U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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
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CHADMOORE WIRELESS GROUP, INC.
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Name of small business issuer in its charter
COLORADO 84-1058165
- ---------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2875 E. PATRICK SUITE G, LAS VEGAS, NV 89120
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (702) 740-5633
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Securities registered under Section 12(b) of the Exchange Act: NONE
Title of each class and name of each exchange on which registered:
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $1,900,167
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. As of March 31, 1998, the aggregate market value of the company's common
stock held by non-affiliates was $12,588,885. State the number of shares
outstanding of each of the issuer's classes of common equity as of the latest
practicable date. As of March 31, 1998,24,218,917 shares of common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes No X
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<PAGE>
FORM 10-KSB/A
INDEX
PART II
Item 6. Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure Signatures
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the fiscal year ended December 31,
1997, which should be read in conjunction with, and is qualified in its entirety
by, the consolidated financial statements and notes thereto included elsewhere
in this report.
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,
termination of proposed transactions, access to sources of capital, adverse
results in pending or threatened litigation, consequences of actions by the FCC,
and general economics.
During the year ended December 31, 1997, the Company's primary activities were
acquiring assets (spectrum and infrastructure), attempting to secure capital,
performing engineering activities, and assembling and installing infrastructure
on antenna sites. To a far lesser degree the Company concentrated on
establishing distribution, marketing and building a customer base. Planned
principal operations have commenced, but there has been no significant revenue
therefrom. The Company has determined it is still devoting most of its efforts
to activities such as financial planning, raising capital, acquiring operating
assets, training personnel, developing markets and building its network of
licenses. In addition, approximately 45% of 1997 revenue was derived from
non-core business activities which is not the primary focus of its operations.
The Company's normal operations would be selling air-time to customers in 175
secondary and tertiary markets throughout the continental United States, not
selling and servicing radio equipment. Management believes the Company continues
to be a development stage company, as set forth in Statement of Financial
Accounting Standards No. 7 "Accounting and Reporting by Developmental Stage
Enterprises". The Company will emerge from the developmental stage when its
primary activities are focused on distribution, marketing and building its
customer base and there is significant revenue therefrom, which the Company
anticipates to occur during 1999.
RESULTS OF OPERATION
Total revenues for the fiscal year ended December 31, 1997 increased 4.6% to
$1,900,167 from $1,816,312 in 1996, reflecting increases of $182,785, or 32.4%,
in Radio Services (recurring revenues from air-time subscription by customers)
and $65,585, or 23.8%, in Maintenance and Installation services, offset by
declines of $15,189, or 1.9%, in Equipment Sales and $49,128, or 91.8%, in
Other. Consistent with the Company's plan of operation to focus on recurring
revenues by selling its commercial SMR service through independent dealers, the
proportion of total revenues generated by Radio Services increased from 31.1% in
1996 to 39.3% in 1997. In such business model, 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 local dealers.
The 32.4% increase in Radio Services revenues, from $564,550 in 1996 to $747,335
in 1997, was driven by an increase in the number of subscribers utilizing the
Company's SMR systems, from approximately 2,100 at December 31, 1996 to
approximately 8,300 at December 31, 1997. Most of such additions occurred in the
latter part of the year. The increase in subscribers, in turn, was primarily due
to full-scale implementation of service by the Company in 19 new markets during
1997. Pricing per subscriber unit in service remained comparable during both
years.
The 23.8% increase in revenues from Maintenance and Installation services, from
$274,996 in 1996 to $340,581 in 1997, was attributable to an increase in new
subscribers in the Company's two direct distribution markets whose radio
equipment required initial installation and programming, as well as increased
repair services in the same markets.
Equipment Sales remained relatively flat at $807,884 in 1997 versus $823,073 in
1996. The 91.8% decline in Other revenues from $53,495 in 1996 to $4,367 in 1997
was primarily the result of commissions on the reselling of cellular services
for other providers during 1996 which was discontinued in the first quarter of
1997 in connection with the Company's focus on its core SMR business.
The Company anticipates that Equipment Sales and Maintenance and Installation
service will remain relatively constant and 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 business model, 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 increased by $140,110, or 17.2%, from $813,398 in 1996 to $953,508
in 1997. This increase was primarily due to SMR system site expenses at the
Company's 19 new markets rolled out during 1997. As a result, gross margin
(total revenue less cost of sales, as a percentage of total revenue) declined
from 55% in 1996 to 50% in 1997. This is reflective of the lead time between
system implementation, at which time certain operating costs are incurred, and
the generation of revenues from such operations.
Salaries, wages, and benefits expense increased by $1,092,593, or 64.7%, from
$1,687,792 in 1996 to $2,780,385 in 1997, primarily due to personnel additions,
largely in operational areas, made in anticipation of the Company starting to
transition from aggregating SMR spectrum to constructing, marketing, and rolling
out commercial SMR service utilizing such spectrum. Relative to total revenues,
salaries, wages, and benefits expense measured 146% in 1997 compared with 93%
for 1996, which reflects the lead-time required for personnel additions prior to
realizing higher revenues from the rolling out of additional markets as enabled
by such incremental staffing. Correspondingly, in future years the Company
expects salaries, wages, and benefits expense as a percent of total revenues to
decline as the Company realizes operating leverage gained from an increasing
subscriber base managed through essentially the same infrastructure.
Furthermore, such increase in salaries, wages, and benefits expense was more
than offset by a decrease of $1,466,992, or 27.1%, in general and administrative
expenses, from $5,416,192 in 1996 to $3,949,200 in 1997. The decrease in general
and administrative expenses was primarily due to promotional expenses incurred
during 1996 to help market the Company. These services were not utilized in 1997
to the extent they were in 1996, resulting in a decrease of $574,477, or 71%. In
addition, as the Company's overhead structure has increased, it has resulted in
a decrease in the Company utilizing outside professionals. The Company expects
the decline in professional fees to continue as it transitions from spectrum
acquisition to systems implementation and operation. This decline was partially
offset by an increase in site expenses for non-commercial markets. The Company
expects its general and administrative site costs to decrease as sites are
commercialized and these costs move from general and administrative to cost of
sales. Relative to total revenues, general and administrative expenses declined
to 207.8% in 1997 compared with 298.2% for 1996. The Company expects general and
administrative expenses as a percent of total revenues to continue to decline in
future years as the Company realizes operating leverage gained from an
increasing subscriber base managed through essentially the same infrastructure.
Depreciation and amortization expense increased $308,432, or 81.3% from $379,247
in 1996 to $687,679 in 1997, reflecting greater capital expenditures associated
with construction and implementation of operating systems equipment.
Due to the foregoing, total operating expenses increased $217,768 or 2.6% from
$8,296,629 in 1996 to $8,514,397 in 1997, and the Company's loss from operations
increased by $133,913 or 2.1%, from $6,480,317 to $6,614,230, for such
respective periods.
In the second fiscal quarter of 1997, the Company recorded a charge of
$7,166,956 to reflect a then-probable permanent 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 licenses back to the FCC. At June 30, 1997,
management determined that approximately 2,700 channels were permanently
impaired. Licenses so selected by the Company were chosen based on numerous
strategic factors, including importance of the markets in which such licenses
were located, channel densities in such markets, projected system revenues, and
potential competitive impact. The impairment charge was based on, among other
things, management's estimate of the Company's ability to meet FCC construction
requirements in 158 markets by the deadline. As of November 20, 1997 the Company
had exceeded its estimate and met all of the FCC's construction requirements for
approximately 3,800 of the 5,500 affected channels. As a result, the Company
exceeded its estimate by approximately 1,000 channels and released approximately
1,700 channels back to the FCC. The impairment charge for the approximately
2,700 channels was accounted for as a permanent impairment. The cost basis of
the management agreements and options to acquire licenses will not be adjusted
to reflect the excess of the actual build out over the estimate, in accordance
with SFAS No. 121 "Impairment of Long Lived Assets and Long Lived Assets to be
Disposed of".
In the fourth quarter of 1997, the Company recorded a one-time non-cash write
down of $443,474 associated with its investment in JJ&D LLC. This write down was
almost exclusively purchased goodwill from the original purchase price
allocation. Management believes this investment is permanently impaired based on
the Company's expectation of JJ&D LLC's future performance.
Interest expense was restated in 1997 and 1996 with respect to a SEC
announcement regarding a beneficial conversion feature embedded in a
convertible security, see Note 7 to the consolidated financial statements.
Interest expense decreased $2,063,296, or 62.5%, from $3,301,219 in 1996 to
$1,237,923 in 1997 due to a "beneficial conversion feature" associated with the
issuance of convertible debentures in 1997 and in 1996 resulting in interest
expense, aggregating $767,986 and $3,034,483 in 1997 and 1996 respectively, see
Note 7. Interest income decreased $41,973, or 77%, from $54,504 in 1996 to
$12,531 in 1997 as a result of lower balances of cash on hand.
During 1997, the Company had a gain on settlement of debt, totaling $839,952 as
compared to $47,450 in 1996.
Based on the foregoing, the Company's net loss increased $4,818,553 from
$9,860,733, in 1996 to $14,679,286, in 1997. This increase was almost entirely
the result of the aforementioned $7,166,956 impairment charge and a $443,474
write down of its investment in JJ&D, LLC. This was partially offset by a
greater "beneficial conversion feature" in 1996.
PLAN OF OPERATION
See Item 1. DESCRIPTION OF BUSINESS
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that during 1998, depending on the rate of market roll-out
during such period, it will require approximately $8 million to $10 million in
additional funding, of which approximately $3.5 million is available and an
additional $4.5 million to $6.5 million is required, 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 facilities with Motorola, Inc. ("Motorola") and MarCap
Corporation ("MarCap"), 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 equity and debt financings
which are currently in progress. See discussion of "Recovery" below. There can
be no assurances that the Company will be able to successfully obtain the
additional equity and debt financings currently in progress, or will be
otherwise able to obtain sufficient financing to consummate the Company's
business plan.
On January 13, 1998, the Company entered into a letter of intent with Recovery
Equity Partners II, L.P. ("Recovery"), an institutional private equity fund with
$208 million under management that focuses on special situation investing. The
letter provides that Recovery may invest up to $10 million of equity capital
into the Company. Under the terms of this potential transaction, which remains
subject to certain contingencies, Recovery would purchase $5 million of the
Company's common stock at closing, with an option to purchase an additional $5
million of the Company's common stock, commencing in April 1999, at a higher
price. Based on certain performance criteria, the option for the second $5
million of investment by Recovery would be callable by the Company.
