<PAGE> 1
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)
(702) 740-5633
--------------
(Issuer's telephone number)
-------------------------------------------------------------------
(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 AUGUST 10, 1998 ISSUER HAD 35,915,676 SHARES OF COMMON STOCK, $.001 PAR
VALUE, OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [ ] No [X]
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Financial Statements of Chadmoore Wireless Group, Inc.
and Subsidiaries (A developmental stage company):
Consolidated Balance Sheets:
As of June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations:
For the Six Months Ended June 30, 1998 and 1997 and
for the Period January 1, 1994 to June 30, 1998 4
Consolidated Statements of Operations:
For the Three Months Ended June 30, 1998 and 1997 5
Consolidated Statement of Shareholders' Equity
For the Six Months ended June 30, 1998 6
Consolidated Statements of Cash Flows:
For the Six Months Ended June 30, 1998 and 1997 and
for the Period January 1, 1994 to June 30, 1998 7-8
Notes to Unaudited Consolidated Financial Statements 9-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATION 14-23
PART II - OTHER INFORMATION 24
ITEM 1. LEGAL PROCEEDINGS 24
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
</TABLE>
2
<PAGE> 3
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
UNAUDITED
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,505,455 $ 959,390
Accounts receivable, net of allowance for doubtful accounts of $11,100
and $45,000, respectively 435,361 265,935
Other receivables 96,467 99,223
Inventory 114,379 89,133
Deposits and prepaids 302,625 130,858
------------ ------------
Total current assets 5,454,287 1,544,539
Property and equipment, net 8,919,337 5,809,168
FCC licenses, net of accumulated amortization of $330,091 and $231,917,
respectively 13,943,842 6,726,954
Debt issuance costs, net of accumulated amortization of $15,670 and $0,
respectively 129,182 --
Management agreements and options to acquire licenses 24,031,931 23,779,931
Investment in license options 1,984,329 4,113,995
Non-current deposits and prepaids 32,928 32,928
------------ ------------
Total assets $ 54,495,836 $ 42,007,515
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and capital lease obligations $ 4,590,787 $ 2,638,414
Accounts payable 2,370,485 1,165,425
Accrued liabilities 726,224 1,106,029
Unearned revenue 293,859 107,057
Licenses - options payable 350,000 350,000
License option commission payable 3,412,000 3,412,000
Accrued interest 385,861 173,686
Other current liabilities 913,080 131,273
------------ ------------
Total current liabilities 13,042,296 9,083,884
Long-term debt, excluding current installments 9,199,592 4,614,157
Minority interests 411,967 352,142
------------ ------------
Total liabilities 22,653,855 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
June 30, 1998 and December 31, 1997 -- --
Series B issued and outstanding 45,218 shares at June 30, 1998 and
219,000 shares at December 31, 1997 45 219
Series C issued and outstanding 10,119,614 shares at June 30, 1998 and
0 shares at December 31, 1997 10,120 --
Common stock, $.001 par value. Authorized 100,000,000 shares; issued and
outstanding 35,592,634 shares at June 30, 1998 and 21,163,847 shares
at December 31, 1997 35,592 21,164
Additional paid-in capital 64,868,636 57,269,015
Stock subscribed -- 32,890
Deficit accumulated during the development stage (33,072,412) (29,365,956)
------------ ------------
Total shareholders' equity 31,841,981 27,957,332
------------ ------------
Total liabilities and shareholders' equity $ 54,495,836 $ 42,007,515
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Unaudited Consolidated Statements of Operations
For the Six Months Ended June 30, 1998 and 1997 and for the
Period from January 1, 1994 through June 30, 1998
<TABLE>
<CAPTION>
PERIOD FROM
6 MONTHS ENDED JUNE 30, 1/1/94
----------------------------------- THROUGH
1998 1997 06/30/98
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues:
Radio services $ 869,359 $ 286,457 $ 2,181,244
Equipment sales 235,537 622,889 1,866,494
Maintenance and installation 142,253 155,325 757,830
Other 473 17,213 58,335
--------------- --------------- ---------------
1,247,622 1,081,884 4,863,903
--------------- --------------- ---------------
Costs and expenses:
Cost of sales 401,710 545,489 2,168,616
Salaries, wages, and benefits 1,289,111 1,170,356 6,630,169
General and administrative 1,759,189 1,407,616 18,420,935
Depreciation and amortization 473,372 323,342 1,766,585
--------------- --------------- ---------------
3,923,382 3,446,803 28,986,305
--------------- --------------- ---------------
Loss from operations (2,675,760) (2,364,919) (24,122,402)
--------------- --------------- ---------------
Other income (expense):
Minority interest (34,597) -- (15,231)
Interest expense (net) (813,185) (144,729) (1,708,183)
Loss on reduction of management agreements and
licenses to estimated fair value -- (7,166,956) (7,166,956)
Bad debt expense -- -- --
Standstill agreement expense (182,914) -- (182,914)
Writedown of investment in JJ&D, LLC -- -- (443,474)
Loss on extinguishment of debt -- -- (598,222)
