company, CCI and CMRS, ("CCI" and
"CMRS") entered into a First Amendment and Financing and Security Agreement with
MarCap Corporation ("MarCap") which amended that certain Financing and Security
Agreement dated October 29, 1996 between CCI and Motorola, Inc. ("Motorola" and
the "Motorola Loan Facility"), the interest of Motorola therein having been
assigned to MarCap, pursuant to which MarCap extended to CCI and CMRS an
additional loan facility (the "MarCap Facility") in a maximum amount of
$2,000,000.
As of March 31, 1998 the total outstanding amounts of the MarCap Facility and
Motorola Loan Facility were $2,049,080 and $363,100, respectively. The Company
incurred debt issuance costs related to the drawdowns totaling $144,852. These
costs will be amortized over the lives of the loans.
As of March 31, 1998, the Company was not in compliance with its debt covenants,
such as, tangible net worth, minimum annualized revenue and cash flow to debt.
However, the necessary debt waiver was obtained. The Company has renegotiated
the covenants stipulated in the agreement and the Company is in compliance
thereof, and has classified the appropriate portion (maturing after one year)
as long-term debt.
(5) EQUITY TRANSACTIONS
A. PREFERRED STOCK CONVERSIONS
On December 23, 1997, the Company completed a private placement of Series B
Convertible Preferred Stock (the "Series B Preferred") through Settondown
Capital International ("Settondown"). The Series B Preferred provides for
liquidation preference of $10.00 per share and cumulative dividends at 8.0% per
annum from the date of issuance, payable quarterly in cash or Common Stock, at
the then-current market price, at the option of the Company.
Holders of the Series B Preferred are entitled to convert any portion of the
Series B Preferred into Common Stock at the average market price of the Common
Stock for the five (5) day trading period ending on the day prior to conversion.
If the difference between the average price and the current market price is
greater than 20%, the lookback is increased to 20 days. The Series B Preferred
also provides that holders are restricted from converting an amount of Series B
Preferred which would cause them to exceed 4.99% beneficial ownership of the
Common Stock. In the event that any securities remain outstanding on the second
anniversary of the closing date, all remaining securities must be converted on
such date. During the three months ended March 31, 1998 the holders of Series B
Preferred Stock converted 79,519 shares of Series B Preferred into 1,803,052
shares of Common Stock. Dividends on such shares of Series B Preferred were
$10,732, which was paid with 22,095 shares of Common Stock.
B. EXERCISE OF LICENSE OPTION
On January 12, 1998, the Company consummated an agreement with 32 of 33 licensee
corporations that were due approximately 8% of the outstanding common stock of
CMRS as the balance of consideration due for the Company's exercising options to
acquire approximately 3,220 licenses from such licensee corporations, for such
licensee corporations to accept $150,000 in lieu of such stock in CMRS. Upon
signing, the Company had five days to fund such transaction. Due to limited time
and internal resources, the Company sought an investor that could immediately
meet the $150,000 in payments. Already familiar with the Company from its
earlier investment, Settondown agreed to provide the financing and acquire the
approximately 8% minority interest in CMRS, provided that the Company in turn
enter into an exchange agreement with Settondown to issue 800,000 shares of
Common Stock in return for the minority interest in CMRS. These transactions
closed on February 10, 1998, in conjunction with which Settondown also agreed to
limit its selling of such shares of Common Stock to no more than 50,000 shares
per month for the first six months following issuance thereof. An effect of
these transactions was to eliminate an approximately 8% minority interest in
CMRS in return for the issuance of 800,000 shares of Common Stock. CMRS remains
a wholly owned subsidiary of the Company with no further obligations to the 32
licensee corporations. The one remaining licensee continues to operate under the
Company's Management and Option Agreements. Negotiations are currently underway
to exercise the option. If a satisfactory resolution cannot be achieved the
Company intends to continue to operate under the current Management and Option
Agreement, subject to the licensee's direction. The Company recorded the 800,000
shares at the fair market value on the date of the transaction, February 10,
1998, this amount was capitalized into investment in options to acquire
licenses.
C. STANDSTILL AGREEMENT
On February 10, 1998, the Company and several holders of the Series B Preferred
entered into an amendment providing that such holders would not convert any
Series B Preferred into Common Stock prior to March 11, 1998. In consideration
for such amendment, the Company agreed to issue to the Series B Preferred
holders pursuant to Regulation S an aggregate of 310,023 shares of Common Stock
and warrants to purchase approximately 380,000 shares of Common Stock, the terms
of which are the same as the terms of the warrants issued in the December 23,
1997 private placement described above.
The expense of $182,914 has been determined based on the fair market value of
the shares on the date of the transaction. The fair value of the warrants was
less than the exercise price, as a result no value was allocated to warrants on
the date of the transaction.
(6) COMMITMENTS AND CONTINGENCIES
A. LICENSE OPTION AND MANAGEMENT AGREEMENT CONTINGENCIES
Goodman/Chan Waiver. Nationwide Digital Data Corp. and Metropolitan
Communications Corp. among others (collectively, "NDD/Metropolitan"), traded in
the selling of SMR application preparation and filing services to the general
public. Most of the purchasers in these activities had little or no experience
in the wireless communications industry. Based on evidence that NDD/Metropolitan
had been unable to fulfill their construction and operation obligations to over
4,000 applicants who had received FCC licenses through NDD/Metropolitan, the
Federal Trade Commission ("FTC") filed suit against NDD/Metropolitan in January,
1993, in the Federal District Court for the Southern District of New York
("District Court").
The District Court appointed Daniel R. Goodman (the "Receiver") to preserve the
assets of NDD/Metropolitan. In the course of the Receiver's duties, he together
with a licensee, Dr. Robert Chan, who had received several FCC licenses through
NDD/Metropolitan's services, filed a request to extend the construction period
for each of 4,000 SMR stations. At that time, licensees of most of the stations
included in the waiver request ("Receivership Stations") were subject to an
eight-month construction period. On May 24, 1995, the FCC granted the request
for extension. The FCC reasoned that the Receivership Stations were subject to
regulation as commercial mobile radio services stations, but had not been
granted the extended construction period to be awarded to all CMRS licensees.
Thus, in an effort to be consistent in its treatment of similarly situated
licensees, the FCC granted an additional four months in which to construct and
place the Receivership Stations in operation (the "Goodman/Chan Waiver"). The
grant of the Goodman/Chan Waiver is to become effective upon publication in the
Federal Register. As of this date, the Goodman/Chan Waiver has not been
published in the Federal Register.
The FCC has never released a list of stations it considers to be Receivership
Stations, in spite of repeated requests by the Company. Nonetheless, on the
basis of release to the Company, by the Receiver, of a list of the Receivership
Stations believed by the Receiver to be subject to Management and Option
Agreements with or held by the Company, the Company believes that approximately
800 of the licenses that it owns or manages are Receivership Stations. For its
own licenses and under the direction of each licensee for managed stations, the
Company has proceeded with the construction of Receivership Stations. Because
the FCC has not released its final order for publication, no assurance can be
given that any of such stations owned or managed by the Company will obtain
relief with respect to deadlines for timely construction pursuant to FCC rules.
The Company believes that the Goodman/Chan Waiver decision will be published
during 1998. However, significant delay by the FCC in publishing the
Goodman/Chan Waiver in the Federal Register would necessitate a
re-prioritization of the Company's rollout plan.
The Receiver has requested that the Company replace some of the existing
Management and Option Agreements with Goodman/Chan licensees with promissory
notes. The Company engaged in discussions with the Receiver in this regard, but
did not reach a final determination and concluded that no further discussions
are warranted at this time. However, there can be no assurances that the
Receiver would not decide to take actions in the future to challenge the
Company's agreements with Goodman/Chan licensees, including the Company's rights
to licenses under such agreements, in an effort to enhance the value of the
Receivership Estate.
B. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
On June 16, 1995, CCI filed a request for approval of an extended implementation
plan for the construction of over two thousand SMR stations with the FCC. On
December 15, 1995, the FCC denied that request. On January 21, 1996, CCI
appealed the denial to the U.S. Court of Appeals for the District of Columbia
Circuit. Briefs were filed and oral argument was heard on November 5, 1996. The
Court has not issued an opinion. Based on relevant precedent, the Company
believes there is substantial basis for the appeal. It cannot predict when the
Court will issue an opinion, or whether that opinion will be favorable to the
Company. If the Court denies the Appeal, the licenses for a small number of the
stations CCI manages may be automatically canceled. Licenses for other stations
CCI manages have been preserved by the Goodman/Chan Waiver or were otherwise
timely constructed and not subject to the above.