Among other factors, Recovery's equity investment in the Company is contingent
on the Company raising at least $10 million of debt financing, which the Company
is currently attempting to obtain. On March 4, 1998, the Company entered into a
letter of intent with Foothill Capital Corporation ("Foothill") by which
Foothill would provide $10 million of secured debt financing to the Company
subject to certain conditions being met. Collateral for such debt financing
would consist of substantially all the Company's assets other than those already
pledged to other creditors. Recovery has informed the Company that the Foothill
financing, if completed as currently contemplated, would satisfy Recovery's
aforementioned contingency that the Company raise at least $10 million of debt
financing. Closing of the contemplated transactions with Recovery and Foothill,
both of which remain subject to satisfactory completion of due diligence, formal
approval by their respective internal approval committees, satisfactory
completion of documentation, and (in the case of Foothill only) satisfactory
appraisal of collateral, is expected to occur by mid-1998. However, there can be
no assurances that such transactions will close in a timely fashion or at all.
On March 9, 1998, the Company entered into a vendor financing arrangement with
GeoTrans, a wholly owned subsidiary of Tetra Tech, Inc., whereby GeoTrans will
perform turn-key implementation of full-scale SMR system operations for the
Company in up to 10 markets per month and 145 total markets. During 1997,
GeoTrans completed preliminary construction services for the Company in 78
markets. The financing mechanism in the Company's arrangement with GeoTrans
specifies a $4,000 down-payment per market by the Company and approximately
$18,000 per market to be drawn by the Company under its Motorola financing
facility, with GeoTrans financing the balance of approximately $49,000 per
market on 120-day payment terms, with incentives to the Company of up to a 3%
discount for early payment. Collateral for such financing arrangement consists
of 183 channels in nine primarily non-strategic markets with a fair market value
estimated by the Company of $4.4 million.
On December 23, 1997, the Company completed a private placement of Series B
Convertible Preferred Stock (the "Series B Preferred") and warrants for
$1,575,188, net of transaction costs of $24,812, through Settondown Capital
International, Limited ("Settondown") under Regulation S ("Regulation S") of the
Securities Act of 1933, as amended. 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 the Company's
common stock at the option of the Company at the then-current market price. The
purchase price of one share of Company common stock under each warrant is the
closing bid price of the shares of company common stock on the Nasdaq OTC
Bulletin Board as quoted by Bloomberg, LP on the date of closing. The warrants
may be exercised at any time prior to their expiration in December, 2002.
Holders of the Series B preferred are entitled to convert any portion of the
Series B Preferred into Common Stock of the Company at the average market price
of the Company's 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 provided that holders are restricted from converting
an amount of Series B Preferred which would cause them to exceed 4.99%
beneficial ownership of the Company's common stock.
On February 10, 1998, the Company and several holders of the Series B Preferred
entered into an amendment providing that such holders would not convert any
Series B Preferred into common stock of the Company prior to March 11, 1998. In
consideration for such amendment, the Company agreed to issue to the Series B
Preferred holders pursuant to Regulation S an aggregate of approximately 315,000
shares of the Company's common stock and warrants to purchase an additional
approximately 380,000 shares of the company's common stock, the terms of which
warrants are the same as terms of the warrants issued in the December 23, 1997
private placement described above.
On January 12, 1998, the Company consummated an agreement with 32 of 33 licensee
corporations that were due approximately 8% of the outstanding common stock of
CMRS (as the balance of consideration due for the Company's exercising options
to acquire licenses from such licensee corporations), for such licensee
corporations to accept $150,000 in lieu of such stock in CMRS. Upon signing, the
Company had five days to fund such transaction. Due to limited time and internal
resources, the Company sought an investor that could immediately meet the
$150,000 in payments. Already familiar with the Company from its earlier
investment, Settondown agreed to provide the financing to acquire the
approximately 8% minority interest in CMRS, provided that the Company in turn
enter into an exchange agreement with Settondown to issue 800,000 shares of the
Company's common stock in return for the minority interest in CMRS. These
transactions closed on February 10, 1998, in conjunction with which Settondown
also agreed to limit its selling of such shares of common stock of the Company
to no more than 50,000 shares per month for the first six months following
issuance thereof. An effect of these transactions was to eliminate an
approximately 8% minority interest in CMRS in return for the issuance of 800,000
shares of the Company's common stock. CMRS remains a wholly owned subsidiary of
the Company with no further obligations to the 32 licensee corporations,
considerably simplifying the Company's capital structure as a result. Management
believes the transactions were advantageous because the valuation placed by the
Company on the eight percent of CMRS common stock which would otherwise been
issued to the license holders was greater than the cash consideration actually
provided by the Company as a result of the transactions. However, no assurances
can be given that the Company's valuation of such eight percent of CMRS common
stock would be generally accepted, especially given the absence of a public
market in CMRS shares and market uncertainties regarding the valuation of assets
such as those held by CMRS. The one remaining licensee continues to operate
under the Company's Management and Option Agreement. Negotiations are currently
underway to exercise the Option. If a satisfactory resolution cannot be achieved
the Company intends to continue to operate under the current Management and
Option Agreement, subject to the licensee's direction.
On October 30, 1997, two subsidiaries of the Company, CCI and CMRS, entered into
a First Amendment and Financing and Security Agreement with MarCap 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, (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 have been made on
February 6, 1998, March 6, 1998, and March 27, 1998, respectively.
On February 25, 1998, the Company and MarCap entered into a letter agreement
relating to the Motorola and MarCap Facilities which provided for (i) complete
cross-collateralization of the Motorola and MarCap Facilities without the
aforementioned unwinding provision, (ii) a revised borrowing base formula for
the Motorola and MarCap Facilities, (iii) notification by the Company to
Motorola of the modifications being made pursuant to such letter agreement, (iv)
affirmation by the Company to utilize its diligent best efforts to raise at
least $5 million of equity and $15 million of aggregate financing by April 30,
1998, (v) waiver of existing covenants for the Motorola and MarCap facilities
through April 30, 1998 so long as the Company continues to utilize its diligent
best efforts to raise at least $5 million of equity and $15 million of aggregate
financing by such date, (vi) affirmation by MarCap that it will not object to
the Company incurring $10 million in additional senior debt so long as the
Company is not in material default on the Motorola or MarCap facilities, (vii)
new covenants for the Motorola and MarCap facilities, based on the Company's
business plan as if no additional equity and debt financing were raised by April
30, 1998, that would take effect after April 30, 1998. On March 5, 1998,
Motorola provided the Company with written acknowledgment of the notification
required by the Company as described in clause (iii) above. As a result of these
modifications, the Company is in full compliance with the Motorola and MarCap
facilities, and has classified the appropriate portion (maturing after one year)
as long-term debt.
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 Motorola facility
was extended from 30 months to 42 months from the effective dates thereof. As of
March 19, 1998, $363,100 was outstanding under the Motorola Facility. 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 million of Motorola equipment for its SMR systems under
the Motorola Facility during 1998.
Based on the foregoing, the Company believes that it should have adequate
resources to continue establishing its SMR business and emerge from the
development stage during 1999. However, while the Company believes that it has
developed adequate contingency plans, the failure to consummate the
aforementioned potential financing with Recovery and Foothill as currently
contemplated, or at all, 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 lendors
that have expressed interest in providing capital to the Company, selling
selected channels, and focusing solely on the 22 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.
During the twelve months ended December 31, 1997 and 1996, the Company used net
cash in operating activities of $3,037,044 and $4,984,138 respectively. The
Company continues to fund operations through financing activities as the Company
continues to be in the development stage. The major non operations use of cash
for the years ended December 31, 1997 and 1996 was the acquisition of
communications assets. The major non operations source of cash for the years
ended December 31, 1997 and 1996 are proceeds from issuance of preferred stock
and proceeds from issuance of long-term debt.
The Company's auditors opinion, in the Company's Form 10-KSB for the year ended
December 31, 1997, included an explanatory paragraph which expressed substantial
doubt about the Company's ability to continue as a going concern. The Company's
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 12 to the consolidated
financial statements, the Company has suffered recurring losses from operations,
has a deficiency of working capital, and has a deficit accumulated during the
development stage that raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 12. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
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. 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.
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, 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income. SFAS No. 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 sections of a statement of financial
position, and is effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company is currently assessing the impact
on the financial statements for the year ended December 31, 1997 and for the
year ended December 31, 1996 and believes that SFAS No. 130 will not result in
comprehensive income different from net income as reported in the accompanying
financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes additional
standards for segment reporting in financial statements and is effective for
fiscal years beginning after December 15, 1997. The Company currently operates
as one segment. The adoption of SFAS 131 is not expected to have a material
effect on the Company's financial position or results from operations.
Statement of Position 98-5 "Reporting on Costs of Start-Up Activities" (SOP
98-5) requires the costs of start-up activities and organizational costs to be
expensed as incurred. SOP 98-5 is effective for Fiscal years beginning after
December 15, 1998. The adoption of SOP 98-5 is not expected to have a material
effect on the Company's financial position or results from operations.
ITEM 7 FINANCIAL STATEMENTS
The audited Financial Statements of the Company for the year ended December 31,
1997 and 1996, are located at page F-1.