Gain on settlement of debt -- -- 717,638
Cost of settlement of license dispute -- -- (143,625)
Management fees -- -- 472,611
Gain on sale of assets -- -- 330,643
Loss on retirement of note payable -- -- (32,404)
Other, net -- (52,185) (179,893)
--------------- --------------- ---------------
(1,030,696) (7,363,870) (8,950,010)
--------------- --------------- ---------------
Net loss $ (3,706,456) $ (9,728,789) (33,072,412)
=============== =============== ===============
Basic and diluted weighted average number of common
shares outstanding 27,321,879 19,511,640 12,076,378
--------------- --------------- ---------------
Basic and diluted net loss per share $ (0.14) $ (0.50) (2.74)
--------------- --------------- ---------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Unaudited Consolidated Statements of Operations
For the Three Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
3 MONTHS ENDED JUNE 30,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Revenues:
Radio services $ 497,721 $ 144,966
Equipment sales 150,008 371,498
Maintenance and installation 83,513 56,485
Other 228 10,085
--------------- ---------------
731,470 583,034
--------------- ---------------
Costs and expenses:
Cost of sales 218,777 273,375
Salaries, wages and benefits 755,432 594,316
General and administrative 1,007,218 647,342
Depreciation and amortization 279,238 162,984
--------------- ---------------
2,260,665 1,678,017
--------------- ---------------
Loss from operations (1,529,195) (1,094,983)
--------------- ---------------
Other income (expense):
Minority interest (25,300) --
Interest expense (net) (352,815) (80,743)
Loss on reduction of management agreements and
licenses to estimated fair value -- (7,166,956)
Other, net -- (52,500)
--------------- ---------------
(378,115) (7,300,199)
--------------- ---------------
Net loss $ (1,907,310) $ (8,395,182)
=============== ===============
Basic and diluted weighted average number of common
shares outstanding 32,236,504 19,868,119
--------------- ---------------
Basic and diluted net loss per share $ (0.06) $ (0.42)
--------------- ---------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Unaudited Consolidated Statements of Shareholders' Equity
For the Six months ended June 30, 1998
<TABLE>
<CAPTION>
DEFICIT
PREFERRED STOCK COMMON STOCK ACCUMULATED
------------------------ ---------------------- ADDITIONAL DURING
OUTSTANDING OUTSTANDING PAID-IN DEVELOPMENT STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE SUBSCRIBED
----------- -------- ---------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 219,000 $ 219 21,163,847 $21,164 57,269,015 (29,365,956) $ 32,890
Shares issued under employee
compensation plan -- -- 108,500 108 55,878 -- --
Shares issued for subscribed
stock -- -- 11,400 11 32,879 -- (32,890)
Shares issued for exercise of
license option -- -- 800,000 800 351,200 -- --
Shares issued for conversion
of preferred stock (173,782) (174) 3,618,107 3,619 (3,445) -- --
Shares issued for preferred
stock dividend -- -- 69,330 69 (69) -- --
Shares issued for standstill
agreement -- -- 310,023 310 182,604 -- --
Compensation expense for
options issue -- -- -- -- 15,040 -- --
Shares issued for services -- -- 290,765 290 160,635 -- --
Shares issued for exercise of
license option -- -- 31,000 31 15,159 -- --
Shares issued for purchase of
fixed assets -- -- 335,000 335 188,715 -- --
Shares issued for cash 10,119,614 10,120 8,854,662 8,855 6,601,025 -- --
Net loss -- -- -- -- -- (3,706,456) --
----------- -------- ---------- -------- ----------- ----------- --------
Balance at June 30, 1998 10,164,832 $ 10,165 35,592,634 $35,592 64,868,636 (33,072,412) $ --
=========== ======== ========== ======= =========== =========== ========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
------------
<S> <C>
Balance at December 31, 1997 $ 27,957,332
Shares issued under employee
compensation plan 55,986
Shares issued for subscribed
stock --
Shares issued for exercise of
license option 352,000
Shares issued for conversion
of preferred stock --
Shares issued for preferred
stock dividend --
Shares issued for standstill
agreement 182,914
Compensation expense for
options issue 15,040
Shares issued for services 160,925
Shares issued for exercise of
license option 15,190
Shares issued for purchase of
fixed assets 189,050
Shares issued for cash 6,620,000
Net loss (3,706,456)
------------
Balance at June 30, 1998 $ 31,841,981
============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Unaudited Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997 and for the
Period from January 1, 1994 through June 30, 1998
<TABLE>
<CAPTION>
6 MONTHS ENDED JUNE 30, PERIOD FROM
------------------------------- 1/1/94 THROUGH
1998 1997 06/30/98
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,706,456) $ (9,728,789) $ (33,072,412)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest 34,597 -- 15,231
Depreciation and amortization 473,372 400,768 1,766,585
Writedown of management agreements and licenses to
estimated fair value -- 7,166,956 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 -- -- (670,188)
Loss on extinguishment of debt -- -- 598,222
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 539,466 -- 805,978