Airnet, Inc. v. Chadmoore Wireless Group, Inc. Case No. 768473, Orange County
Superior Court
On April 3, 1997, Airnet, Inc. ("Airnet") served a summons and complaint on the
Company, alleging claims related to a proposed merger between Airnet and the
Company that never materialized. In particular, Airnet has alleged that a
certain "letter of intent" obligated the parties to complete the proposed
merger. The Company denies this allegation. In its complaint, Airnet has alleged
the following purported causes of action against the Company: breach of
contract, breach of the implied covenant of good faith and fair dealing,
intentional interference with prospective economic advantage, intentional
interference with contractual relationship, including breach of contract, false
promise and conversion. Airnet has also purported to seek the following relief
from the Company: $28,000,000 in compensatory damages plus interest, punitive
damages, costs of suit and attorney's fees. The Company challenged the
sufficiency of the complaint as to most of the purported causes of action on the
grounds that these purported causes of action fail to state facts sufficient to
constitute a cause of action. The Company also challenged the sufficiency of the
punitive damages allegations on the grounds that the compliant fails to state
facts sufficient to support these allegations. Rather than oppose these
challenges to its complaint, Airnet elected to file a first amended complaint.
Believing that Airnet's amendments were immaterial the Company renewed its
challenges to Airnet's pleading. On September 9, 1997, the court sustained the
Company's demurrers to Airnet's claims for damages based on the Company's
alleged failure to complete the merger and to Airnet's claims for conversion. At
Airnet's request, the court allowed Airnet to amend its pleading a second time
to attempt to state these claims, and Airnet's new complaint asserts claims for
breach of contract, anticipatory breach of contract, intentional interference
with prospective economic advantage, interference with contractual relationship,
inducing breach of contract and false promise. The Company again filed demurrers
challenging certain of the claims in Airnet's pleading. On January 16, 1998, the
Court overruled the Company's demurrers to the Second Amended Complaint.
On February 2, 1998, the Company answered the Second Amended Complaint with a
general denial and by asserting the following affirmative defenses: failure to
state a claim, uncertainty, statutes of limitations, laches, lack of capacity,
lack of standing, waiver, estoppel, knowledge and acquiescence, unclean hands,
unjust enrichment, fraud, misrepresentations, res judicata, justification,
privilege, no action intended or reasonably calculated to cause injury, lack of
causation, acts of third parties, failure to allege a contract, no meeting of
the minds, statute of frauds, lack of privity, fraud in the inducement, mistake,
lack of consideration, failure of consideration, failure of conditions
precedent, concurrent, subsequent, Airnet's intentional misrepresentation,
Airnet's negligent misrepresentations, performance excused by Airnet's failure
to perform, performance excused by recision, performance excused by
modification, antecedent breaches by Airnet, accord and satisfaction, privileged
communications, justified communications, no damages, failure to mitigate and
offset.
On February 2, 1998, the Company filed a Cross-Complaint against Airnet as well
as three other named cross-defendants related to Airnet: Uninet, Inc.,
("Uninet") Anthony Schatzlein ("Schatzlein") and Dennis Houston ("Houston"). The
Company's Cross-Complaint alleges various causes of action including fraud,
breach of oral contract, fraud and defamation which arise out of the proposed
merger and the events surrounding it. On March 2, 1998, cross-defendants Airnet,
Uninet, Schatzlein and Houston answered the Cross-Complaint with a general
denial and a single affirmative defense -- that the Cross-Complaint does not
state facts sufficient to constitute a cause of action.
The Company intends to vigorously defend the Second Amended Complaint and to
pursue the claims set forth in the Cross-Complaint. Although the Company intends
to defend the action vigorously, it is still in its early stages and no
substantial discovery has been conducted in this matter, with certainty.
Accordingly, at this time, the Company is unable to predict the outcome of this
matter. A non-binding mediation is scheduled for June 12, 1998 before a retired
judge of the superior court.
Chadmoore Communications, Inc. v. John Peacock Case No. CV-S-97-00587-HDM (RLH),
United States District Court for the District of Nevada
In September 1994, CCI entered into a two year consulting agreement (the
"Consulting Agreement") with John Peacock ("Peacock") to act as a consultant and
technical advisor to CCI concerning certain specialized mobile radio ("SMR")
stations. In May, 1997 CCI filed a complaint against Peacock for declaratory
relief in the United States District Court for the District of Nevada, seeking a
declaration of the respective rights and obligations of CCI under the Consulting
Agreement. CCI is seeking this judicial declaration based upon Peacock's
contention that he is entitled to certain bonus compensation under the
Consulting Agreement. Peacock contends that this bonus compensation is due
regardless of whether an SMR license is granted based upon his activities as a
consultant. CCI contends that the Consultant Agreement is clear that such bonus
compensation is only awarded upon the "grant" of an SMR license. Peacock
contends that he is entitled to bonus compensation of four hundred five thousand
($405,000). In lieu of answering the complaint, Peacock filed a motion seeking
dismissal of the action based on the assertion that he is not subject to
jurisdiction in Nevada courts. After briefing, that motion was denied by the
Court, and the parties are now proceeding with discovery.
On September 26, 1997, Peacock answered the Complaint and asserted the following
affirmative defenses: failure to state a claim, failure to perform, intentional
concealment or failure to disclose material facts, estoppel, unclean hands, lack
of subject matter, claims not authorized by declaratory relief statutes,
improper venue, forum non conveniens, rescission and reformation, and choice of
law.
On or about January 28, 1998, Peacock filed a motion to add a counterclaim to
this litigation. The counterclaim purported to allege causes of action based on
breach of the Consultant Agreement, fraud and breach of fiduciary duty. CCI
objected to Peacock's improper attempt to add tort claims to this litigation and
Peacock agreed to withdrawn them, amend its proposed counterclaim by
stipulating, and assert only a breach of contract claim based on the Consulting
Agreement. The Amended Counterclaim was deemed filed with the Court, on March
15, 1998. On May 11, 1998 Chadmoore cited its Reply to Peacock's Counsels claim,
denying liability and asserting Thirty-eight affirmative defenses, including
defenses based on Peacock's alleged fraud and failure to perform. For then with
its Reply, Chadmoore filed a counterclaim against Peacock and two entities
related to Peacock - Peacock's Radio and Wild's Computer Services, Inc. and
Peacock's Radio, a Partnership. Chadmoore's counterclaim asserts claims for
Fraud, Breech of Fiduciary Duty, and Breech of Contract. Chadmoore's
counterclaim seeks general and punitive damages.
CCI intends to vigorously pursue its Complaint and defend against the
counterclaim. At this time, discovery has not been completed and the Company is
unable to predict the outcome of this matter.
Pursuant to the FCC's jurisdiction over telecommunications activities, the
Company is involved in pending matters before the FCC which may ultimately
affect the Company's operations.
(7) MANAGEMENT PLANS
The accompanying unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered recurring losses from operations, has a negative working capital of
$8,521,025, and has a $34,199,585 deficit accumulated during the development
stage that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are described below. The
unaudited consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
The Company believes that over the next 12 months, depending on the rate of
market roll-out during such period, it will require approximately $5.0 million
to $7.0 million in additional funding for full-scale implementation of its SMR
services and ongoing operating expenses. To meet such funding requirements, the
Company anticipates continued utilization of its existing borrowing facility
with Motorola, Inc. ("Motorola"), a vendor financing arrangement recently
consummated with HSI GeoTrans, Inc. ("GeoTrans"), sales of selected SMR channels
deemed non-strategic to its business plan, and additional debt funding as
needed. There can be no assurances that the Company will be able to successfully
obtain the additional debt financings or will be otherwise able to obtain
sufficient financing to consummate the Company's business plan.
Based on the foregoing, the Company believes that it should have adequate
resources to continue establishing its SMR business and emerge from the
development stage during 1999. However, while the Company believes that it has
developed adequate contingency plans, the failure to obtain additional debt
financing, if needed, could have a material adverse effect on the Company,
including the risk of bankruptcy. Such contingency plans include pursuing
similar financing arrangements with other institutional investors and lenders
that have expressed interest in providing capital to the Company, selling
selected channels, and focusing solely on the 28 markets in which full-scale
service has already been implemented. This latter course might entail ceasing
further system expansion in such markets (which in the aggregate are generating
positive cash flow) and reducing corporate staff to the minimal level necessary
to administer such markets. The Company believes that this strategy would
provide sufficient time and resources to raise additional capital or sell
selected channels in order to resume its growth. However, there can be no
assurances that this or any of the Company's contingency plans would adequately
address the aforementioned risks, or that the Company will attain overall
profitability once it has emerged from the developmental stage.