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Index to Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 and for the period from
January 1, 1994 through December 31, 1997 F-3
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997 and 1996 and for the period
from January 1, 1994 through December 31, 1997 F-4
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997 and 1996 and for the period from
January 1, 1994 through December 31, 1997 F-7
Notes to Consolidated Financial Statements F-9
<PAGE>
Chadmoore Wireless Group, Inc. and Subsidiaries
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, 1997 and 1996
DECEMBER 31, DECEMBER 31,
1997 1996
Restated Restated
<S> <C> <C>
ASSETS
Current assets:
Cash $ 959,390 $ 1,463,300
Accounts receivable, net of allowance for doubtful accounts of $45,000 265,935 266,520
and $0, respectively
Receivables other 99,223 --
Inventory 89,133 197,476
Prepaid property management rights -- 81,563
Deposits and prepaids 130,858 156,644
------------ ------------
Total current assets 1,544,539 2,165,503
------------ ------------
Investment in JJ&D, LLC -- 532,997
Property and equipment, net 5,809,168 3,164,098
FCC licenses, net of accumulated amortization of $231,917 and $153,404, 6,726,954 1,394,895
Respectively
Debt issuance costs, net of accumulated amortization of $0 and $39,038, -- 77,562
Respectively
Management agreements 16,623,573 22,725,442
Investment in options to acquire management agreements 7,156,358 9,771,445
Investment in license options 4,113,995 3,239,691
Other 32,928 55,994
------------ ------------
Total Assets $ 42,007,515 $ 43,127,627
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Current installments of long-term debt and capital lease obligations $ 2,638,414 $ 247,366
Accounts payable 1,165,425 329,122
Accrued liabilities 1,106,029 --
Unearned revenue 107,057 --
Licenses - options payable 350,000 49,800
License option commission payable 3,412,000 524,800
Accrued interest 173,686 62,346
Other current liabilities 131,273 1,810
------------ ------------
Total current liabilities 9,083,884 1,215,244
------------ ------------
Capital lease obligations -- 8,646
Long-term debt, excluding current installments 4,614,157 2,500,141
Restricted option prepayment -- 832,116
Minority interests 352,142 --
------------ ------------
Total liabilities 14,050,183 4,556,147
Shareholders' equity :
Preferred stock, $.001 par value. Authorized 40,000,000 shares
Series A. Issued and canceled 250,000 shares, outstanding
-0- shares at December 31, 1997 and 1996. -- --
Series B. Issued and outstanding 219,000 shares at
December 31, 1997 and 0 shares at December 31, 1996. 219 --
Common stock, $.001 par value. Authorized 100,000,000 shares;
issued and outstanding 21,163,847 shares at December 31, 1997
and 17,823,445 shares at December 31, 1996 21,164 17,824
Additional paid-in capital 60,303,498 55,985,974
Stock subscribed 32,890 288,835
Deficit accumulated during the development stage (32,400,439) (17,721,153)
------------ ------------
Total shareholders' equity 27,957,332 38,571,480
------------ ------------
Total liabilities and shareholders' equity $ 42,007,515 $ 43,127,627
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Statements of Operations
For the Years Ended December 31, 1997 and 1996 and for the
Period from January 1, 1994 through December 31, 1997
PERIOD FROM
1/1/94
YEAR ENDED DECEMBER 31, THROUGH
12/31/97
1997 1996
Restated Restated Restated
----------- -----------
<S> <C> <C> <C>
Revenues:
Radio services $ 747,335 $ 564,550 $ 1,311,885
Equipment sales 807,884 823,073 1,630,957
Maintenance and installation 340,581 274,996 615,577
Management fees -- 100,198 472,611
Other 4,367 53,495 57,862
----------- ----------- -----------
1,900,167 1,816,312 4,088,892
----------- ----------- -----------
Costs and expenses:
Cost of sales 953,508 813,398 1,766,906
Salaries, wages and benefits 2,780,385 1,687,792 5,341,058
General and administrative 3,949,200 5,416,192 16,661,746
Depreciation & amortization 687,679 379,247 1,293,213
Cost of settlement on license dispute 143,625 -- 143,625
----------- --------------- -----------
8,514,397 8,296,629 25,206,548
----------- ----------- -----------
Loss from operations (6,614,230) (6,480,317) (21,117,656)
----------- ----------- -----------
Other income (expense):
Minority interest 19,366 -- 19,366
Interest expense, net (1,237,923) (3,301,219) (4,697,467)
Loss on reduction of management agreements and licenses to
estimated fair value (7,166,956) -- (7,166,956)
Write down of investment in JJ&D, LLC (443,474) -- (443,474)
Gain on settlement of debt 839,952 47,450 887,402
Gain on sale of assets -- -- 330,643
Loss on retirement of note payable -- -- (32,404)
Other, net (76,021) (126,647) (179,893)
----------- ----------- -----------
(8,065,056) (3,380,416) (11,282,783)
----------- ----------- -----------
Net loss $(14,679,286) $(9,860,733) $(32,400,439)
Calculation of net loss available to common shareholders:
Preferred stock preferences -- (1,203,704) (1,203,704)
----------- ----------- -----------
Net loss applicable to common shares $(14,679,286) $(11,064,437) $(33,604,143)
----------- ----------- -----------
Calculation of net loss per common share:
Net loss $ (0.73) $ (0.79) $ (3.18)
----------- ----------- -----------
Preferred stock preferences -- (0.10) (0.12)
----------- ----------- -----------
Basic and diluted loss per share $ (0.73) $ (0.89) $ (3.30)
----------- ----------- -----------
Weighted average shares outstanding 20,061,602 12,384,216 10,187,647
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
For the period from January 1, 1994 to December 31, 1997
DEFICIT
PREFERRED ACCUMULATED
STOCK COMMON STOCK ADDITIONAL DURING TOTAL
OUTSTANDING OUTSTANDING AMOUNT PAID-IN STOCK DEVELOPMENT SHAREHOLDERS'
SHARES SHARES CAPITAL SUBSCRIBED STAGE EQUITY
-------- --------- ------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 -- 325,000 $ 325 $ 146,546 $ -- $ (638,620) $ (491,749)
Net loss -- -- -- -- -- (35,383) (35,383)
-------- --------- ------- ----------- -------- ----------- -----------
Balance at December 31, 1994, as -- 325,000 325 146,546 -- (674,003) (527,132)
previously
stated
Effect of Plan of Reorganization:
Eliminate Capvest accumulated deficit -- -- -- -- -- 674,003 674,003
Shares issued in lieu of cash -- 175,000 175 538,134 -- -- 538,309
Shares issued to Chadmoore Communications, -- 4,000,000 4,000 (589,180) -- (827,095) (1,412,275)
Inc
As adjusted for reorganization with
Chadmoore Communication, Inc. the -- 4,500,000 4,500 95,500 -- (827,095) (727,095)
acquirer
Shares of Chadmoore Communications, Inc.,
issued January 1995 -- -- -- 565,000 -- -- 565,000
Shares issued in exchange for Chadmoore
Communications, Inc. shares -- 30,000 30 44,970 -- -- 45,000
Shares issued in connection with the private
placement -- 763,584 764 1,526,407 -- -- 1,527,171
Shares issued to investors for cash -- 400,000 400 399,200 -- -- 399,600
Shares issued under employee benefit and
consulting services plan -- 496,000 496 1,777,719 -- -- 1,778,215
Shares issued for legal fees -- 62,500 62 249,938 -- -- 250,000
Shares issued in conjunction with
conversion of advances -- 707,720 708 1,165,498 -- -- 1,166,206
Shares issued to license holders -- 562,260 562 859,696 -- -- 860,258
Shares issued to option holders -- 865,000 865 1,039,136 -- -- 1,040,001
Options issued in lieu of cash payments for
legal, consulting and financing fees -- -- -- 2,841,788 -- -- 2,841,788
Shares subscribed -- -- -- -- 324,807 -- 324,807
Net loss -- -- -- -- -- (7,033,325) (7,033,325)
-------- --------- ------- ----------- -------- ----------- -----------
Balance at December 31, 1995 -- 8,387,064 8,387 10,564,852 324,807 (7,860,420) 3,037,626
</TABLE>
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity, Continued For the period
from January 1, 1994 to December 31, 1997
PREFERRED STOCK COMMON STOCK
--------------- ------------
DEFICIT
ACCUMULATED
ADDITIONAL DURING TOTAL
OUTSTANDING OUTSTANDING PAID-IN STOCK DEVELOPMENT SHAREHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL SUBSCRIBED STAGE EQUITY
---------- ------ ---------- ------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995, -- $ -- 8,387,064 $ 8,387 $10,564,852 $ 324,807 $ (7,860,420) $ 3,037,626
continued
Shares issued in connection with -- -- 549,417 549 883,033 (324,807) -- 558,775
the private placement
Shares issued to investors for cash -- -- 430,000 430 644,570 -- -- 645,000
Preferred shares issued to investors 250,000 250 -- -- 2,273,458 -- -- 2,273,708
for cash
Preferred shares converted to common
shares (250,000) (250) 977,057 977 (727) -- -- --
Shares issued for options exercised -- -- 4,407,500 4,408 3,280,838 -- -- 3,285,246
Shares issued for assets purchased
from General Communications, Inc. -- -- 100,000 100 176,463 -- -- 176,563
Shares issued for conversion of -- -- 3,553,213 3,553 5,983,567 -- -- 5,987,120
debentures
Shares issued for CMRS and 800 -- -- 508,000 508 1,930,502 -- -- 1,931,010
acquisition
Shares issued to license holders -- -- 332,960 333 881,801 -- -- 882,134
Shares issued for legal fees -- -- 62,500 63 62,437 -- -- 62,500
Shares issued in connection with --
of two year, 8%, convertible notes -- -- 30,000 30 14,970 -- -- 15,000
Options issued for 20% interest in -- -- -- -- 400,000 -- -- 400,000
JJ&D, LLC
Options issued for purchase agreement
for SMR equipment from JJ&D, LLC -- -- -- -- 88,500 -- -- 88,500
Options issued for CMRS and 800 -- -- -- -- 26,981,579 -- -- 26,981,579
Acquisition
Options issued for consulting services -- -- -- -- 866,250 -- -- 866,250
Shares subscribed -- -- -- -- -- 288,835 -- 288,835
Canceled shares -- -- (1,514,266) (1,514) (2,080,602) -- -- (2,082,116)
Beneficial conversion feature associated
with convertible debentures 3,034,483 3,034,483
Net loss -- -- -- -- -- -- (9,860,733) (9,860.733)
------- ------ --------- ------- ----------- ---------- ------------ ----------
Balance at December 31, 1996, Restated -- $ -- 17,823,445 $17,824 $55,985,974 $ 288,835 $(17,721,153) $38,571,480
======= ====== ========== ======= =========== ========== ============ ===========
</TABLE>
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity, Continued For the period
from January 1, 1994 to December 31, 1997
PREFERRED STOCK COMMON STOCK
--------------- ------------
DEFICIT
ACCUMULATED
ADDITIONAL DURING TOTAL
OUTSTANDING OUTSTANDING PAID-IN STOCK DEVELOPMENT SHAREHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL SUBSCRIBED STAGE EQUITY
---------- ------ ----------- ------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996,
continued -- $ -- 17,823,445 $17,824 $55,985,974 $ 288,835 $(17,721,153) $ 38,571,480
Shares issued for stock subscribed -- -- 231,744 232 255,713 (255,945) --
Shares issued for options exercised -- -- 323,857 323 161,606 -- -- 161,929