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:
Decrease in stock subscriptions receivable, net
of stock subscribed -- -- (637,193)
(Increase) in accounts receivable and other receivables (125,517) (153,699) (322,212)
Decrease (increase) in inventory (25,246) (10,139) (36,398)
(Increase) in debt issuance costs (144,852) -- (144,852)
(Increase) decrease in deposits and prepaid expenses (116,281) 50,856 (237,275)
Increase in accounts payable and accrued liabilities 706,240 243,615 2,979,504
Increase in unearned revenue 186,802 -- 293,859
Increase in license options commission payable -- -- 524,800
Increase in accrued interest 212,175 38,194 704,124
Increase in other current liabilities 822,278 96,533 973,971
------------- ------------- -------------
Net cash used in operating activities (945,468) (1,895,705) (11,797,123)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of assets from General Communications, Inc. -- -- (352,101)
20% 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 (156,409) (195,350) (1,842,854)
Sale of management agreements and options to acquire
licenses -- -- 500,000
Purchase of property and equipment (3,073,794) (332,064) (7,697,969)
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 (3,230,203) (527,414) (13,191,488)
------------- ------------- -------------
</TABLE>
(Continued)
7
<PAGE> 8
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Unaudited Consolidated Statements of Cash Flows, Continued
For the Six Months Ended June 30, 1998 and 1997 and for the
Period from January 1, 1994 through June 30, 1998
<TABLE>
<CAPTION>
PERIOD FROM
6 MONTHS ENDED JUNE 30, 1/1/94
------------------------------- THROUGH
1998 1997 06/30/98
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds upon issuance of common stock $ 7,500,000 $ -- $ 11,816,543
Equity issuance costs (705,000) -- (705,000)
Proceeds upon issuance of preferred stock -- -- 3,848,895
Proceeds upon exercise of options - related parties -- -- 62,500
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)
Payments of long-term debt and capital lease obligations (686,284) (195,187) (1,655,550)
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 7,721,736 1,334,813 29,494,066
------------- ------------- -------------
Net increase (decrease) in cash 3,546,065 (1,088,306) 4,505,455
Cash at beginning of period 959,390 1,463,300 --
------------- ------------- -------------
Cash at end of period $ 4,505,455 $ 374,994 $ 4,505,455
============= ============= =============
Supplemental disclosure of cash paid for:
Taxes $ -- $ -- $ --
Interest $ 96,945 $ 17,251 $ 529,502
============= ============= =============
</TABLE>
Supplemental disclosure for non-cash investing and financing activities:
1998
* Issuance of 108,500 shares of Common Stock to employees.
* Issuance of $5,013,797 of notes payable, net of discount, to exercise options
to purchase FCC licenses.
* Conversion of 173,782 shares of convertible preferred stock into 3,618,107
shares of common stock.
* Issuance of 69,330 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 with a value of $352,000, for
exercise of license option.
* Reclassification of minority interest of approximately $14,915 into property
and equipment.
* Issuance of 31,000 shares of common stock with a value of $15,190 to a license
holder.
* Issuance of 290,765 shares of common stock for prepaid professional services
with a value of $160,925.
* Issuance of 335,000 shares of common stock with a value of $189,050 and
licenses with a cost of $100,000 for fixed assets.
1997
* Conversion of $1,150,000 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 to purchase common stock which had $161,929 of
prepaid exercise price.
* Reclassification $108,027 of deposits to property and equipment.
See accompanying notes to unaudited consolidated financial statements.
8
<PAGE> 9
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 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, which 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 for the period ending December 31, 1997.
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 June 30,
1998 the Company has no 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.
C. CASH EQUIVALENTS
For the purposes of the statement of cash flows the Company considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
D. RECLASSIFICATIONS
Certain amounts in the 1997 Unaudited Consolidated Financial Statements have
been reclassified to conform to the 1998 Presentation.
E. 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.
F. CUSTOMER ACQUISITION COSTS
Customer acquisition costs are expensed as incurred or, if appropriate,
amortized ratably over the initial term of the service contract.
9
<PAGE> 10
(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 six months ended June 30,
1998, the Company had exercised Option Agreements for approximately 650 channels
for consideration of cash, notes payable and the Company's common stock ("Common
Stock") totaling approximately $5,934,366. In relation to the exercise of the
options for the licenses, the Company has also incurred commission costs
totaling approximately $1,302,000, which are included in FCC licenses.