(8) SUBSEQUENT EVENTS
On May 4, 1998, pursuant to an Investment Agreement ("Agreement"), dated May 1,
1998 between the Company and Recovery Equity II L.P. ("Recovery"), Recovery
purchased, for $7,500,000, from the Company, 8,854,662 shares of common stock,
10,119,614 shares of mandatorily redeemable Series C preferred stock, an
eleven-year warrant to purchase up to 14,612,796 shares of common stock at an
exercise price of $.001, a three-year warrant to purchase up to 4,000,000 shares
of common stock at an exercise price of $1.25, and a five and one-half year
warrant to purchase up to 10,119,614 shares of common stock at an exercise price
of $.3953. The warrants contain certain provisions which restrict conversion
and/or provide adjustments to the conversion price and number of shares. In
conjunction with the Agreement, the Company engaged an investment banking firm
which determined a fair value for each security issued pursuant to the
Agreement. Consistent with this determination, the Company has allocated the
proceeds of $7,500,000 to the securities based on relative fair values.
On May 1, 1998, the Company and Recovery entered into a Shareholders Agreement
which stipulated that the Company and each of the Shareholders shall take all
action necessary to cause the Board to consist of two Directors to be designated
by the Recovery Shareholders, two Directors designated by the Chief Executive
Officer of the Company, and two independent Directors.
On May 1, 1998, the Company and Recovery entered into an Advisory Agreement
commencing on May 1, 1998 and ending on the fifth anniversary, The Consultant
shall devote such time and efforts to the performance of providing consulting
and management advisory services for the Company. In consideration of the
consultants provision of the services to the Company, the Company shall pay the
consultant an annual fee of $312,500 beginning on the first anniversary which
shall be paid in advance, in equal monthly installments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
The following is a discussion of the unaudited consolidated financial condition
and results of operations of Chadmoore Wireless Group, Inc., together with its
subsidiaries (collectively "Chadmoore" or the "Company"), for the quarter ended
March 31, 1998, and 1997, respectively.
Statements contained herein that are not historical facts are forward-looking
statements as that term is defined by the Private Securities Litigation Reform
Act of 1995. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, the forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
from those projected. The Company cautions investors that any forward-looking
statements made by the Company are not guarantees of future performance and that
actual results may differ materially from those in the forward-looking
statements. Such risks and uncertainties include, without limitation,
fluctuations in demand, loss of subscribers, the quality and price of similar or
comparable wireless communications services, well-established competitors who
have substantially greater financial resources and longer operating histories,
regulatory delays or denials, ability to complete intended market roll-out,
access to sources of capital, adverse results in pending or threatened
litigation, consequences of actions by the FCC, and general economics.
During the year ended December 31, 1997, the Company's primary activities were
acquiring assets (spectrum and infrastructure), attempting to secure capital,
performing engineering activities, and assembling and installing infrastructure
on antenna sites. To a far lesser degree the Company concentrated on
establishing distribution, marketing and building a customer base. Planned
principal operations have commenced, but there has been no significant revenue
therefrom. The Company has determined it is still devoting most of its efforts
to activities such as financial planning, raising capital, acquiring operating
assets, training personnel, developing markets and building its network of
licenses. In addition, approximately 45% of 1997 revenue was derived from
non-core business activities which is not the primary focus of its operations.
The Company's normal operations would be selling air-time to customers in 175
secondary and tertiary markets throughout the continental United States, not
selling and servicing radio equipment. Management believes the Company continues
to be a development stage company, as set forth in Statement of Financial
Accounting Standards No. 7 "Accounting and Reporting by Developmental Stage
Enterprises". The Company will emerge from developmental stage when its primary
activities are focused on distribution, marketing and building its customer base
and there is significant revenue therefrom, which the Company anticipates to
occur during 1999.
(1) PLAN OF OPERATION
INTRODUCTION
The Company is the second-largest holder of frequencies in the United States in
the 800 megahertz ("MHz") band for commercial specialized mobile radio ("SMR")
service. With control over 4,800 channels in the 800 MHz band through ownership
of the licenses or through generally irrevocable options to acquire licenses
(see Licenses and Rights to Licenses), the Company's Operating Territory, covers
more than 53 million people in 168 markets, throughout the United States with
focus on secondary and tertiary cities ("Operating Territory").
PRINCIPAL SERVICE AND MARKETS
Also known as dispatch, one-to-many, or push-to-talk, Chadmoore's commercial SMR
service enables reliable, cost-effective, real-time communications for smaller
and medium-sized enterprises ("SMEs") that rely on mobile workforces. For a flat
fee of approximately $15.00 per radio per month, customers enjoy unlimited
air-time for communicating instantaneously with their teams.
Dispatch is a two-way wireless communication service primarily for business
users who have a need to communicate between a central dispatch point and a
mobile workforce. Users can choose to communicate with a group, selected
sub-groups or individuals. The customer base for dispatch service is typically
stable, diverse, and cost-conscious, including general and specialty
contractors, HVAC service providers, security services, courier and other
delivery services, distribution and transportation firms, real estate and
insurance agents, farmers, and other SMEs that have significant field operations
and need to provide their personnel with the ability to communicate directly in
real-time on a one-to-one or one-to-many basis. Consequently, the Company
believes that SMR represents an attractive and affordable communication solution
for smaller and middle market businesses, especially in the secondary and
tertiary cities in which Chadmoore is focusing.
The Company's primary objectives are to continue developing, operating and
aggressively loading SMR systems within its Operating Territory and to do so in
a manner that effectively deploys capital, maximizes recurring revenues per
dollar of invested capital, and generates positive cash flow at the system level
as quickly as possible. In assessing these objectives and its spectrum position,
the Company adopted its strategy to focus on the traditional analog SMR
business.
Several key factors are believed by the Company to support this strategy,
including (i) an established market base of 18.8 million users in the U.S.
estimated to already rely on analog SMR service for dispatch applications, (ii)
capacity constraints creating pent-up demand, (iii) before the FCC's licensing
freeze, demand for SMR that had expanded consistently at a rate of approximately
15% to 18% per year for the prior 10 years, (iv) basic businesses of the nature
served by SMR have endured for decades, and are expected to continue to
indefinitely into the future, particularly in the secondary and tertiary cities
focused on by Chadmoore, (v) favorable economic and demographic conditions have
stimulated significant business formation, with SMR positioned as a
cost-effective entry-level productivity tool for SMEs, (vi) outsourcing to
commercial SMR providers was becoming economical for users on private systems,
(vii) analog SMR technology is proven, dependable, and widely available, (viii)
analog dispatch service provides unlimited one-to-many communications for a
known, flat fee of approximately $15 per user per month, (ix) excellent system
economics are attainable as analog SMR service is simple and cost-effective to
deploy, (x) such system economics enable the Company to add capacity
incrementally as demand dictates, resulting in a relatively low cost of
infrastructure, (xi) additional services such as sub-fleet billing, interconnect
(telephony), automatic vehicle location, mobile data, voice mail, short
messaging (paging), and telemetry can be offered using the same infrastructure,
thereby generating operating leverage, (xii) an experienced, trained, and
motivated distribution network was already in place primarily in the form of
Motorola Sales and Service ("MSS") shops, and (xiii) nothing precludes the
Company from migrating to digital or other technology as future capacity
requirements dictate on a market by market basis.
Prior to adopting its analog technology platform, the Company had considered but
decided against implementing a digital infrastructure ("digital SMR"). This
decision was based, in part, on the Company's evaluation of the following
factors: (i) competitors converting to digital SMR were expected by the Company
to create further segmentation and awareness in the marketplace, (ii) full-scale
digital conversion strategies generally require turning off existing SMR systems
in order to utilize frequencies within a digital architecture, creating a pool
of established users which the Company believes to be potentially available to
other providers, (iii) the capital costs per subscriber associated with such
digital technology are substantially higher than those for analog systems, (iv)
the Company believes that the increasingly competitive nature of the wireless
communications industry increases the risks associated with the higher capital
costs of such digital technology, (v) a four to five times lower pricing
advantage for analog versus digital service can be marketed to the
cost-conscious end-user, (vi) other than digital encryption, the Company
believes that essentially the same feature set can be offered to the customer
using analog technology, (vii) the Company believes that it can add
infrastructure on an as-needed, just-in-time basis and for significantly less
capital cost, and (viii) nothing precludes the Company from migrating to a
digital SMR platform as future capacity requirements dictate on a market by
market basis, although such a migration would require additional expenditures.