Shares issued for conversion of
debentures -- -- 1,587,527 1,588 1,123,507 -- -- 1,125,095
Shares issued for debt restructuring -- -- 1,050,000 1,050 723,450 -- -- 724,500
Shares issued for license dispute -- -- 101,700 102 127,023 -- -- 127,125
Shares issued for legal fees -- -- 45,574 45 21,830 -- -- 21,875
Options issued for services -- -- -- -- 329,426 -- -- 329,426
Preferred shares issued in
connection with private placement 219,000 219 -- -- 1,574,969 -- -- 1,575,188
Beneficial conversion feature
associated with convertible
debentures (restated Note 7) 767,986 767,986
Restructuring of convertible
debentures (restated Note 7) (767,986) (767,986)
Net loss -- -- -- -- -- -- (14,679,286) (14,679,286)
---------- ------ ----------- ------- ----------- ---------- ------------ -----------
Balance at December 31, 1997, Restated 219,000 $ 219 21,163,847 $21,164 $60,303,498 $ 32,890 $(32,400,439) $ 27,957,332
========== ====== =========== ======= =========== ========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
For the Years Ended December 31, 1997 and 1996 and for the
Period From January 1, 1994 through December 31, 1997
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------ 1/1/94 THROUGH
1997 1996 12/31/97
Restated Restated Restated
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(14,679,286) $(9,860,733) $(32,400,439)
Adjustments to reconcile net loss to net cash used in operating
activities:
Minority interest in loss (19,366) -- (19,366)
Depreciation and amortization 687,679 379,247 1,293,213
Non cash interest expense
767,986 3,034,483 3,802,469
Write down of management agreements and licenses to
estimated
fair value 7,166,956 -- 7,166,956
Write down of investment in JJ&D, LLC 443,474 -- 443,474
Write off of license options 330,882 -- 330,882
Write down of prepaid management rights 81,563 -- 81,563
Gain on extinguishment of debt (839,952) -- (839,952)
Gain on sale of assets held for resale -- -- (330,643)
Shares issued for settlement of license dispute 127,125 -- 127,125
Amortization of debt discount 168,410 98,102 266,512
Equity in losses from minority investments -- 1,322 1,322
Expense associated with:
Stock issued for services 21,875 281,119 2,605,036
Options issued for services 329,430 866,250 4,037,464
Change in operating assets and liabilities:
Increase in accounts receivable (98,638) (98,057) (196,695)
Decrease (Increase) in inventory 108,343 (119,495) (11,152)
Decrease in due from General Communications, Inc. -- 76,252 --
Decrease (Increase) in prepaid expense (82,241) 22,661 (120,994)
Increase (Decrease) in accounts payable 836,299 (30,710) 1,167,235
Increase in accrued liabilities 1,106,029 -- 1,106,029
Increase in unearned revenue 107,057 -- 107,057
Increase in commission payable -- 175,600 524,800
Increase in accrued interest 247,638 189,821 491,949
Increase in other current liabilities 151,693 -- 151,693
------------- ------------- -------------
Net cash used in operating activities (3,037,044) (4,984,138) (10,214,462)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of assets from General Communications, Inc. -- (352,101) (352,101)
Investment in JJ&D, LLC -- (100,000) (100,000)
Purchase of Airtel Communications, Inc. assets -- (50,000) (50,000)
Purchase of CMRS and 800 SMR Network, Inc. -- (3,547,000) (3,547,000)
Purchase of SMR station licenses -- -- (1,398,575)
Purchase of license options (211,550) (775,545) (1,686,445)
Sale of management agreements & investment in options to acquire
licenses 500,000 -- 500,000
Purchase of property and equipment (1,885,223) (2,186,520) (4,624,175)
Sale of property and equipment 827,841 -- 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) -- (11,123)
------------- ------------- -------------
Net cash used in investing activities (780,055) (7,011,166) (9,961,285)
------------- ------------- -------------
</TABLE>
(Continued)
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows, Continued For the
Years Ended December 31, 1997 and 1996 and for the
Period From January 1, 1994 through December 31, 1997
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------ 1/1/94 THROUGH
1997 1996 12/31/97
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds upon issuance of common stock $ -- $ 1,944,941 $ 4,316,543
Proceeds upon issuance of preferred stock 1,575,188 2,273,707 3,848,895
Proceeds upon exercise of options - related -- -- 62,500
Decrease in stock subscriptions receivable, net of
stock subscribed -- -- (637,193)
Proceeds upon exercise of options - unrelated -- 2,097,757 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 (440,665) (225,830) (969,266)
Proceeds from issuance of notes payable -- -- 375,000
Proceeds from issuance of long-term debt 2,178,666 7,180,000 10,323,666
---------- ----------- -----------
Net cash provided by financing activities 3,313,189 13,270,575 21,135,137
---------- ----------- -----------
Net increase (decrease) in cash (503,910) 1,275,271 959,390
Cash at beginning of period 1,463,300 188,029 --
---------- ----------- -----------
Cash at end of period $ 959,390 $ 1,463,300 $ 959,390
========== =========== ===========
Supplemental disclosure of cash paid for:
Taxes $ -- $ -- $ --
Interest $ 42,264 $ 258,880 $ 404,979
========== =========== ===========
</TABLE>
NON-CASH ACTIVITIES:
SEE NOTES 2,4,5,6,7,8 AND 9 FOR DISCLOSURE OF NON-CASH TRANSACTIONS.
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
A. THE COMPANY AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Chadmoore Wireless Group, Inc. and subsidiaries including majority owned joint
ventures (the "Company"), and is a development stage company. The Company
commenced formal operations in the state of Nevada on May 11, 1994, and was
organized for the purpose of acquiring and operating Specialized Mobile Radio
("SMR") wireless communication systems.
In February 1995, the Company (formerly Capvest Internationale, Ltd.
("Capvest"), a publicly held entity) entered into a Plan of Reorganization
(Plan) whereby the Company exchanged 89% of its issued and outstanding stock for
85% of the restricted common shares of Chadmoore Communications, Inc. (CCI).
Capvest has not had significant operations since its inception in 1988. Pursuant
to the Plan, Capvest changed its name to Chadmoore Wireless Group, Inc.
The transaction has been accounted for under the purchase method of accounting
as a reverse purchase acquisition whereby Chadmoore Wireless Group, Inc. is the
remaining legal entity and CCI is the acquirer and remaining operating entity.
Pursuant to this structure, the consolidated shareholders' equity of the legal
entity has been adjusted for the effect of the reorganization and to reflect the
shareholders' equity of the acquiring entity as of December 31, 1994.
Through December 31, 1997, the Company has been engaged primarily in the
identification, development and acquisition of SMR systems and Options to
Acquire SMR Stations and has therefore not commenced normal operations nor
generated significant revenues. In addition, a development stage company is
required to report the results of its operations and cash flow from inception to
date. However, Capvest has been dormant since 1988 and CCI began operations on
May 11, 1994. Therefore, the statements of operations, shareholders' equity and
cash flows have been presented from January 1, 1994 (the beginning of the fiscal
year of inception) to December 31, 1997.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of all
majority owned companies and joint ventures. All significant inter-company
balances and transactions have been eliminated in consolidation. Minority
interest represents the minority partners' proportionate share in the venturer's
equity or equity in income(loss) in the joint ventures.
C. INVENTORY
Inventories, which consist of merchandise and parts, are accounted for by the
lower of cost (using the first-in first-out method) or net realizable value.
D. FCC LICENSES
FCC licenses are recorded at cost and consist of authorizations issued by the
Federal Communications Commission (FCC) which allow the use of certain
communications frequencies. FCC licenses have a primary term of five or ten
years and are renewable for additional five-year periods for a nominal fee.
Although there can be no assurance that the licenses will be renewed, management
expects that the licenses will be renewed as they expire. FCC license costs and
renewal fees are amortized using the straight-line method over 20 years and 5
years, respectively. The Company evaluates the recoverability of FCC licenses by
determining whether the unamortized balance of this asset is expected to be
recovered over its remaining life through projected undiscounted operating cash
flows.
E. INCOME TAXES
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109), whereby deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
F. USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
G. REVENUES
The Company's only source of revenue through March 7, 1996 was management fee
income from General Communications Radio Sales and Services, Inc. ("General").
In connection with these services, the Company recorded a management fee equal
to the net cash flows of General. On March 8, 1996, the Company completed the
asset purchase of General's assets and in May 1996, the Company completed the
acquisition of Airtel Communications, Inc. and consummated Management and Option
to Acquire Agreements with Airtel SMR, Inc. Throughout 1997 the Company
continued to implement its business plan by rolling out commercial SMR service
in an additional 19 cities. As of December 31, 1997 the Company had 21 markets
where they were fully commercial and generating revenue. As such, the Company
now recognizes revenue from monthly radio dispatch and interconnect services
based on monthly access charges per radio, plus in the case of telephone
interconnect service, revenue is recognized based on air time charges as used.
Revenue is also recognized from equipment service upon acceptance by the
customer of the work completed as well as from the sale of equipment when
delivered.
All services paid by the customer in advance are recorded as unearned revenue.
H. LOSS PER SHARE
Basic and diluted loss per share were computed in accordance with SFAS No. 128,
"Earnings Per Share". Prior years have been restated to reflect the application
of SFAS 128. As discussed in Notes 7A and 8B the Company has restated its loss
per share applicable to common shareholders for the beneficial conversion
features embedded in the convertible debentures and preferred stock. The
effect of the restatement resulted in a change in net loss per share in 1996
from $0.55 to $0.89, respectively. There was no effect on the net loss per
share for the year ended December 31, 1997.