As of June 30, 1998, of the approximately 4,800 licenses under the Company's
control, approximately 3,000 licenses had transferred to the Company and
approximately 1,460 were in the process of being transferred to the Company,
pending FCC approval. The remaining approximately 340 licenses continue to be
maintained under Option and/or Management Agreements (defined below), for which
the Company has decided to delay exercise based on various economic and
operating 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 June 30, 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 June 30, 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 accordingly by
the Company. If the Company were to exercise the remaining outstanding Option
Agreements for approximately 340 channels as of June 30, 1998, the obligations
would total approximately $8 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) PROPERTY AND EQUIPMENT
Property and equipment, which is recorded at cost and depreciated over their
estimated useful lives, generally 5-10 years, consists primarily of SMR system
components, which have an estimated useful life of 10 years. The recorded amount
of property and equipment capitalized and the related accumulated depreciation
is as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
SMR systems and equipment $ 7,991,332 $ 5,768,117
SMR systems in process 1,198,750 --
Buildings and improvements 335,900 335,900
Land 102,500 102,500
Furniture and office equipment 278,130 249,164
Automobiles 18,766 --
Leasehold improvements 9,759 9,759
--------------- ---------------
9,935,137 6,465,440
Less accumulated depreciation (1,015,800) (656,272)
--------------- ---------------
$ 8,919,337 $ 5,809,168
=============== ===============
</TABLE>
(4) LONG-TERM DEBT
(A) DEBT ISSUANCES
During the six months ended June 30, 1998 the Company entered into notes payable
with license holders for approximately $5,000,000, net of a discount of
approximately $1,725,000; these notes represent the final payment to exercise
license options for approximately 650 licenses. As of June 30, 1998 the Company
had entered into notes payable totaling approximately $8,175,000, net of a
discount of approximately $2,675,000, calculated at an imputed interest rate of
15%.
10
<PAGE> 11
As of June 30, 1998 the total outstanding amounts of the MarCap Facility and
Motorola Loan Facility were $1,945,683 and $323,778, 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.
(B) NEW DEBENTURE
As reported in the Company's Form 10-KSB for the year ended December 1997, the
Company restructured a Convertible Debenture and the holder accepted a new
debenture. The holder of the new debenture has presented the Company with a
default and acceleration notice. However, the Company believes such note holder
does not have the right to cause acceleration pursuant to such purported notice.
The Company is currently in discussions with the holder with respect to this
matter.
(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. During the six months ended June 30, 1998 the holders of Series B
Preferred Stock converted 173,782 shares of Series B Preferred into 3,618,107
shares of Common Stock. Dividends on such shares of Series B Preferred were
$37,340, which was paid with 69,330 shares of Common Stock. In addition,
dividends of $19,146 have accrued on the Series B Preferred as of June 30, 1998.
B. EQUITY INVESTMENT
On May 1, 1998, the Company closed a $7.5 million equity investment with
Recovery Equity Investors II, L.P. ("Recovery"), an institutional private equity
fund. In addition to such investment, Recovery has an option to purchase from
the Company up to an additional $5 million in equity, and the Company has the
ability to buy back such option if the Company meets certain performance
criteria. The Company incurred $880,000 of equity issuance costs associated with
this transaction.
(6) RELATED PARTY TRANSACTIONS
The Company paid $604,872 to Private Equity Partners ("PEP"), for professional
services associated with equity and debt financings, for the six months ended
June 30, 1998. The managing partner of PEP is a director of the Company.
(7) 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").
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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.
On July 31, 1998 the Federal Communications Commission (the "Commission") issued
a Memorandum Opinion and Order and Order on Reconsideration in which it
enunciated its final decision in the Goodman/Chan proceeding. Initial review of
the opinion by the Company's counsel indicates a potentially favorable outcome
in this matter, as it appears that the relief granted by the Commission will be
applicable to a significant number of the Company's owned and/or managed
stations.
The Commission noted that it would request publication of its decision in the
Federal Register as promptly as possible. Thus, it is expected that this item
will be published in the Federal Register prior to August 30, 1998. At the date
of official publication, the decision will take legal effect, provided that no
successful challenges seeking a judicial stay of the Commission's action are
forthcoming.
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.
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
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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, with certainty. A non-binding mediation previously scheduled for June
12, 1998 before a retired judge of the superior court, is currently scheduled to
take place on August 21, 1998.
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
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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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
The following is a discussion of the consolidated financial condition and
results of operations of Chadmoore Wireless Group, Inc., together with its
subsidiaries (collectively "Chadmoore" or the "Company"), for the three months
ended and six months ended June 30, 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. See the
Company's Form 10-KSB for the year ended December 1997.
(1) PLAN OF OPERATION
A. 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 of 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 frequencies, cover
approximately 55 million people in 180 markets throughout the United States,
with focus on secondary and tertiary cities ("Operating Territory").