Because virtually all of the channels acquired by the Company were initially
unused, with few or no existing customers on such frequencies, Chadmoore did not
need to adopt a digital infrastructure in order to create room for growth.
Rather, with ample available frequencies at its disposal, the Company could
continue to offer traditional SMR users the low-cost, fixed-rate communications
solution to which they are accustomed.
As of March 31, 1998, the Company had constructed, and based on detailed
criteria relating to engineering, demographics, competition, market conditions,
and dealer characteristics, had developed a prioritized roll-out plan for a
total of 168 markets in the United States covering more than 53 million people.
This population number, based on estimated 1996 U.S. Census Bureau estimates for
Metropolitan Statistical Area figures, represents the number of people residing
in the Operating Territory and is not intended to be indicative of the number of
users or potential penetration rates as the Company establishes operating SMR
systems. Of these 168 markets, the Company has implemented full-scale systems
and distribution, servicing approximately 13,000 subscribers (an increase in
excess of 50% since December 31, 1997) in the following 28 markets as of May 14,
1998:
Augusta, GA Austin, TX
Baton Rouge, LA Bay City/Saginaw, MI
Bowling Green, KY Charleston, SC
Charlotte, NC Corpus Christi, TX
Fayetteville, AR Fort Myers, FL
Fort Wayne, IN Grand Rapids, MI
Huntsville, AL Jacksonville, FL
Lake Charles, LA Lexington, KY
Little Rock, AR Mankato, MN
Memphis, TN Milwaukee, WI
Naples, FL Nashville, TN
Pine Bluff, AR Portland, ME
Richmond, VA Roanoke, VA
Rockford, IL South Bend, IN
Chadmoore generates revenue primarily from monthly billing for dispatch services
on a per unit (radio) basis. In selected markets, additional revenue is
generated from telephone interconnect service based on air-time charges as used,
and in the case of the Memphis and Little Rock markets (in which direct rather
than indirect distribution is used), from the sale of radio equipment,
installation, and equipment service as well.
As initial capacity in a market is approached, additional channels can be
integrated into the main system using the same basic controller (system
computer), which reduces the average capital cost per channel. The Company
believes that such system economics enable the Company to add capacity
incrementally as demand dictates and maximize recurring revenues per dollar of
capital invested. At the same time, capacity increases geometrically as channels
are added due to the greater statistical probability of a channel being
available for any user at any given time. In the Company's belief, these two
factors generate strong operating leverage as the system expands.
In general, the Company prioritizes its markets based on five key parameters:
(i) the quality of the potential dealer, (ii) the lack of available capacity
from other SMR providers in the market, (iii) business and population
demographics, (iv) channel density, availability of tower space, topography, and
similar engineering considerations, and (v) the overall business case including
anticipated pricing, demand, infrastructure and operating costs, return on
investment, and potential for value-added services.
DISTRIBUTION
Once commercial service has been implemented in a market, Chadmoore's
executional focus turns to acquiring new users. In general, the Company utilizes
an indirect distribution network of well-established local dealers, most of
which are MSS shops, to penetrate its markets. The Company believes that this
distribution channel enables it to capitalize on substantial existing
infrastructure, reduce capital requirements, reduce fixed operating costs,
outsource lower-margin equipment sales and service, enhance flexibility, and
speed roll-out, while also bringing the Company immediate market knowledge and
presence, significant industry experience, and an established base of customers
and prospects to sell into. Chadmoore selects its dealers on the basis of
loading history, infrastructure for supporting customers, motivation level, and
references from vendors and customers. Motorola, Inc. (NYSE: MOT) has been very
helpful to the Company in identifying and introducing Chadmoore to quality
dealers in high-priority markets as well. In markets in which the Company
operates, but where a suitable dealer or independent agent is not available, the
Company intends to establish its own marketing presence or offer such markets as
expansion opportunities for top dealers serving the Company in other cities, in
each case to the extent the Company finds practical. In addition, the Company's
management team recognizes that additional staff will be required to properly
support marketing, sales, engineering, accounting, and similar disciplines to
achieve its 1998 marketing objectives.
Through corporate and field management, Chadmoore supports its dealers with a
range of selling tools and incentives. The Company has engaged Moscato Marsh &
Partners, Inc. of New York ("Moscato") for advertising, marketing, and
promotional services as well as administering the local market launch in the
remaining 140 markets. Several elements of Chadmoore's customer acquisition
strategy are incorporated into Moscato's program, including further development
of "Power To Talk" (PTT) service mark, creation and distribution of local dealer
support kits, design and planning of local market promotional, media, and public
relations programs in all of the Company's 168 markets, production of collateral
materials and national advertisements in trade publications, and development of
a full-time field marketing administrative program on a local market basis.
During 1997 for selected dealers in priority markets, the Company implemented a
dealer partner program in order to finance system construction ahead of plan. In
this program, dealers made substantial direct contributions that financed 100%
of the initial system build-out. Depending on the market, the dealer generally
recoups 60% to 80% of such investment from system earnings after operating
expenses, and retains a 20% to 40% interest in the system thereafter. Of key
significance, the dealer is repaid only if the system is profitable. The result:
a long-term partnering relationship that motivates the Company to support the
dealers, and that the Company believes motivates dealers to load systems
rapidly, provide excellent service and customer retention, and market
value-added services to the installed base. Company management believes that
such emphasis has, in part, been responsible for a Chadmoore churn rate (the
rate at which customers disconnect service) well below industry average.
To keep the motivational aspects of the dealer partner program but reduce the
effective capital cost to the Company, in selected markets for which full-scale
roll-out has yet to occur the Company anticipates implementing a modified dealer
partner arrangement in which the dealer would contribute approximately 25% to
60% (depending on market size) towards initial market roll-out costs in return
for a 10% interest in the local system. This investment would be a capital
contribution, and not recouped from system earnings. Based on the speed and
extent of loading subscribers onto the system, the dealer partner would have
incentive opportunities to earn up to an additional 10% interest in the system.
COMPETITIVE BUSINESS CONDITIONS AND COMPANY'S INDUSTRY POSITION
In management's evaluation, key factors relevant to competition in the wireless
communication industry are pricing of service, size of the coverage area,
quality of communication, reliability and availability of service (i.e. waiting
time for a "clear channel", absence of busy signals, and absence of transmission
disconnects or failures). The Company's success depends in large measure on its
ability to compete with numerous wireless service providers in each of its
markets, including cellular operators, PCS service providers, digital SMR
service providers, paging services, and other analog SMR operators. The wireless
communications industry is highly competitive and comprised of many companies,
most of which have substantially greater financial, marketing, and other
resources than the Company. While the Company believes that it has developed a
differentiated and effective business plan, there can be no assurances that it
will be able to compete successfully in its industry.
Since the late 1980s, Nextel Communications Inc. ("Nextel") in particular has
acquired a large number of SMR systems and is in the process of implementing a
conversion from analog SMR technology to Motorola's digital integrated Dispatch
Enhanced Network ("iDEN") system. Other cellular operators and PCS providers are
implementing digital transmission protocols on their systems as well. Chadmoore
believes that Nextel is focusing on higher-end, cellular-like telephony users,
thereby creating a market segmentation opportunity for the Company. As a result,
the Company competes with Nextel primarily on the basis of price.
Other potential wireless competitors for Chadmoore include Southern Company and
Geotek. Both are implementing digital architectures and pursuing Nextel-like
strategies on a regional or primary market basis. Southern Company is a large
utility focusing on wide-area communications for its own vehicle fleet in the
Southeastern U.S., while selling excess capacity to other businesses traveling
the same geographic region. Geotek is deploying an advanced proprietary
technology developed from Israeli military systems that operates on 900 MHz. As
with Nextel, Chadmoore intends to compete with Southern Company and Geotek
primarily based on price.
Most other analog SMR providers consist of local small businesses, often passed
from generation to generation, that Chadmoore believes lack the spectrum,
professional marketing, management expertise, and resources brought to the
marketplace by the Company. In fact, available capacity and operating
capabilities of existing SMR providers constitute key factors in Chadmoore's
market prioritization matrix. The Company intends to compete with existing
analog SMR providers primarily on the basis of customer service, capacity to
meet customer growth, and professional marketing and dealer support.