I. 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
sections of a statement of financial position and is effective for financial
statements issued for fiscal years beginning after December 15, 1997. The
Company is currently assessing the impact on the financial statements for the
years ended December 31, 1997 and 1996, and believes that SFAS 130 will not
result in comprehensive income different from net income as reported in the
accompanying financial statements.
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 currently operates as one segment. The adoption of SFAS
131 is not expected to have a material effect on the Company's financial
position or results from operations.
Statement of Position 98-5 "Reporting on Costs of Start-Up Activities" (SOP
98-5) requires the costs of start-up activities and organizational costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The adoption of SOP 98-5 is not expected to have a material
effect on the Company's financial position or results from operations.
J. RECLASSIFICATIONS
Certain amounts in the 1996 Consolidated Financial Statements have been
reclassified to conform with the 1997 presentation.
K. STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense could be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock Based Compensation, which permits entities
to recognize as expense over the vesting period the fair value of all stock
based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made as if the fair value based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply provisions of
APB opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
L. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,
("SFAS No. 121") on January 1, 1996. This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of this Statement did not have a material impact on the
Company's financial positions, results of operations, or liquidity.
M. CUSTOMER ACQUISITION COSTS
Customer acquisition costs are expensed in the period they are incurred.
(2) ACQUISITIONS
A. CMRS AND 800 STOCK PURCHASE AGREEMENT
On June 14, 1996, the Company executed a Stock Purchase Agreement with Libero
Limited ("Libero") to purchase approximately 5,500 channels. Pursuant to the
agreement, the Company acquired from Libero all the issued and outstanding
common stock of CMRS Systems, Inc. ("CMRS") and 800 SMR Network, Inc. ("800")
(jointly the "Management Companies"). The Management Companies engage in the
business of constructing and managing mobile radio stations ("Stations"). The
Management Companies entered into management agreements with certain companies
(the "Companies"), pursuant to which CMRS or 800 agreed, in accordance with
applicable "FCC" rules, regulations, and policies, to construct and manage all
of the SMR stations for which the Companies received licenses from the FCC. The
respective shareholders of the Companies granted to the Management Companies,
options to acquire all of the stock of the Companies, at such time as all
conditions of such transfer of control were met, as set forth in the FCC rules,
regulations and policies and as required by 310 of the Communications Act of
1934, as amended by U.S.C.310, a Transfer of Control Application would be filed
with the FCC.
The Company consummated such acquisition for combined consideration valued at
$32,496,887. The Company has accounted for the acquisition under the purchase
method of accounting. The purchase price was paid with (1) an aggregate cash
consideration of $3,547,000; (2) 508,000 shares of the Company's restricted
common stock valued at $1,968,308; and (3) a grant of an option to purchase
8,323,857 shares of common stock for a period of ten years at an exercise price
of $0.50 per share valued at $26,981,579. An independent appraisal was obtained
by the Company for value of the securities.
Based on the independent appraiser's estimate of the fair market value of the
assets exchanged, $22,725,442 of the combined consideration was allocated to
"Management Agreements" and the remaining $9,771,445 was allocated to
"Investment in options to acquire licenses" (the "Options"). The exercise price
under the Options was payable by the Management Companies with an amount of the
Management Companies own stock equal to 10% of the then issued and outstanding
stock. The Management Companies' stock was to be issued and allocated on a
pro-rata basis to the licensees based on their individual license percentage of
the total number of licenses. No cash consideration was payable upon exercise of
the Options by either the Company or the Management Companies. (See Subsequent
Events, Footnote 13).
Approximately 5,500 channels managed by 800 and CMRS Systems were included in a
five year Extended Implementation Plan granted by the FCC on March 31, 1995,
under Section 90.629 of the FCC rules, 47 C.F.R. 90.629. Under the Extended
Implementation Plan the stations had to be constructed in accordance with a
five-year construction plan. In December of 1995, the Company filed the required
documents, as requested by the FCC, re-justifying the extended construction
plan. In May of 1997, the FCC denied the re-justification plan and granted six
months from the date of the denial to complete construction of the stations
managed by 800 and CMRS. Under the Commission's decision, licenses for any
stations not constructed before the six month deadline of November 20, 1997
would be canceled.
As a result of the ruling, the Company restructured its build-out plan and
prioritized the channels based on detailed criteria relating to engineering
specifications, demographics, competition, market conditions and dealer
characteristics. Based on the results of prioritization and the construction
deadline stipulated by the FCC, the Company believed the value of certain
licenses under the Management Agreements and Options to Acquire Licenses had
been permanently impaired. For the approximately 5,500 channels, management
allocated a portion of the original purchase price based on estimated fair
market value determined by the criteria mentioned above. Based on this process,
management estimated the Company would be able to meet FCC construction
requirements on approximately 2,800 channels, before November 20, 1997. These
channels were allocated an aggregate value of $25,329,931. The remaining
channels, approximately 2,700, were determined to be permanently impaired. As a
result, the Company recorded an impairment charge of $7,166,956 in the second
quarter. Based on the independent appraiser's estimate of the fair market value
at the time of purchase, $5,016,869 was allocated to Management Agreements and
the remaining $2,150,087 was allocated to the Options. As of November 20, 1997
the Company had met all of the FCC's construction requirements for
approximately 3,800 of the 5,500 channels. As a result the Company exceeded its
estimate by approximately 1,000 channels, and released approximately 1,700
channels back to the FCC.
B. GENERAL COMMUNICATIONS ASSET PURCHASE AGREEMENT
On March 8, 1996, the Company finalized the General Communications Asset
Purchase Agreement. In conjunction with this transaction, the Company purchased
certain SMR equipment, land, building, other fixed assets, accounts receivable,
inventory and FCC licenses for SMR channels in Memphis, Tennessee from General.
Prior to the asset purchase and since November 1994, the Company was managing
the daily operations of General for a management fee equal to the net cash flows
of General.
The acquired assets were recorded at $834,569. The Company paid $345,609 in cash
and issued 100,000 shares of restricted common stock with a fair market value on
March 8, 1996, of $176,563, based on the discounted average closing bid and ask
price of the Company's common stock trading on the NASD Electronic Bulletin
Board. The Company's non-competition agreement, consulting agreement and note
payable liabilities to General with a balance totaling $906,687, net of the
corresponding non-competition and consulting agreement asset of $244,571 were
canceled and a new note payable was issued. The new note is a 25-year,
unsecured, non-interest bearing, negotiable promissory note with a face value of
$4,110,000, scheduled to be repaid in 300 monthly installments.
The note's monthly payments are subject to Consumer Price Index (CPI) increases
in years three through thirteen. The Company has assumed a CPI increase of 2.5%
for recording purposes thereby reflecting the gross value of the note equal to
$5,024,198. Interest on the note has been imputed at 9% giving a net present
value of $1,208,869, net of unamortized discount of $3,815,329 amortized on the
straight line method over the term of the note.
The following unaudited pro forma results of operations assume the acquisition
occurred as of January 1, 1996:
YEAR ENDED
DECEMBER 31,
UNAUDITED PRO FORMA INFORMATION 1996
- ------------------------------- ----
Revenues $2,378,805
Net loss (9,858,532)
Basic net loss per common share $ (0.89)
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the General acquisition been
consummated as of January 1, 1996, nor are they necessarily indicative of future
operating results.
C. JJ&D, LLC INVESTMENT
In May 1996, the Company purchased a 20% interest in JJ&D, LLC ("JJ&D") for
$600,000. The terms of the agreement provided for consideration consisting of
$100,000 cash, $100,000 note payable, due in 120 days, and $400,000 of value in
options to acquire restricted common stock of the Company. The value assigned to
the options was based on a arms-length negotiation as set forth in the purchase
agreement. At December 31, 1996, the investment was accounted for using the
equity method of accounting. All significant intercompany transactions were
eliminated and amortization of goodwill and equity in earnings was not material.
In 1997, the Company evaluated the recoverability of this asset in accordance
with APB 18 and determined it to be other than temporarily impaired. The
impairment measured by the amount in which the carrying amount exceeded the fair
value of the asset, resulted in a write-down of $443,474, principally goodwill,
charged to other income (expense).
As of December 31, 1997 the investment account has been reduced to zero.
Accordingly, the Company discontinued the application of the equity method. No
losses have accumulated since the equity method was suspended.
D. AIRTEL SMR, INC. MANAGEMENT AND OPTION TO ACQUIRE AGREEMENT
On May 11, 1996, the Company completed a Management and Option to Acquire
Agreement with Airtel SMR, Inc., an operator of SMR stations. The Company
assumed a $100,000 note payable, due May 1998, with interest at 12%. The Company
received SMR equipment valued at $62,702, Management Agreements for one-year
valued at $3,730 and an Option to Acquire the common stock of Airtel SMR, Inc.
valued at $33,568. The allocated valuations of the Management Agreement and
Option to Acquire Agreement were based on Management's estimates. Condensed
financial information of Airtel SMR, Inc. has not been presented as it is not
material to the results of operations of the Company. On February 23, 1997, the
Company exercised its option to acquire the outstanding stock of Airtel SMR,
Inc. for $75,000 cash and a 180 day, non-interest bearing note payable for
$75,000. In addition, the $100,000 note payable previously assumed was to become
due and payable upon the exercise of the option. The parties agreed to amend the
terms of the note. The Company made an initial payment of $36,628, with the
remaining $36,628 to be paid in 5 monthly installments of $4,707, and a final
payment of $14,866. As of December 31, 1997, this note has a remaining balance
of $10,158. In August 1997, the holder of the $75,000 note waived the note in
exchange for SMR equipment having a cost basis of $50,000 to the Company.
Therefore, the Company recorded FCC licenses with an estimated value of
$125,000.
E. AIRTEL COMMUNICATIONS, INC. ASSET PURCHASE AGREEMENT
On May 11, 1996, the Company completed an Asset Purchase Agreement with Airtel
Communications, Inc., an SMR sales organization. The Company paid $50,000 and
received certain office equipment and rights to a customer list valued at
$47,788. The customer list has been reviewed in accordance with SFAS No. 121 and
the Company has determined, based on expected future benefit, that the value of
this asset has been impaired. The customer list, net of accumulated amortization
of $40,819 has been written off as a charge to income from operations. Condensed
financial information of Airtel Communications, Inc. has not been presented as
it is not material to the results of operations of the Company.