B. 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 on 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
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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 is 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 June 30, 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
180 markets in the United States covering approximately 55 million people. This
population number, based on 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 180 markets, the Company has implemented full-scale systems and
distribution, servicing approximately 18,000 subscribers (an increase in excess
of 117% since December 31, 1997) in the following 51 markets as of August 14,
1998:
Abilene, TX Grand Rapids, MI Mobile, AL
Atlantic City, NJ Greenville, NC Naples, FL
Augusta, GA Greenville, SC Nashville, TN
Austin, TX Harrisburg, PA Norfolk, VA
Baton Rouge, LA Huntsville, AL Omaha, NE
Bay City/Saginaw, MI Jackson, MS Pine Bluff, AR
Beaumont, TX Jacksonville, FL Portland, ME
Bowling Green, KY Jacksonville, NC Richmond, VA
Charleston, SC Lafayette, IN Roanoke, VA
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Charlotte, NC Lafayette, LA Rochester, MN
Charlottesville, VA Lake Charles, LA Rockford, IL
Chattanooga, TN Lexington, KY Silverhill, AL
Columbia, SC Little Rock, AR South Bend, IN
Corpus Christi, TX Madison, WI Springfield, IL
Fayetteville, AR Mankato, MN St. Cloud, MN
Fort Myers, FL Memphis, TN Tyler, TX
Fort Wayne, IN Milwaukee, WI Wilmington, NC
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, the Company can integrate
additional channels under its control 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.
C. 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 129 markets. Several elements of Chadmoore's customer acquisition
strategy are incorporated into Moscato's program, including further development
of its "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 180 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
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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 has implemented a modified dealer partner
arrangement in which the dealer contributes 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 is a capital contribution, and not
recouped from system earnings. Based on the speed and extent of loading
subscribers onto the system, the dealer partner also has incentive opportunities
to earn up to an additional 10% interest in the system.
D. 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 targeted end-user and
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 targeted end-user, price and to a certain extent, geographic
differentiation.
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 Management's opinion, 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,
available spectrum, capacity to meet customer growth, and professional marketing
and dealer support.
E. LICENSES AND RIGHTS TO LICENSES
Within its 180 target markets, Chadmoore controls approximately 4,800 channels
in the 800 MHz band through ownership of 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") that remain in effect 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
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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 June 30, 1998, the Company had exercised Option Agreements on
approximately 4,460 channels, of which approximately 3,000 had transferred to
the Company and approximately 1,460 were in the process of being transferred to
the Company, pending FCC approval. The remaining approximately 340 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.
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<PAGE> 19
(2) RESULTS OF OPERATION
A. SIX MONTHS ENDED JUNE 30, 1998 VERSUS SIX MONTHS ENDED JUNE 30, 1997
Total revenues for the six months ended June 30, 1998 increased 15.3% to
$1,247,622 from $1,081,884 for the six months ended June 30, 1997, reflecting
increases of $582,902, or 203.5%, in Radio Services (recurring revenues from
air-time subscription by customers), offset in part by declines of $387,352, or
62.2%, in Equipment Sales and $13,072, or 8.4%, 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 69.7% for the six months ended June 30, 1998 from 26.5% for the six months
ended June 30, 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 203.5% increase in Radio Services revenues, to $869,359 for the six months
ended June 30, 1998 from $286,457 for the six months ended June 30, 1997, was
driven by an increase in the number of subscribers utilizing the Company's SMR
systems, which measured 15,380 at June 30, 1998 versus approximately 3,672 at
June 30, 1997, an increase of over 319% during the twelve months ended June 30,
1998. The increase in subscribers, was attributed to full-scale implementation
of service by the Company in 31 new markets during the period and continued
subscriber growth in existing markets. Pricing per subscriber unit in service
remained comparable over the periods. Further, during the six months ended June
30, 1998, the number of subscribers increased from 8,297 to 15,380, or 85.4%, as
compared to an increase from 2,135 to 3,672, or 72.0%, during the same period in
1997.
The 62.2% decrease in revenues from Equipment Sales, to $235,537 for the six
months ended June 30, 1998 from $622,889 for the six months ended June 30, 1997,
and the 8.4% decrease in revenues from Maintenance and Installation services, to
$142,253 for the six months ended June 30, 1998 from $155,325 for the six months
ended June 30, 1997, was partially attributed to the sale of lower price but
higher margin equipment in the Company's two direct distribution markets. In
addition, the Company had insufficient working capital to maintain inventory and
a full complement of salespeople during the first quarter of 1998.
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 $143,779, or 26.4%, to $401,710 for the six months
ended June 30, 1998 from $545,489 for the six months ended June 30, 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, the gross margin (total revenue less cost of sales, as a
percentage of total revenue) increased by 18.2 percentage points, to 67.8% for
the six months ended June 30, 1998 from 49.6% for the six months ended June 30,
1997.