LICENSES AND RIGHTS TO LICENSES
Within its 168 target markets, Chadmoore controls approximately 4,800 channels
in the 800 MHz band through ownership of the licenses or through generally
irrevocable five and ten-year options to acquire licenses ("Option Agreements"),
subject to FCC rules, regulations, and policies, coupled with management
agreements ("Management Agreements") until such Option Agreements have been
exercised or expire. The Management Agreements give the Company the right to
manage the SMR systems, subject to the direction of the licensees, for a period
of time prior to the transfer of the licenses to the Company as stated in the
agreements, usually 2 to 5 years. During such period, revenues received by the
Company are shared with the licensee only after certain agreed-upon costs to
construct the channels have been recovered by the Company. These like-term
Management Agreements with the license holders are intended to enable the
Company to develop, maintain, and operate the corresponding SMR channels subject
to the licensee's direction. Any acquisition of an SMR license by the Company
pursuant to exercise of an Option Agreement is subject, among other things, to
approval of the acquisition by the FCC. Until an Option Agreement is exercised
and the corresponding license is transferred to Chadmoore, the Company acts
under the direction and ultimate control of the license holder and in accordance
with FCC rules and regulations.
Once an SMR station is operating, the Company may exercise its Option Agreement
to acquire the license at any time prior to the expiration of the Option
Agreement. As of March 31, 1998, the Company had exercised Options Agreements on
approximately 4,030 channels, of which approximately 670 had transferred to the
Company and approximately 3,360 were in the process of being transferred to the
Company, pending FCC approval. The remaining approximate 770 channels continue
to be utilized under Option and Management Agreements, for which the Company has
decided to delay exercise based on economic considerations.
The Company presently intends to exercise all such remaining Option Agreements,
but such exercise is subject to certain considerations. The Company may elect
not to exercise an Option Agreement for various business reasons, including the
Company's inability to acquire other licenses in a given market, making it
economically unfeasible for the Company to offer an SMR system in such market.
If the Company does not exercise an Option Agreement, its grantor may retain the
consideration previously paid by the Company. Moreover, if the Company defaults
in its obligations under an Option Agreement, the grantor may retain the
consideration previously paid by the Company as liquidated damages. Further, if
the SMR system is devalued by the Company's direct action, the Company is also
liable under the Option Agreement for the full Option Agreement price, provided
the grantor gives timely notice. The Option Agreements also authorize a court to
order specific performance in favor of the Company if a grantor fails to
transfer the license in accordance with the Option Agreement. However, there can
be no assurance that a court would order specific performance, since this remedy
is subject to various equitable considerations. To the extent that Option and
Management Agreements remain in place, no assurance can be given that they will
continue to be accepted by the FCC or will continue in force.
(2) RESULTS OF OPERATION
Total revenues for the quarter ended March 31, 1998 increased 3.5% to $516,092
from $498,849 in the first quarter of 1997, reflecting increases of $230,087, or
162.6%, in Radio Services (recurring revenues from air-time subscription by
customers), offset by declines of $165,863, or 66.0%, in Equipment Sales and
$40,100, or 40.6% in Maintenance and Installation services. Consistent with the
Company's plan of operation to focus on recurring revenues by selling its
commercial SMR service through independent local dealers, the proportion of
total revenues generated by Radio Services increased to 72.0% in the first
quarter of 1998 from 28.4% in the first quarter of 1997. Where the Company sells
through independent dealers, the local dealer rather than the Company sells,
installs, and services the radio equipment and records the revenues and costs
associated therewith and the Company receives only the recurring revenue
associated with the sale of airtime. The Company anticipates that the proportion
of total revenues from recurring revenues will continue to increase in future
periods as additional markets are rolled out utilizing indirect distribution
through such local dealers.
The 162.6% increase in Radio Services revenues, to $371,578 in the first quarter
of 1998 from $141,491 in the first quarter of 1997, was driven by an increase in
the number of subscribers utilizing the Company's SMR systems, which measured
11,260 at March 31, 1998 versus approximately 2,600 at March 31, 1997, an
increase of over 325% during the twelve months ended March 31, 1998, with
approximately 70% of the growth occurring in the second half of such period. The
increase in subscribers, in turn, may be attributed to full-scale implementation
of service by the Company in 17 new markets during the period. Pricing per
subscriber unit in service remained comparable over the periods. Further, during
the period January 1, 1998 through March 31, 1998, the number of subscribers
increased by approximately 3,000 as compared to approximately 500 during the
same period in 1997, an increase of approximately 500%.
The 66.0% decrease in revenues from Equipment Sales, to $85,528 in the first
quarter of 1998 from $251,391 in the first quarter of 1997 and the 40.6%
decrease in revenues from Maintenance and Installation services, to $58,740 in
the first quarter of 1998 from $98,840 in the first quarter of 1997, was
attributed to a relatively lower increase in new subscribers purchasing new
equipment in the Company's two direct distribution markets as well as
insufficient working capital to maintain inventory and a full complement of
salespeople.
The Company anticipates that Equipment Sales and Maintenance and Installation
service will continue to account for a declining share of total revenues in the
future, because since acquiring full-service operations in its first two
markets, the Company has utilized and intends to continue utilizing indirect
distribution through local dealers in substantially all markets. As noted
previously, in such cases, the local dealer rather than the Company sells,
installs, and services the radio equipment and records the revenues and costs
associated therewith.
Cost of sales decreased by $89,241, or 32.8%, to $182,873 in the first quarter
of 1998 from $272,114 in the first quarter of 1997. This decrease was due to
lower Equipment and Maintenance and Installation revenues, which have higher
cost of sales associated with them, compared to Radio Services revenues. As a
result, gross margin (total revenue less cost of sales, as a percentage of total
revenue) increased by 19.1 percentage points, to 64.6% in the first quarter of
1998 from 45.5% in the first quarter of 1997.
Salaries, wages, and benefits expense decreased by $122,790, or 21.3%, to
$453,250 in the first quarter of 1998 from $576,040 in the first quarter of
1997, primarily due to a lower number of employees and significantly reduced
relocation expenses. Relative to total revenues, salaries, wages, and benefits
expense measured 87.8% in the first quarter of 1998 compared with 115.5% for the
first quarter of 1997. In future years the Company expects salaries, wages, and
benefits expense as a percent of total revenues to continue to decline as the
Company realizes operating leverage gained from an increasing subscriber base
managed through essentially the same infrastructure.
General and administrative expense, increased $72,126, or 9.5%, in to $832,400
in the first quarter of 1998 from $760,274 in the first quarter of 1997. This
increase is primarily attributed to an increase in site expenses for non-revenue
generating sites. The Company expects such general and administrative site costs
to decrease as these sites generate revenue and related site costs become cost
of sales. Relative to total revenues, general and administrative expense
increased to 161.3% in the first quarter of 1998 compared with 152.4% for the
first quarter of 1997. The Company expects general and administrative expense as
a percent of total revenues to decline in future years as the Company realizes
operating leverage gained from an increasing subscriber base managed through
essentially the same infrastructure.
Depreciation and amortization expense increased $33,776, or 21.1% to $194,134 in
the first quarter of 1998 from $160,358 in the first quarter of 1997, reflecting
greater capital expenditures associated with construction and implementation of
operating systems equipment.
Due to the foregoing, total operating expenses decreased $106,129, or 6.0%, to
$1,662,657 in the first quarter of 1998 from $1,768,786 in the first quarter of
1997, and the Company's loss from operations decreased by $123,372, or 9.7%, to
$1,146,565 from $1,269,937, for such respective periods.
Net interest expense increased $154,418, or 50.5%, to $460,370 in the first
quarter of 1998 from $305,952 in the first quarter of 1997, which may be
attributed to higher average balances outstanding under loan facilities and
additional notes payable to licensees, from the exercise of Option Agreements,
partially off-set by a "beneficial conversion feature" associated with the
issuance of convertible debentures convertible at a discount from the then
current common stock market price recorded as interest expense in 1997.
Based on the foregoing, the Company's net loss increased $223,257, or 14.2%, to
$1,799,146, or $0.08 per basic and diluted share, in the first quarter of 1998
from $1,575,889, or $0.08 per basic and diluted share, in the first quarter of
1997.
(3) LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 30, 1998 and 1997, the Company used net cash
in operating activities of $979,775. The Company continues to fund operations
through financing activities as the Company continues to be in the development
stage. The major use of cash for the three months ended March 30, 1998 and 1997
was the acquisition of communication assets. The major source of cash for three
months ended March 30, 1998 and 1997 are proceeds from issuance of long-term
debt.