(3) REVENUES AND COST OF SALES
The Company had revenues from equipment sales of $807,884 and $823,073 for the
years ended 1997 and 1996, respectively. The cost of sales associated with these
revenues were $607,155 and $551,862 for the years ended 1997 and 1996,
respectively.
(4) 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. The recorded amount of property and equipment capitalized and the
related accumulated depreciation is as follows:
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
SMR systems and equipment $5,768,117 $2,744,696
Buildings and improvements 335,900 345,665
Land 102,500 102,500
Furniture and office equipment 249,164 203,385
Leasehold improvements 9,759 --
---------- ----------
6,465,440 3,396,246
Less accumulated depreciation (656,272) (232,148)
---------- ----------
$5,809,168 $3,164,098
JJ&D Master Purchase Agreement
In September of 1996, the Company signed a purchase agreement with JJ&D. The
agreement gave the Company the option to purchase, within one year from the date
of the agreement, certain specialized SMR equipment. In connection with the
agreement, the Company granted 295,000 options, with an exercise price of $ 1.00
per share. The options vest at 1,000 per unit as the equipment is shipped.
During 1996, 95 units were purchased and as a result, 95,000 options had vested.
In September 1997, the agreement expired. The Company did not purchase
additional units while the agreement was in existence. As a result, no
additional options vested. Also JJ&D did not exercise their vested options. Upon
the expiration of the agreement, 200,000 granted options lapsed. As of December
31, 1997, both parties are no longer obligated under this agreement.
(5) INVESTMENT IN LICENSE OPTIONS
A. LICENSE OPTION AGREEMENTS
The Company entered into various option agreements to acquire FCC licenses for
SMR channels. The option agreements allow the Company to purchase licenses,
subject to FCC approval, within a specified period of time after the agreement
is signed. As of December 31, 1997, the Company exercised option agreements for
approximately 480 channels for consideration of cash, notes payable and issuance
of Common Stock totaling approximately $4,183,572. In relation to the exercise
of the options for the channels, the Company has also incurred commission
expense totaling $1,102,000. Additionally, the Company has made partial payments
in cash and Common Stock totaling $1,393,012 toward the purchase of
approximately 1,100 channels. Commission expense associated with these options
is $2,310,000.
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. There is approximately
$300,000 of accrued installment payments recorded at December 31, 1997 in
"Licenses - options payable". If the holder requests remedy, in writing, the
Company has thirty days to remedy any deficiency by sending monies totaling all
outstanding installment payments due such holder. The Company addresses each
request on a case by case basis and determines, based on various factors,
whether to pay the outstanding installment payments, purchase the license in
full with a promissory note or cancel the option agreement. As of March 31,
1998, holders of such amended option agreements have not elected to terminate
the options or exercise other available remedies. If the Company elects to
cancel the option agreement all consideration paid is retained by the licensee
and expensed accordingly by the Company. If the Company were to exercise the
remaining outstanding option agreements for approximately 1,100 channels as of
December 31, 1997, the obligations would total approximately $21 million.
Upon entering into an option agreement, the Company also entered into a
management agreement with the licensee. The management agreements give the
Company the right to manage the SMR systems, subject to the direction of the
licensee, for a period of time prior to the transfer of the license to the
Company as stated in the agreements, usually 2 to 5 years. During such period,
revenues received by the Company will be shared with the licensee only after
certain agreed-upon costs to construct the channels are recovered by the
Company.
(6) GAIN ON SETTLEMENT OF DEBT
In September 1996, one of the Company's vendors signed a release agreement to
accept $90,000 as full payment of all the Company's outstanding liability to it.
Total outstanding liability at that time was $137,450. The resulting gain of
$47,450 is reflected in the Company's statement of operations under gain on
settlement of debt at December 31, 1996.
In September of 1996, the Company recorded an obligation to Libero in the amount
of $2,082,116. This obligation was recorded as a restricted option prepayment
and could only be reduced by the exercise of options by Libero in connection
with the CMRS and 800 Stock Purchase Agreement (see note 2). In September 1997,
the Company entered into a mutual termination agreement with Libero whereby all
outstanding options were terminated and the remaining restricted option
prepayment balance was forgiven. This resulted in a gain on settlement of debt
of $670,188.
(7) LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following:
<S> <C> <C>
DECEMBER 31, DECEMBER 31,
1997 1996
----------- -----------
Note payable in connection with the asset purchase from General
(see Note 2), payable in monthly installments of $12,500 through February 1997;
$13,750 through February 1998; thereafter, monthly payments are subject to
annual CPI increases through February 2008 at which time the monthly payments
are capped through February 2021. Management has assumed annual CPI increases to
be 2.5%. Non-interest bearing with interest imputed at 9%, net of unamortized
discount of $3,688,151 as of December 31, 1997. $1,201,160 $1,223,330
Notes payable, two year, 8%, aggregate principal amount of $3,000,000, due
September 1998, principal and interest convertible into shares of the Company's
common stock (see note 7). -- 750,000
Notes payable, three year, 8%, aggregate principal amount of $5,000,000, due
June 1999, principal and interest convertible into shares of the Company's common
stock (see note 7). -- 400,000
Notes payable to MarCap in connection to the purchase of radio communications
equipment, payable in 36 monthly installments maturing at various dates through
2000, interest rates from 10.625% to 11.15%, secured by a guarantee and stock
pledge agreement. 401,380 270,651
Note payable to MarCap in connection with the $2 million line of credit.
collateralized by certain assets of the Company, payable in 36 monthly
installments through November 2000, including interest at 12%, secured by
guarantee and stock pledge agreement. 470,264 --
Note payable to Motorola Credit in connection with equipment purchase, payable
in three monthly installments ending January 1998 34,189 --
Note payable, maturing in August 1998, 10 monthly principal payments of $162,750,
one interest payment of $425,000. 1,627,500 --
Notes payable to licensees, payable in 36 monthly installments beginning March
1998 through November 1998 and ending March 2001 through November 2001. Non
interest bearing, interest imputed at 15%. Aggregate face amount of $4,131,194
net discount of $964,386. 3,166,808 --
Notes payable to Joint ventures to be paid from positive cash flow of
the related LLC. Non interest bearing, interest imputed at 15%. 325,639 --
Note payable in connection with asset purchase, maturing May 1998, including
interest at 12%. 10,158 73,256
7,237,048 2,717,237
Less current installments (2,622,891) (217,096)
----------- -----------
$4,614,157 $2,500,141
</TABLE>
(7) LONG-TERM DEBT - CONTINUED
Aggregate maturity of debt, net of discount, for the next five years is as
follows:
Year ended December 31
1998 $2,622,891
1999 1,533,525
2000 1,460,629
2001 507,826
2002 33,310
Thereafter 1,078,867
$7,237,048
A. DEBT ISSUANCES AND CONVERSIONS
In June 1996, the Company issued $4.0 million out of a $5.0 million offering of
8%, three year, convertible notes payable. The Company received $3,580,000, net
of placement fees of $420,000, which are accounted for as a reduction of the
obligation amortized on the straight-line method which approximates the
effective interest method. Subsequent to June 1996, the Company placed the
remaining $1.0 million convertible notes and received $900,000, net of
placement fees of $100,000. Principal and accrued interest are convertible into
common stock at a conversion price for each share of common stock equal to the
market price of the common stock. Market price is defined as the lessor of (a)
a 27-1/2% discount off of the 5 day average closing bid price of the common
stock, as reported by the National Association of Securities Dealers Electronic
Bulletin Board, for the previous 5 business days ending on the day before the
conversion date, or (b) the closing bid on the closing date of the sale. The
holders of the notes are entitled to convert one-third of the principal into
shares of common stock commencing after each of forty one days, sixty one days
and eighty one days after the date of issuance. During 1996, certain holders
tendered $4.6 million of the convertible notes and $80,432 of accrued interest
for conversion into 2,187,029 shares of the Company's common stock.
In September 1996, the Company issued a new debt offering of $3.0 million of
8%, two-year convertible notes. The Company received $2.7 million, net of
placement fees of $300,000. The Company issued 30,000 shares of common stock in
connection with the placement of the convertible notes. Principal and accrued
interest are convertible into common stock at a conversion price for each share
of common stock equal to the market price of the common stock. Market price is
defined as the lessor of (a) a 27-1/2% discount off of the 5 day average
closing bid price of the common stock, as reported by the National Association
of Securities Dealers Electronic Bulletin Board, for the previous 5 business
days ending on the day before the conversion date, or (b) the closing bid on
the closing date of the sale. During 1996, the holder tendered $2.0 million of
the convertible notes and $30,673 of accrued interest for conversion into
1,366,184 shares of the Company's common stock. The holders of the notes are
entitled, to convert one-third of the principal into shares of common stock
commencing after each of forty one days, sixty one days and eighty one days
after the date of issuance. On December 27, 1996, the holder tendered $250,000
of the convertible notes and $5,945 of accrued interest for conversion into
231,744 shares of the Company's common stock. The unissued common stock and the
value of these shares of $255,945 is recorded as common stock subscribed in
shareholders' equity at December 31, 1996.
In a 1997 announcement, the staff of the Securities and Exchange Commission
("SEC") indicated that when convertible debentures are convertible at a
discount from the then current common stock market price, a "beneficial
conversion feature", should be recognized as a return to the convertible
debenture holders. The SEC staff believes that any discount resulting from an
allocation of the proceeds equal to the intrinsic value should be allocated to
additional paid-in-capital and increase the effective interest rate of the
security and should be reflected as a debt discount and amortized to interest
expense over the period beginning on the date of issuance of the notes and
ending on the date the notes are first convertible. Based on the market price
of the Company's common stock on the date's of issuance, the convertible debt
had a beneficial conversion feature valued at $3,034,483. The affect of the
beneficial conversion feature was not recorded in the Company's 1996
Consolidated financial statements previously filed as part of its Form 10-KSB
for the year ended December 31, 1996. Because of the SEC announcement, the
Company has restated its 1996 consolidated financial statements to reflect such
announcement for the period as required by the SEC staff. The net effect of the
restatement represents a non-cash charge which is reflected as interest expense
and an increase in additional paid-in-capital as the discount was completely
amortized prior to December 31, 1996. Accordingly, the restatement had no
impact on Shareholders' equity at December 31, 1996.