Salaries, wages, and benefits expense increased by $118,755, or 10.1%, to
$1,289,111 for the six months ended June 30, 1998 from $1,170,356 for the six
months ended June 30, 1997, primarily due to a higher number of employees to
support the Company's expansion into additional markets as discussed above.
Relative to total revenues, salaries, wages, and benefits expense measured
103.3% for the six months ended June 30, 1998 compared with 108.2% for the six
months ended June 30, 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 economies of scale gained from an increasing subscriber
base managed through essentially the same infrastructure.
General and administrative expenses, increased $351,573, or 24.9%, to $1,759,189
for the six months ended June 30, 1998 from $1,407,616 for the six months ended
June 30, 1997. This increase is partially attributed to an increase in site
expenses for non-revenue generating sites, the majority of these site expenses,
for 1997, were incurred in the second half of the year when the Company
initiated the construction of its channels. The Company expects such general and
administrative site costs to decrease as these sites generate revenue and
related site costs become cost of sales. Additionally, general and
administrative expenses increased in conjunction with the Company's expansion
into additional markets. Relative to total revenues, general and administrative
expenses increased to 141.0%
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<PAGE> 20
for the six months ended June 30, 1998 compared with 130.1% for the six months
ended June 30, 1997. The Company expects general and administrative expenses as
a percent of total revenues to decline in future years as the Company realizes
economies of scale gained from an increasing subscriber base managed through
essentially the same infrastructure.
Depreciation and amortization expense increased $150,030, or 46.4% to $473,372
for the six months ended June 30, 1998 from $323,342 for the six months ended
June 30, 1997, reflecting greater capital expenditures associated with
construction and implementation of operating systems equipment.
Due to the foregoing, total operating expenses increased $476,579, or 13.8%, to
$3,923,382 for the six months ended June 30, 1998 from $3,446,803 for the six
months ended June 30, 1997, and the Company's loss from operations increased by
$310,841, or 13.1%, to $2,675,760 from $2,364,919, for such respective periods.
Net interest expense increased $668,456, or 461.9%, to $813,185 for the six
months ended June 30, 1998 from $144,729 for the six months ended June 30, 1997,
which is attributable to higher average balances outstanding under loan
facilities and additional notes payable to licensees from the exercise of Option
Agreements.
Based on the foregoing, the Company's net loss, excluding the recording of a
one-time expense of $7,166,956 during the second quarter of 1997 (to reflect a
then-probable impairment of value to management agreements and options to
acquire licenses for which the Company at such time was uncertain of its ability
to construct systems prior to an FCC-mandated construction deadline of November
20, 1997 which would have resulted in forfeiture of such spectrum back to the
FCC), increased $1,144,623, or 44.7%, to $3,706,456, or $.14 per basic and
diluted share, for the six months ended June 30, 1998 from $2,561,833, or $.13
per basic and diluted share, for the six months ended June 30, 1997. Including
such one-time expense during the second quarter of 1997, the Company's net loss
decreased $6,022,333, or 61.9%, during the six months ended June 30, 1998 from
$9,728,789, or $.50 per basic and diluted share, for the six months ended
June 30, 1997.
B. THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED JUNE 30, 1997
Total revenues for the three months ended June 30, 1998 increased 25.5% to
$731,470 from $583,034 for the three months ended June 30, 1997, reflecting
increases of $352,755, or 243.3%, in Radio Services and $27,028, or 47.8% in
Maintenance and Installation services, offset in part by declines of $221,490,
or 59.6%, in Equipment Sales. 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 68.0% for the three months ended June 30, 1998 from 24.9%
for the three months ended June 30, 1997. 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 243.3% increase in Radio Services revenues, to $497,721 for the three months
ended June 30, 1998 from $144,966 for the three months ended June 30, 1997, was
driven by an increase in the number of subscribers utilizing the Company's SMR
systems in both new and existing markets. Pricing per subscriber unit in service
remained comparable over the periods.
The 59.6% decrease in revenues from Equipment Sales, to $150,008 for the three
months ended June 30, 1998 from $371,498 for the three months ended June 30,
1997, was partially attributed to the sale of lower price and higher margin
equipment in the Company's two direct distribution markets.
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 $54,598, or 20.0%, to $218,777 for the three months
ended June 30, 1998 from $273,375 for the three months ended June 30, 1997. This
decrease was due to lower Equipment Sales, which have higher cost of sales
associated with them, compared to Radio Services revenues. As a result, gross
margin increased by 16.9 percentage points, to 70.0% for the three months ended
June 30, 1998 from 53.1% for the three months ended June 30, 1997.