The Company believes that over the next 12 months, depending on the rate of
market roll-out during such period, it will require approximately $5.0 million
to $7.0 million in additional funding for full-scale implementation of its SMR
services and ongoing operating expenses. To meet such funding requirements, the
Company anticipates continued utilization of its existing borrowing facility
with Motorola, Inc. ("Motorola"), a vendor financing arrangement recently
consummated with HSI GeoTrans, Inc. ("GeoTrans"), sales of selected SMR channels
deemed non-strategic to its business plan, and additional debt funding as
needed. There can be no assurances that the Company will be able to successfully
obtain the additional debt financings or will be otherwise able to obtain
sufficient financing to consummate the Company's business plan.
On May 4, 1998, pursuant to an Investment Agreement ("Agreement"), dated May 1,
1998 between the Company and Recovery Equity II L.P. ("Recovery"), Recovery
purchased, for $7,500,000, from the Company, 8,854,662 shares of common stock,
10,119,614 shares of mandatorily redeemable Series C preferred stock, an
eleven-year warrant to purchase up to 14,612,796 shares of common stock at an
exercise price of $.001, a three-year warrant to purchase up to 4,000,000 shares
of common stock at an exercise price of $1.25, and a five and one-half year
warrant to purchase up to 10,119,614 shares of common stock at an exercise price
of $.3953. The warrants contain certain provisions which restrict conversion
and/or provide adjustments to the conversion price and number of shares. In
conjunction with the Agreement, the Company engaged an investment banking firm
which determined a fair value for each security issued pursuant to the
Agreement. Consistent with this determination, the Company has allocated the
proceeds of $7,500,000 to the securities based on relative fair values.
On May 1, 1998, the Company and Recovery entered into an Advisory Agreement
commencing on May 1, 1998 and ending on the fifth anniversary, The Consultant
shall devote such time and efforts to the performance of providing consulting
and management advisory services for the Company. In consideration of the
consultants provision of the services to the Company, the Company shall pay the
consultant an annual fee of $312,500 beginning on the first anniversary which
shall be paid in advance, in equal monthly installments.
In conjunction with Recovery's increased equity financing, the Company has
elected to defer its previously announced effort to raise secured debt
financing, but intends to return to the debt markets as needed in the future,
presumably with a stronger balance sheet, longer operating history, and greater
critical mass. Consistent with that decision, Chadmoore has terminated
discussions under its previously disclosed letter of intent with Foothill
Capital Corporation. The Company contemplates returning to the debt market
during the next 12 months, but has not entered into any substantive discussions
or commitments for additional debt financing as of the date hereof.
On March 9, 1998, the Company entered into a vendor financing arrangement with
GeoTrans, a wholly owned subsidiary of Tetra Tech, Inc., whereby GeoTrans is
performing turn-key implementation of full-scale SMR operating systems for the
Company in up to 10 markets per month and 145 total markets. During 1997,
GeoTrans completed preliminary construction services for the Company in 78
markets. The financing mechanism in the Company's arrangement with GeoTrans
specifies a $4,000 down-payment per market by the Company and approximately
$18,000 per market to be drawn by the Company under its Motorola financing
facility, with GeoTrans financing the balance of approximately $49,000 per
market on 120-day payment terms, with incentives to the Company of up to a 3%
discount for early payment. Collateral for such financing arrangement consists
of 183 channels in nine primarily non-strategic markets with a fair market value
estimated by the Company of $4.4 million.
On January 12, 1998, the Company consummated an agreement with 32 of 33 licensee
corporations that were due approximately 8% of the outstanding common stock of
CMRS (as the balance of consideration due for the Company's exercising options
to acquire approximately 3,220 licenses from such licensee corporations), for
such licensee corporations to accept $150,000 in lieu of such stock in CMRS.
Upon signing, the Company had five days to fund such transaction. Due to limited
time and internal resources, the Company sought an investor that could
immediately meet the $150,000 in payments. Already familiar with the Company
from its earlier investment, Settondown Capital International ("Settondown")
agreed to provide the financing and acquire the approximately 8% minority
interest in CMRS, provided that the Company in turn enter into an exchange
agreement with Settondown to issue 800,000 shares of Common Stock in return for
the minority interest in CMRS. These transactions closed on February 10, 1998,
in conjunction with which Settondown also agreed to limit its selling of such
shares of Common Stock to no more than 50,000 shares per month for the first six
months following issuance thereof. An effect of these transactions was to
eliminate an approximately 8% minority interest in CMRS in return for the
issuance of 800,000 shares of Common Stock. CMRS remains a wholly owned
subsidiary of the Company with no further obligations to the 32 licensee
corporations, considerably simplifying the Company's capital structure as a
result. Management believes the transactions were advantageous because the
valuation placed by the Company on the 8% of CMRS common stock which would
otherwise have been issued to the license holders was greater than the
consideration actually provided by the Company as a result of the transactions.
However, no assurances can be given that the Company's valuation of such 8% of
CMRS common stock would be generally accepted, especially given the absence of a
public market in CMRS shares and market uncertainties regarding the valuation of
assets such as those held by CMRS. The one remaining licensee continues to
operate under the Company's Management and Option Agreements. Negotiations are
currently underway to exercise the option. If a satisfactory resolution cannot
be achieved the Company intends to continue to operate under the current
Management and Option Agreement, subject to the licensee's direction.
On October 30, 1997, two subsidiaries of the Company, CCI and CMRS, entered into
a First Amendment and Financing and Security Agreement with MarCap Corporation
("MarCap") which amended that certain Financing and Security Agreement dated
October 29, 1996 between CCI and Motorola (the "Motorola Loan Facility"), the
interest of Motorola therein having been assigned to MarCap, pursuant to which
MarCap extended to CCI and CMRS an additional loan facility (the "MarCap
Facility") in a maximum amount of $2,000,000 (plus certain fees and legal
expenses payable to MarCap). The MarCap Facility is secured by (i) a pledge of
all the stock of two subsidiaries and assignment of all limited liability
company membership interests in three limited liability companies, which
collectively hold licenses or rights to licenses in up to 452 channels in 12
markets having a value (per a third-party appraiser) of approximately $8,800,000
(subsequently valued at approximately $10,400,000 by the same third-party
appraiser), (ii) a first lien on all non-Motorola equipment used in systems for
such markets, and (iii) a cross-pledge of all collateral previously granted in
favor of Motorola relating to the Motorola Facility, which cross-pledge, until
modified by letter agreement dated February 25, 1998 between the Company and
MarCap as described further below, would unwind with respect to collateral
pledged under either the Motorola Facility or MarCap Facility upon full
repayment by the Company of all outstanding balances under either such
respective Facility. The MarCap Facility is further guaranteed by Chadmoore
Wireless Group, Inc. and by Chadmoore Communications of Tennessee, Inc. to the
extent of its interest in the collateral previously pledged in favor of
Motorola.
On October 31, 1997, the initial draw under the MarCap Facility was made in the
amount of $481,440 and evidenced by a promissory note executed in favor of
MarCap. Subsequent draws of $250,000, $650,000 and $663,000 (plus certain fees
and legal expenses payable to MarCap) were made on February 6, 1998, March 6,
1998, and March 27, 1998, respectively.
On February 25, 1998, the Company and MarCap entered into a letter agreement
relating to the Motorola and MarCap Facilities which provided for (i) complete
cross-collateralization of the Motorola and MarCap Facilities without the
aforementioned unwinding provision, (ii) a revised borrowing base formula for
the Motorola and MarCap Facilities, (iii) notification by the Company to
Motorola of the modifications being made pursuant to such letter agreement, (iv)
affirmation by the Company to utilize its diligent best efforts to raise at
least $5 million of equity and $15 million of aggregate financing by April 30,
1998, (v) waiver of existing covenants for the Motorola and MarCap facilities
through April 30, 1998 so long as the Company continues to utilize its diligent
best efforts to raise at least $5 million of equity and $15 million of aggregate
financing by such date, (vi) affirmation by MarCap that it will not object to
the Company incurring $10 million in additional senior debt so long as the
Company is not in material default on the Motorola or MarCap facilities, (vii)
new covenants for the Motorola and MarCap facilities, based on the Company's
business plan as if no additional equity and debt financing were raised by April
30, 1998, that would take effect after April 30, 1998. On March 5, 1998,
Motorola provided the Company with written acknowledgment of the notification
required by the Company as described in clause (iii) above. As a result of these
modifications, the Company is in full compliance with the Motorola and MarCap
facilities, and has classified the appropriate portion (maturing after one year)
as long-term debt.