In February 1997, the Company executed a Securities Placement Agreement to place
a minimum of $1,000,000 and maximum of $4,000,000 of the Company's three year,
8% convertible Debentures. Principal and interest are convertible into shares of
the Company's common stock. In addition, the Securities Purchase Agreement calls
for the issuance of 75,000 warrants to purchase shares of the Company's common
stock at an exercise price of $2.50 per share for each $1,000,000 of 8%
convertible Debentures placed. The warrants are exercisable for three years from
date of grant. On February 19, 1997, the Company placed $1,000,000 of the 8%
Convertible Debentures and received $860,000, net of $140,000 of placement fees.
The Company granted 75,000 warrants in connection with the placement. In
addition, the Company granted 30,000 warrants at an exercise price of $1.50 per
share in connection with the placement. On February 24, 1997, the Company placed
an additional $750,000 of the 8% Convertible Debentures and received $670,000,
net of $80,000 in placement fees. The Company granted 56,250 warrants in
connection with the placement. In addition, the Company granted 22,500 warrants
at an exercise price of $1.50 per share in connection with the placement.
Principal and accrued interest are convertible at a conversion price for each
share of common stock equal to the lesser of (a) $1.37 or (b) a discount of 25%
for principal and accrued interest held up to 90 days from the closing date, a
discount of 27-1/2% for principal and accrued interest held for 91 to 130 days
from the closing date or a discount of 30-1/2% for principal and accrued
interest held for more than 131 days. The discount will apply to the average
closing bid price for the 5 trading days ending on the date before the
conversion date, as represented by the National Association of Securities
Dealers and Electronic Bulletin Board.
On June 10, 1997 the holder of the $1,750,000 three-year 8% convertible
Debenture discussed above, tendered a notice of payment for penalties in the
amount of $52,500. The penalties were a result of the Company's nonperformance
to prepare and have declared effective, a registration statement with the
Securities and Exchange Commission to register the shares underlying the
convertible Debentures within 110 days from the date of closing. In addition, on
July 31, 1997, and August 1, 1997, the holder tendered to the Company notices of
conversion, pursuant to Regulation S, for $100,000 and $50,000 of principal,
respectively. The notices as tendered did not comply with the requirements of
Regulation S. The Company therefore did not issue the requested stock. If the
Company had been compelled to issue all of the stock into which the Debenture is
convertible, Management believes the effect on the Company's stock price and
liquidity could have been severe.
In September 1997, the holder of the convertible Debenture entered into an
agreement with the Company to restructure the convertible Debenture financing
described above (the "Debenture Restructuring Agreement"). Under the Debenture
Restructuring Agreement the holder agreed to restrict the holder's daily sales
of Company stock to not more than 10% of its total trading volume on the NASDAQ
bulletin board (but, notwithstanding the foregoing restriction the holder may
sell up to 100,000 shares per month). In addition, the Debenture Restructuring
Agreement also requires the holder to exchange the convertible Debenture
(including rights to all accrued interest and penalties) for a new debenture
(the "New Debenture") with a maturity date of August 31, 1998, in the principal
amount of $1,627,500, payable in ten monthly payments of $162,750. These
payments can be made in cash or stock at the then current market price (at the
Company's option). Interest, in the liquidated amount of $425,000, can also be
paid, by the Company, in cash or stock at the then current market price and is
payable in September 1998. The New Debenture is required to be secured by
specified Company assets with a value of at least 150% of principal outstanding.
Pursuant to the Restructuring Agreement, the holder also received 1,050,000
shares of common stock, which represented: payment of principal, interest
through September 1997, and penalties. The common stock was issued at the
current market price on date of execution.
The Company has accounted for the transaction in accordance with the provisions
of FASB 125, "Accounting for Transfers and Servicing of Financial Asset and
Extinguishment of Liabilities", wherein gain or loss on extinguishment is the
difference between the total reacquisition cost of the debt, to the debtor, and
the net carrying amount of the $1,750,000 Convertible Debenture on the Company's
books on the date of extinguishment.
In a 1997 announcement, the staff of the Securities and Exchange Commission
("SEC") indicated that when convertible debentures are convertible at a
discount from the then current common stock market price, a "beneficial
conversion feature", should be recognized as a return to the convertible
debenture holders. The SEC staff believes any discount resulting from an
allocation of the proceeds equal to the intrinsic value should be allocated to
additional paid-in capital and increase the effective interest rate of the
security and should be reflected as a debt discount and amortized to interest
expense over the period beginning on the date of issuance of the notes and
ending on the date the notes are first convertible. Based on the market price
of the Company's common stock on the date's of issuance, the convertible debt
had a beneficial conversion feature valued at $767,986. The affect of the
beneficial conversion feature was not recorded in the Company's 1997
consolidated financial statements previously filed as part of Form 10-KSB for
the year ended December 31, 1997. Because of the SEC announcement, the Company
has restated its 1997 consolidated financial statements to reflect such
announcement for the period as required by the SEC staff. The restatement
results in an increase in interest expense of $767,986 due to a beneficial
conversion feature embedded in the convertible debenture. In addition, the loss
on settlement of the debenture was reduced by $767,986, from $598,222 to a gain
of $169,764 as the amount credited to additional paid in capital was recovered
from additional paid in capital when the debenture was exchanged as basis in
the debenture given up. Accordingly, there is no change in the net loss in the
accompanying consolidated statement of operations, and the restatements had no
impact on Shareholders' equity at December 31, 1997.
The beneficial conversion features for the year ended December 31, 1997 and
1996, based on the market price of the Company's common stock on the date's of
issuance, totaled $767,986 and $3,034,483, respectively, and were amortized to
interest expense in 1997 and 1996.
B. LEASE COMMITMENTS
The Company entered into a new lease for its corporate offices and warehouse
facilities in Las Vegas, Nevada, commencing in December 1997, under a
non-cancelable operating lease agreement which expires in March 2002.
Terms of the lease provide for minimum monthly lease payments of $16,331
including operating expenses. The agreement provides for annual adjustments to
the minimum monthly lease payment based on the consumer price index as defined
therein.
In addition, the Company leases sales facilities in Little Rock, AR and
Southaven, MS with monthly lease payments of $ 915 and $ 905, respectively.
The Company is obligated under two capital leases for various SMR equipment. In
addition, the Company leases certain antenna sites for transmission of SMR
services. The terms of these leases range from month-to-month to 5 years, with
options to renew.
Future minimum payments associated with the leases described herein, including
renewal options are as follows:
CAPITAL OPERATING
LEASES LEASES
Years ended December 31:
1998 $ 16,081 $ 828,989
1999 -- 407,743
2000 -- 365,066
2001 -- 312,416
2002 -- 244,400
-------- ----------
$ 16,081 $2,158,614
======== ==========
Total minimum lease payments $ 16,081
Imputed interest (558)
--------
Present value of minimum capitalized lease payments 15,523
Less current portion (15,523)
--------
Long-term capitalized lease obligations $ --
========
Total rent expense for the year ended December 31, 1997 and 1996 amounted to
$79,642 and $66,728, respectively.
C. MOTOROLA PURCHASE AND FINANCE AGREEMENTS
On October 25, 1996, the Company's subsidiary CCI signed a purchase agreement
with Motorola to purchase approximately $10.0 million of Motorola's radio
communications equipment, including 144 SmartNet II trunked radio systems. The
agreement requires that the equipment be purchased within 30 months, since
extended to 42 months of the effective date of the agreement (initial shipping
of the equipment). To date, approximately 20% of the Company's equipment has
been purchased from Motorola. If the Company was unable to use Motorola as a
vendor, it could have a materially adverse effect on the Company.
In connection with this purchase agreement, CCI entered into a Financing and
Security Agreement with Motorola (the " Motorola Loan Facility") for the
equipment stated above. This agreement allows CCI to borrow up to a total of
$5.0 million. This Motorola Loan Facility is available for drawdowns during the
effective term of the purchase agreement as extended. The facility allows no
more than one drawdown per month. Each of the drawdowns is evidenced by a
separate promissory note (the "Promissory Note"). Principal and interest on the
Promissory Note are payable in arrears monthly for a period of 36 months from
the funding date. The Loan Facility closed on October 29, 1996, and is subject
to certain pledges, representations, warranties and covenants. As a part of the
financing provided pursuant to the purchase agreement between CCI and Motorola,
the Company executed a guaranty and security agreement with Motorola, pursuant
to which the Company unconditionally and irrevocably guarantees the obligations
of CCI under the purchase agreement. The guaranty and security agreement
contains various financial and other covenants of the Company. As of December
31, 1997, the Company was indebted for approximately $401,000 under the Loan
Facility.
In addition to the guaranty & security agreement, the Company also executed a
Stock Pledge Agreement "Agreement" with Motorola. The Agreement grants to
Motorola a first priority security interest in all of the Company's right, title
and interest to all shares of common stock of Chadmoore Communications of
Tennessee (a wholly owned subsidiary of the Company). The Agreement also
entitles Motorola to all subscriptions, warrants and other rights or options
issued to or exercisable by the Company with respect to the common stock, of the
subsidiary.
In August 1997, Motorola, with the Company's concurrence, assigned all of its
interest in the Motorola Loan Facility to the MarCap Corporation. In October
1997, CCI entered into a First Amendment to the Financing Security Agreement
with MarCap, ("Amendment"). In conjunction with the Amendment, MarCap extended a
line of credit for up to $2,000,000 ("MarCap Facility"). There is approximately
$1.5 million available to the Company at December 31, 1997. The MarCap Facility
is secured by pledges of stock in certain subsidiaries holding licenses,
assignment of various membership interests in Joint Ventures, and a cross-pledge
of all collateral previously granted to Motorola, Inc. in connection with the
original Financing and Security Agreement. Advances under the MarCap Facility
are subject to prepayment fees in the amount of 5% of the principal amount if
prepaid during the fist 12 months, 4% if prepaid during the second 12 months,
and 3% in prepaid during the last 12 months of the term relating to the related
advance. The debt covenants as designated in the original Financing and Security
Agreement remained unchanged following the reassignment to MarCap. As of
December 31, 1997, the Company was not in compliance with said debt covenants,
such as, tangible net worth, minimum annualized revenue and cash flow to debt.