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<PAGE> 21
Salaries, wages, and benefits expense increased by $161,116 or 27.1%, to
$755,432 for the three months ended June 30, 1998 from $594,316 for the three
months ended June 30, 1997, primarily due to a higher number of employees to
support the Company's expansion into additional markets. Relative to total
revenues, salaries, wages, and benefits expense measured 103.3% for the three
months ended June 30, 1998 compared with 101.2% for the three months ended
June 30, 1997. In future years the Company expects salaries, wages, and benefits
expense as a percent of total revenues to decline as the Company realizes
economies of scale gained from an increasing subscriber base managed through
essentially the same infrastructure.
General and administrative expenses, increased $359,876, or 55.6%, to $1,007,218
for the three months ended June 30, 1998 from $647,342 for the three months
ended June 30, 1997. This increase is partially 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. Additionally, general and
administrative expenses increased in conjunction with the Company's expansion
into additional markets. Relative to total revenues, general and administrative
expense increased to 137.7% for the three months ended June 30, 1998 compared
with 111.0% for the three months ended June 30, 1997. The Company expects
general and administrative expenses as a percent of total revenues to decline in
future years as the Company realizes economies of scale gained from an
increasing subscriber base managed through essentially the same infrastructure.
Depreciation and amortization expense increased $116,254, or 71.3%, to $279,238
for the three months ended June 30, 1998 from $162,984 for the three months
ended June 30, 1997, reflecting greater capital expenditures associated with
construction and implementation of operating systems equipment.
Due to the foregoing, total operating expenses increased $582,648, or 34.7%, to
$2,260,665 for the three months ended June 30, 1998 from $1,678,017 for the
three months ended June 30, 1997, and the Company's loss from operations
increased by $434,212, or 39.7%, to $1,529,195 from $1,094,983, for such
respective periods.
Net interest expense increased $272,072, or 337.0%, to $352,815 for the three
months ended June 30, 1998 from $80,743 for the three months ended June 30,
1997, which is attributable to higher average balances outstanding under loan
facilities and additional notes payable to licensees resulting from the exercise
of Option Agreements.
Based on the foregoing, the Company's net loss (excluding the recording of a
one-time expense of $7,166,956 during the second quarter of 1997 to reflect a
then-probable impairment of value to management agreements and options to
acquire licenses for which the Company at such time was uncertain of its ability
to construct systems prior to an FCC-mandated construction deadline of
November 20, 1997 which would have resulted in forfeiture of such spectrum back
to the FCC), increased $679,084, or 55.3%, to $1,907,310, or $.06 per basic and
diluted share, for the three months ended June 30, 1998 from $1,228,226, or $.06
per basic and diluted share, for the three months ended June 30, 1997. Including
such one-time expense during the second quarter of 1997, the Company's net loss
decreased $6,487,872, or 77.3%, during the three months ended June 30, 1998 from
$8,395,182, or $.42 per basic and diluted share, for the three months ended
June 30, 1997.
(3) LIQUIDITY AND CAPITAL RESOURCES
The Company believes that over the next 12 months, depending on the rate of
market roll-out during such period, it will require approximately $7 million to
$10 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 additional debt funding or will be otherwise able to obtain sufficient
financing to consummate the Company's business plan.
On June 8, 1998, the Company held an initial closing on the sale of selected SMR
channels deemed non-strategic to its business plan for approximately $975,000.
Final closing remains subject to prior FCC approval.
On May 1, 1998, the Company closed a $7.5 million equity investment with
Recovery Equity Investors II, L.P. ("Recovery"), an institutional private equity
fund. In addition to such investment, Recovery has an option to purchase from
the Company up to an additional $5 million in equity at a significantly higher
price, and the Company has the ability to buy back such option if the Company
meets certain performance criteria. Exercise of the option would result in a
total equity infusion from Recovery of $12.5 million.
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<PAGE> 22
The Company has entered into discussions with various institutional debt
funding sources, but has not entered into any commitments for additional debt
financing as of the date of this filing.
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. 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 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 as of
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, and as a result, the Company is in full compliance with the
Motorola and MarCap facilities.
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
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<PAGE> 23
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 to-$3 million of Motorola equipment for its SMR systems under the
Motorola Facility for the next 12 months.
YEAR 2000 ISSUES
The Company is currently awaiting a proposal from a large computer systems
vendor about acquiring a fully integrated and scalable system (hardware,
software and service contract) ("System") to load subscribers, capture call
records and generate customer bills. The System will be Year 2000 compliant and
the Company expects it to be fully implemented in the second quarter of 1999. If
the Company does not acquire the System, it has a contingency plan to upgrade
its current computer systems or purchase individual software products to address
its needs. The Company has contacted the necessary software vendors, about its
contingency plan, and Management believes that all the necessary Year 2000
compliant software is currently available and can be implemented quickly.