On April 30, 1998, the Company and MarCap agreed upon modifications to the
provisions of the MarCap Facility. Such modifications included (i) a shifting
out of existing covenants by one quarter to account for elapsed time that had
been dedicated to securing financing rather than systems implementation, and
(ii) affirmation by the Company to utilize its diligent best efforts to obtain
the then-proposed $7.5 million of equity financing without the $15 million
aggregate financing requirement. The Company remains in full compliance with the
Motorola and MarCap Facilities.
In October 1996, CCI signed a purchase agreement with Motorola to purchase
approximately $10,000,000 of Motorola radio communications equipment, including
Motorola Smartnet II trunked radio systems. Such purchase agreement required
that the equipment be purchased within 30 months of its effective date. In
conjunction with such purchase agreement, CCI entered into the Motorola Facility
permitting CCI to borrow during the term of the purchase agreement up to 50% of
the value of Motorola equipment purchased under the purchase agreement, or up to
$5,000,000. On August 18, 1997, Motorola, with the Company's concurrence,
assigned all of its interest in the Motorola Facility to MarCap. By way of
letter agreement dated March 10, 1998 among MarCap, Motorola, and the Company,
the effective period of the Motorola purchase agreement and the Motorola
Facility was extended from 30 months to 42 months from the effective dates
thereof. Depending on the Company's ability to continue funding its minimum 50%
down-payment requirement under the Motorola purchase agreement, the Company
anticipates funding approximately $2.5 million of Motorola equipment for its SMR
systems under the Motorola Facility for the next 12 months.
Based on the foregoing, the Company believes that it should have adequate
resources to continue establishing its SMR business and emerge from the
development stage during 1998. However, while the Company believes that it has
developed adequate contingency plans, the failure to obtain additional debt
financing, if needed, could have a material adverse effect on the Company,
including the risk of bankruptcy. Such contingency plans include pursuing
similar financing arrangements with other institutional investors and lenders
that have expressed interest in providing capital to the Company, selling
selected channels, and focusing solely on the 28 markets in which full-scale
service has already been implemented. This latter course might entail ceasing
further system expansion in such markets (which in the aggregate are generating
positive cash flow) and reducing corporate staff to the minimal level necessary
to administer such markets. The Company believes that this strategy would
provide sufficient time and resources to raise additional capital or sell
selected channels in order to resume its growth. However, there can be no
assurances that this or any of the Company's contingency plans would adequately
address the aforementioned risks, or that the Company will attain overall
profitability once it has emerged from the developmental stage.
The Company's unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
7 to the unaudited consolidated financial statements, the Company has suffered
recurring losses from operations, has a negative working capital, and has a
deficit accumulated during the development stage that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 7. The unaudited consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
June 16, 1995, CCI filed a request for approval of an extended implementation
plan for the construction of over two thousand SMR stations with the FCC. On
December 15, 1995, the FCC denied that request. On January 21, 1996, CCI
appealed the denial to the U.S. Court of Appeals for the District of Columbia
Circuit. Briefs were filed and oral argument was heard on November 5, 1996. The
Court has not issued an opinion. Based on relevant precedent, the Company
believes there is substantial basis for the appeal. It cannot predict when the
Court will issue an opinion, or whether that opinion will be favorable to the
Company. If the Court denies the Appeal, the licenses for a small number of the
stations CCI manages may be automatically canceled. Licenses for other stations
CCI manages have been preserved by the Goodman/Chan Waiver or were otherwise
timely constructed and not subject to the above.
Airnet, Inc. v. Chadmoore Wireless Group, Inc. Case No. 768473, Orange County
Superior Court
On April 3, 1997, Airnet, Inc. ("Airnet") served a summons and complaint on the
Company, alleging claims related to a proposed merger between Airnet and the
Company that never materialized. In particular, Airnet has alleged that a
certain "letter of intent" obligated the parties to complete the proposed
merger. The Company denies this allegation. In its complaint, Airnet has alleged
the following purported causes of action against the Company: breach of
contract, breach of the implied covenant of good faith and fair dealing,
intentional interference with prospective economic advantage, intentional
interference with contractual relationship, including breach of contract, false
promise and conversion. Airnet has also purported to seek the following relief
from the Company: $28,000,000 in compensatory damages plus interest, punitive
damages, costs of suit and attorney's fees. The Company challenged the
sufficiency of the complaint as to most of the purported causes of action on the
grounds that these purported causes of action fail to state facts sufficient to
constitute a cause of action. The Company also challenged the sufficiency of the
punitive damages allegations on the grounds that the compliant fails to state
facts sufficient to support these allegations. Rather than oppose these
challenges to its complaint, Airnet elected to file a first amended complaint.
Believing that Airnet's amendments were immaterial the Company renewed its
challenges to Airnet's pleading. On September 9, 1997, the court sustained the
Company's demurrers to Airnet's claims for damages based on the Company's
alleged failure to complete the merger and to Airnet's claims for conversion. At
Airnet's request, the court allowed Airnet to amend its pleading a second time
to attempt to state these claims, and Airnet's new complaint asserts claims for
breach of contract, anticipatory breach of contract, intentional interference
with prospective economic advantage, interference with contractual relationship,
inducing breach of contract and false promise. The Company again filed demurrers
challenging certain of the claims in Airnet's pleading. On January 16, 1998, the
Court overruled the Company's demurrers to the Second Amended Complaint.
On February 2, 1998, the Company answered the Second Amended Complaint with a
general denial and by asserting the following affirmative defenses: failure to
state a claim, uncertainty, statutes of limitations, laches, lack of capacity,
lack of standing, waiver, estoppel, knowledge and acquiescence, unclean hands,
unjust enrichment, fraud, misrepresentations, res judicata, justification,
privilege, no action intended or reasonably calculated to cause injury, lack of
causation, acts of third parties, failure to allege a contract, no meeting of
the minds, statute of frauds, lack of privity, fraud in the inducement, mistake,
lack of consideration, failure of consideration, failure of conditions
precedent, concurrent, subsequent, Airnet's intentional misrepresentation,
Airnet's negligent misrepresentations, performance excused by Airnet's failure
to perform, performance excused by recision, performance excused by
modification, antecedent breaches by Airnet, accord and satisfaction, privileged
communications, justified communications, no damages, failure to mitigate and
offset.
On February 2, 1998, the Company filed a Cross-Complaint against Airnet as well
as three other named cross-defendants related to Airnet: Uninet, Inc.,
("Uninet") Anthony Schatzlein ("Schatzlein") and Dennis Houston ("Houston"). The
Company's Cross-Complaint alleges various causes of action including fraud,
breach of oral contract, fraud and defamation which arise out of the proposed
merger and the events surrounding it. On March 2, 1998, cross-defendants Airnet,
Uninet, Schatzlein and Houston answered the Cross-Complaint with a general
denial and a single affirmative defense -- that the Cross-Complaint does not
state facts sufficient to constitute a cause of action.
The Company intends to vigorously defend the Second Amended Complaint and to
pursue the claims set forth in the Cross- Complaint. At this time, the outcome
of this litigation cannot be predicted with certainty. Although the Company
intends to defend the action vigorously, it is still in its early stages and no
substantial discovery has been conducted in this matter. Accordingly, at this
time, the Company is unable to predict the outcome of this matter. A non-binding
mediation is scheduled for June 12, 1998 before a retired judge of the superior
court.
Chadmoore Communications, Inc. v. John Peacock Case No. CV-S-97-00587-HDM (RLH),
United States District Court for the District of Nevada
In September 1994, CCI entered into a two year consulting agreement (the
"Consulting Agreement") with John Peacock ("Peacock") to act as a consultant and
technical advisor to CCI concerning certain specialized mobile radio ("SMR")
stations. In May, 1997 CCI filed a complaint against Peacock for declaratory
relief in the United States District Court for the District of Nevada, seeking a
declaration of the respective rights and obligations of CCI under the Consulting
Agreement. CCI is seeking this judicial declaration based upon Peacock's
contention that he is entitled to certain bonus compensation under the
Consulting Agreement. Peacock contends that this bonus compensation is due
regardless of whether an SMR license is granted based upon his activities as a
consultant. CCI contends that the Consultant Agreement is clear that such bonus
compensation is only awarded upon the "grant" of an SMR license. Peacock
contends that he is entitled to bonus compensation of four hundred five thousand
($405,000). In lieu of answering the complaint, Peacock filed a motion seeking
dismissal of the action based on the assertion that he is not subject to
jurisdiction in Nevada courts. After briefing, that motion was denied by the
Court, and the parties are now proceeding with discovery.