The Company's current accounting software is not Year 2000 compliant. This
problem will be addressed either by phase II of the System or by upgrading its
current accounting software, with a Year 2000 compliant version which is
currently available. The Company exclusively uses Microsoft products for
internal data storage and communications. The Company has contacted Microsoft
and has been assured that these products are Year 2000 compliant.
The Company relies on third party switching systems to monitor its systems
usage, these systems are primarily manufactured by Motorola. The company has
contacted Motorola and has been assured that the Motorola switching systems are
Year 2000 compliant. Also, to a lesser extent, the Company relies on third party
communication lines, such as internet providers and long distance providers, to
transfer data. The Company has not contacted these providers and is unable to
assess the impact of Year 2000 issues related to these systems.
At the current time Management is unable to estimate the cost of the System,
however the Company estimates the cost of its contingency plans to be
approximately $50,000.
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 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 51 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.
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PART II - OTHER INFORMATION
ITEM 1. 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.
These include the following:
1. Airnet, Inc. v. Chadmoore Wireless Group, Inc. Case No. 768473, Orange
County Superior Court
2. Chadmoore Communications, Inc. v. John Peacock Case No. CV-S-97-00587-HDM
(RLH), United States District Court for the District of Nevada
Details concerning the status of these proceedings are given above. (Part I,
Item 1 Footnote 7B).
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. Details concerning the status of these proceedings at the FCC
are given above. (Part I, Item 1 Footnote 7A).
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.
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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:
4.10 Original articles of incorporation.
4.11 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
(Incorporated by reference to Exhibit 10.16 of the form 8-K)
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 (1)
27.1 Financial Data Schedule 1998 (1)
27.2 Financial Data Schedule 1997 (1)
(1) Filed herewith.
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(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.
(vii) Current report on Form 8-K on May 27, 1998 reporting (a) the sales of
equity securities pursuant to Regulation S and (b) the conversion of
Series B Convertible Preferred Stock.
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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/ Jan Zwaik
-----------------------------------
Jan Zwaik
Chief Financial Officer
Date: August 14, 1998
By: /s/ Robert Moore
-----------------------------------
Robert Moore
Chief Executive Officer
Date: August 14, 1998
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11 Computation of per share amounts (1)
27.1 Financial Data Schedule 1998 (1)
27.2 Financial Data Schedule 1997 (1)
</TABLE>
(1) Filed herewith.
<PAGE> 1
EXHIBIT 11
(11) COMPUTATION OF PER SHARE AMOUNTS
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss (3,706,456) (9,728,789) (1,907,310) (8,395,182)
Preferred stock dividend (56,486) -- (45,754) --
----------- ----------- ----------- -----------
Adjusted net loss applicable to
common shares (3,762,942) (9,728,789) (1,953,064) (8,395,182)
=========== =========== =========== ===========
Weighted average common
shares outstanding 27,321,879 19,511,640 32,236,504 19,868,119
Common equivalent shares
representing shares issuable upon
exercise of stock options 37,519,693 8,249,292 37,519,693 8,249,292
Add back of common equivalent
shares due to antidilutive shares (37,519,693) (8,249,292) (37,519,693) (8,249,292)
----------- ----------- ----------- -----------
Weighted average common shares
outstanding 27,321,879 19,511,640 32,236,504 19,868,119
=========== =========== =========== ===========
Basic net loss per share (0.14) (0.50) (0.06) (0.42)
Diluted net loss per share (0.14) (0.50) (0.06) (0.42)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,505,455
<SECURITIES> 0
<RECEIVABLES> 531,828
<ALLOWANCES> 11,100
<INVENTORY> 114,379
<CURRENT-ASSETS> 5,454,287
<PP&E> 9,935,137
<DEPRECIATION> 1,015,800
<TOTAL-ASSETS> 54,495,836
<CURRENT-LIABILITIES> 13,042,296
<BONDS> 0
0
10,165
<COMMON> 35,592
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 54,495,836
<SALES> 1,247,622
<TOTAL-REVENUES> 1,247,622
<CGS> 401,710
<TOTAL-COSTS> 3,923,382
<OTHER-EXPENSES> 1,030,696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 813,185
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,706,456)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 374,994
<SECURITIES> 0
<RECEIVABLES> 420,219
<ALLOWANCES> 0
<INVENTORY> 207,615
<CURRENT-ASSETS> 1,155,224
<PP&E> 3,907,776
<DEPRECIATION> 414,905
<TOTAL-ASSETS> 35,552,126
<CURRENT-LIABILITIES> 1,759,871
<BONDS> 0
0
0
<COMMON> 19,969
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 35,552,126
<SALES> 1,081,884
<TOTAL-REVENUES> 1,081,884
<CGS> 545,489
<TOTAL-COSTS> 3,446,803
<OTHER-EXPENSES> 7,363,870
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 144,729
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,728,789)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