On September 26, 1997, Peacock answered the Complaint and asserted the following
affirmative defenses: failure to state a claim, failure to perform, intentional
concealment or failure to disclose material facts, estoppel, unclean hands, lack
of subject matter, claims not authorized by declaratory relief statutes,
improper venue, forum non conveniens, rescission and reformation, and choice of
law.
On or about January 28, 1998, Peacock filed a motion to add a counterclaim to
this litigation. The counterclaim purported to allege causes of action based on
breach of the Consultant Agreement, fraud and breach of fiduciary duty. CCI
objected to Peacock's improper attempt to add tort claims to this litigation and
Peacock agreed to withdrawn them, amend its proposed counterclaim by
stipulating, and assert only a breach of contract claim based on the Consulting
Agreement. The Amended Counterclaim was deemed filed with the Court, on March
15, 1998. On May 11, 1998 Chadmoore cited its Reply to Peacock's Counsels claim,
denying liability and asserting Thirty-eight affirmative defenses, including
defenses based on Peacock's alleged fraud and failure to perform. For then with
its Reply, Chadmoore filed a counterclaim against Peacock and two entities
related to Peacock - Peacock's Radio and Wild's Computer Services, Inc. and
Peacock's Radio, a Partnership. Chadmoore's counterclaim asserts claims for
Fraud, Breech of Fiduciary Duty, and Breech of Contract. Chadmoore's
counterclaim seeks general and punitive damages.
CCI intends to vigorously pursue its Complaint and defend against the
counterclaim. At this time, discovery has not been completed and the Company is
unable to predict the outcome of this matter.
Pursuant to the FCC's jurisdiction over telecommunications activities, the
Company is involved in pending matters before the FCC which may ultimately
affect the Company's operations. These pending matters include the "Goodman
Chan" decision and the Company's pending Finders Preference requests. Details
concerning the status of these proceedings at the FCC are given above. (Part I,
Item 1 Footnote 5A).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
(a)(1) A list of the financial statements and schedules thereto as filed in
this report reside at Item 1.
(a)(2) The following exhibits are submitted herewith:
4.1 Certificate of Designation of Rights and Preferences of Series C
Preferred Stock of the Registrant (incorporated by reference to Exhibit
4.1 of Registrant's Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 15, 1998 (the "Form 8-K")).
4.2 Form of Series C Preferred Stock Certificate (Incorporated by
reference to Exhibit 4.2 of the Form 8-K).
10.20 Form of Amendment No. 1 to Offshore Subscription Agreement for Series
B 8% Convertible Preferred Stock dated on or about February 17, 1998 (1)
10.21 Investment Agreement dated May 1, 1998, between the Registrant and
Recovery Equity Investors II, L.P. ("Recovery") (incorporated by
reference to Exhibit 10.1 of the Form 8-K).
10.22 Registration Rights Agreement, dated May 1, 1998, between the
Registrant and Recovery (incorporated by reference to Exhibit 10.2 of
the Form 8-K).
10.23 Stock Purchase Warrant, dated May 1, 1998, issued to Recovery for the
purchase of 4,000,000 shares of Common Stock (incorporated by reference
to Exhibit 10.2 of the Form 8-K).
10.24 Stock Purchase Warrant, dated May 1, 1998, issued to Recovery for the
purchase of 14,612,796 shares of Common Stock (incorporated by reference
to Exhibit 10.2 of the Form 8-K).
10.25 Stock Purchase Warrant, dated May 1, 1998, issued to Recovery for the
purchase of 10,119,614 shares of Common Stock (incorporated by reference
to Exhibit 10.2 of the Form 8-K).
10.26 Shareholders Agreement, dated May 1, 1998, by and among the
Registrant Recovery and Robert W. Moore (incorporated by reference to
Exhibit 10.2 of the Form 8-K).
10.27 Advisory Agreement, dated May 1, 1999, between the Registrant and
Recovery (incorporated by reference to Exhibit 10.2 of the Form 8-K).
10.28 Indemnification Letter Agreement, dated May 1, 1998, between the
Registrant and Recovery (incorporated by reference to Exhibit 10.2 of
the Form 8-K).
11 Computation of per share amounts (2)
27.1 Financial Data Schedule 1998 (2)
27.2 Financial Data Schedule 1997 (2)
(1) Incorporated by reference to Exhibit 10.16 to the Company's Form 8-K, under
Item 9, date of earliest event reported - February 17, 1998
(2) Filed herewith.
(b) Current Reports on Form 8-K
(i) Current Report on Form 8-K filed on February 24, 1998, reported pursuant to
the SEC's Division of Corporation Finance's interpretation of the disclosure
requirements set forth in SEC Release No. 34-37801, reporting (a) On
December 23, 1997, the Company concluded a private placement conducted in
accordance with Regulation S in which the Company sold (i) 219,000 shares of
Series B Convertible Preferred Stock (the "Preferred Stock") and (ii)
warrants ("Warrants") to purchase 300,000 shares of the Company's Common
Stock, with the Company receiving proceeds of $1,650,000; and (b) with
respect to certain conversions of the Preferred Stock, the Company issued
shares of its Common Stock to various holders of some of such Preferred
Shares.
(ii) Current Report on Form 8-K filed on March 16, 1998 reporting (a) the terms
of amendments (the "Amendments") of the terms of the private placement
described in the Company's Current Report on Form 8-K filed on February 24,
1998 (the "Prior 8-K"), which Amendments extended the holding period
applicable to purchasers of the Preferred Stock (as defined in the Prior
8-K) and provided for the issuance of additional shares of Common Stock,
Warrants (as defined in the Prior 8-K) and Common Stock underlying Warrants
to such purchaser; (b) with respect to certain conversions of the Preferred
Stock, the Company issued shares of its Common Stock to various holders of
some of such Preferred Shares; and (c) the Company's agreement to issue
800,000 shares of its Common Stock in accordance with Regulation S to a
single investor (the "Investor") who is not a U.S. Person, in exchange for
the delivery to the Company of 5,032 shares of common stock of CMRS. CMRS
had previously agreed to issue the CMRS Shares to the Investor in exchange
for the agreement of the Investor to pay, on behalf of CMRS, a fee to a LDC
Consulting, Inc.
(iii)Current report on Form 8-K on April 1, 1998 reporting (a) the sales of
equity securities pursuant to Regulation S and (b) the conversion of Series
B Convertible Preferred Stock.
(iv) Current report on Form 8-K on April 14, 1998 reporting (a) the sales of
equity securities pursuant to Regulation S and (b) the conversion of Series
B Convertible Preferred Stock.
(v) Current report on Form 8-K on April 29, 1998 reporting (a) the sales of
equity securities pursuant to Regulation S and (b) the conversion of Series
B Convertible Preferred Stock.
(vi)Current report on Form 8-K filed on May 15, 1998, reporting a $7.5 million
equity investment which closed on May 4, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Chadmoore Wireless Group, Inc.
(formerly CapVest International, Ltd.)
By: /s/ Robert W. Moore
Robert W. Moore
President and CEO
By: /s/ Richard C. Leto
Richard C. Leto
Chief Financial Officer
By: /s/ Rick D. Rhodes
Rick D. Rhodes
Chief Regulatory Officer
By: /s/ Jan S. Zwaik
Jan S. Zwaik
Chief Operating Officer
Date: November 24, 1998
28
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
11 Computation of per share amounts (2)
27.1 Financial Data Schedule 1998 (2)
27.2 Financial Data Schedule 1997 (2)
(1) Incorporated by reference to Exhibit 10.16 to the Company's Form 8-K, under
Item 9, date of earliest event reported - February 17, 1998
(2) Filed herewith.
<PAGE>
(11) COMPUTATION OF PER SHARE AMOUNTS
Three Months Ended March 31
---------------------------
1998 1997
------------ ------------
Net income (loss) (1,799,146) (1,575,889)
Series B preferred stock dividend (10,732) --
------------ ------------
Net loss applicable to common shares (1,809,878) (1,575,889)
============ ============
Weighted average common shares outstanding 22,339,773 19,151,200
Common equivalent shares representing shares 5,061,275 8,377,133
issuable upon exercise of stock options
Less common equivalents shares due to (5,061,275) (8,377,133)
antidilution
Adjusted dilutive weighted average shares
outstanding 22,339,773 19,151,200
============ ============
Basic net income(loss) per share (0.08) (0.08)
Diluted net income (loss) per share (0.08) (0.08)
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
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