However, the necessary debt waiver was obtained. Subsequently, the Company has
renegotiated the covenants stipulated in the agreement and the Company is in
compliance thereof, and has classified the appropriate portion (maturing after
one year) as long-term debt.
(8) EQUITY TRANSACTIONS
A. PRIVATE PLACEMENT
In 1995, the Company prepared a Private Placement Memorandum ("PPM") offering
one million units at a price of $2.00 per unit. In March 1996, the Company sold
549,417 PPM units, 441,666 of which were sold at a discount of $.50. As a
result, the Company expensed $220,833 in connection with the sale of these units
which is included in general and administrative expense in the statement of
operations for the year ending December 31, 1996.
The Company also sold 430,000 shares of restricted common stock to these foreign
investors and received proceeds of $645,000.
B. PREFERRED STOCK PRIVATE PLACEMENT
In April 1996, the Company issued 250,000 shares of convertible preferred stock
(Series A) in exchange for $2,273,457, net of expenses totalling $226,293.
Additionally, in June 1996 the Company issued warrants to purchase 150,000
shares of common stock as prescribed under the agreement. The Series A
convertible stock shall be convertible at any time commencing after May 15,
1996 at a 67% discount from the average closing bid price for the five
preceeding days prior to the date of conversion. The preferred stock was
converted to 977,057 shares of common stock in June 1996.
In a 1997 announcement, the staff of the SEC indicated that when preferred stock
is convertible at a discount from the then current common stock market price,
the "beneficial conversion feature", should be recognized as a return to the
preferred shareholders. Based on the market price of the Company's common stock,
the preferred stock had a beneficial conversion feature of $1,203,704. The
beneficial conversion feature was not included in the calculations of net loss
per common share in the Company's previously filed 10-KSB for the year ended
December 31, 1996. Because of the SEC announcement, the Company has restated its
1996 net loss per common share information to reflect such announcement.
However, since the Company had no retained earnings, such amount was charged to
additional paid-in capital and was off-set by a deemed contribution to
additional paid-in capital resulting in no change to shareholders' equity.
On December 23, 1997, the Company concluded a private placement of 219,000
shares of Series B Convertible Preferred Stock (the "Preferred Stock") and
warrants to purchase 420,000 shares of the Company's common stock, of which
223,937 Warrants were issued at closing and 196,063 Warrants remained to be
issued as of December 31, 1997. The Company received proceeds from the placement
of $1,600,000 net of placement fees of $24,812. The preferred stock is
convertible into shares of common stock beginning 45 days from the closing date
and up to two years from the closing date. The preferred stock is convertible at
average closing bid prices of the Company's common stock as quoted by Bloomberg,
LP for the five-day trading period ending on the day prior to the date of
conversion (the "lookback period"). If the difference between the average price
and the current market price, where the current market price is defined as the
closing bid price of the common stock on the conversion date, is greater than
20% then the lookback period used to calculate the average price will be
increased to 20 trading days. In the event that any securities remain
outstanding on the second anniversary of the closing date, all remaining
securities must be converted on such date. The Company shall pay a dividend on
each share of Preferred Stock at the rate of 8% per annum of the liquidation
preference of $10.00 per share for each share of Preferred Stock, accruing from
date of issuance. The dividend is payable quarterly in cash or common stock at
the option of the Company, is cumulative and is calculated at the price at which
the Preferred Stock may be converted into shares of common stock of the Company
on the date when converted or quarterly based upon the last day of each quarter
with the valuation determined as if that was a Conversion Date. The warrants,
which have an exercise price equal to the fair value of the Company's common
stock on the closing date of the transaction, were deemed to have an estimated
fair value equal to zero and accordingly, all of the net proceeds from the
transaction were allocated to the preferred stock. The holders of the Preferred
Stock and Warrants are restricted from converting an amount which would cause
them to exceed more than 4.99% beneficial ownership of the Company's Common
Stock determined in accordance with Section 13(d) of the Securities Exchange Act
of 1934, as amended. If for any reason, while any of the Preferred Stock and
Warrants are outstanding, Regulation S is rescinded or modified so as to
preclude the holders of the Preferred Stock and Warrants from relying on
Regulation S, the holders of the Preferred Stock and Warrants may demand the
Company to register the Preferred Stock and Warrants.
C. LICENSE PURCHASE
In February 1996, the Company made a down payment on 8 license options and
agreed to issue 11,440 restricted shares of its common stock as payment of the
full option price which is 40% of the purchase price of these licenses. The
shares have been valued at $32,890 and have been recorded as an investment in
license options and common stock subscribed at December 31, 1997.
D. DEBT CONVERSIONS
During 1996, certain holders of the 8% three-year, convertible notes payable
tendered approximately $6.5 million of convertible notes and $117,000 of accrued
interest for conversion into 3,784,957 shares of the Company's common stock, of
which 231,744 of the shares issued were recorded as common stock subscribed at
December 31, 1996.
During 1997, certain holders of the 8%, three year, convertible notes payable,
tendered $1,150,000 of convertible notes and $48,907 of accrued interest for
conversion into 1,587,527 shares of the Company's common stock. The unamortized
debt issuance costs were netted against the $1,150,000 of convertible notes
tendered.
E. CONSULTING
The Company issued 62,500 and 45,574 shares of restricted common stock for legal
services in 1996 and 1997 respectively. The value related to the shares was
based on the fair market value at the date of grant and totaled $62,500 and
$21,875 respectively. The legal services amount was expensed during the year
ended December 31, 1996 and 1997 and is included in the consolidated statement
of operations as general and administrative expenses for each year.
In January 1996, the Company's Board of Directors approved and issued 450,000
shares of restricted common stock in lieu of a cash payment of $153,000 for
consulting services. The expense related to the shares was based on the fair
market value at the date of grant and totaled $866,250. This amount was expensed
during the year ended December 31, 1996, and is included in the consolidated
statement of operations as general and administrative expenses.
F. STOCK RETIREMENT
In September 1996, Libero tendered funds, in the amount $2,082,116, to a former
officer and director of the Company. In consideration of the funds received, the
Company's former officer and director tendered 1,514,266 shares of the Company's
common stock to the Company which were canceled. In consideration for the
shares, the Company recorded an obligation to Libero in the amount of $2,082,116
which could only be used for the future amount of option exercises. In September
1997, the Company entered into a mutual termination agreement with Libero,
whereby all outstanding options were terminated and the remaining restricted
option payment balance was forgiven. This resulted in a gain on settlement of
debt of $670,188.
G. OPTIONS
During 1997, the Company granted stock options to purchase 2,062,723 shares of
the Company's common stock. The options were issued to consultants and various
employees under the Company's Employee Stock Option Plan.
NUMBER
STOCK OPTIONS OF SHARES
-----------
Outstanding at December 31, 1994
Granted at $0.50-$5.50 per share 3,937,136
Less exercised at $0.50-$1.50 per share (865,000)
Lapsed or canceled
Outstanding at December 31, 1995 3,072,136
Granted at $.37-$6.00 per share 11,417,364
Less exercised at $0.37-$2.50 per share (4,470,000)
Lapsed or canceled (376,532)
------------
Outstanding at December 31, 1996 9,642,968
Granted at $.50-1.50 per share 2,062,723
Less exercised at $.50 per share (323,857)
Lapsed or canceled (6,623,507)
------------
Outstanding at December 31, 1997 4,758,327
============
Compensation expense associated with the issuance of options was $329,426 and
$866,250 for the years ended December 31, 1997 and 1996, respectively.
The weighted average fair value of each of the options issued during the year
ended December 31, 1997, substantially all of which were granted at a price
exceeding the then current market price as estimated by management, to be
$413,525 using an option pricing model (Black-Scholes) with the following
assumptions: dividend yield of 0%; expected option life of 1 year; volatility of
42.48% and risk free interest rate of 5.73%.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Number Weighted Weighted Number Weighted
Range of outstanding Average average exercisable at average
exercise at December remaining exercise December 31, exercise
price 31, 1997 contractual life price 1997 price
<S> <C> <C> <C> <C> <C>
$ 0.50 2,062,723 1,085 days $ 0.50 1,142,723 N/A
$ 1.00 120,000 1,096 days $ 1.00 120,000 N/A
$ 1.50 620,000 521 days $ 1.50 620,000 N/A
$ 2.00 300,000 1,096 days $ 2.00 300,000 N/A
$ 2.50 1,255,604 230 days $ 2.50 1,255,604 N/A
$ 4.00-$6.00 400,000 550 days $ 4.88 400,000 N/A
</TABLE>
The Company applied APB Opinion No. 25 in accounting for its stock options and
warrants and, accordingly, compensation cost of $866,250 in 1996 and 329,426 in
1997 has been recognized for its stock options in the financial statements. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income would
have been reduced to the pro forma amount indicated below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- --------------------
<S> <C> <C>
Net income As reported $(14,679,286) $(9,860,733)
(Loss) Pro forma (14,763,385) (13,083,931)
EPS As reported $ (.73) $ (.89)
Pro forma (.74) (1.12)
</TABLE>
Pro forma net income reflects only options granted in 1997 and 1996. Therefore,
the full impact of calculating compensation expense for stock options under SFAS
No. 123 is not reflected in the pro forma net income amounts presented above
because compensation expense is reflected over the options' vesting period of
four years, and compensation expense for options granted prior to January 1,
1996 is not considered.
H. WARRANTS
During the Year ended December 31, 1997, the Company issued warrants in
conjunction with the following transactions:
* 300,000 issued in connection with legal fees
* 183,750 issued in connection with the placement of $1.75 million of
convertible debentures, 8%, due February 2000.
* 420,000 issued in connection with Series B Preferred Stock Placement,
of which 223,937 were issued and 196,063 are to be issued.
During the Year ended December 31, 1996, the Company issued warrants in
conjunction with the following transactions:
* 340,584 issued in connection with the sale of private placement units.
* 200,000 issued in connection with the Series A preferred stock
placement.
* 182,000 issued in connection with the placement of $5.0 million of
convertible debentures, 8%, due June, 1999.
* 100,000 issued in connection with the placement of $3.0 million of
convertible debentures, 8%, due September, 1998
During the year ended December 31, 1995, the Company issued warrants in
conjunction with the following transactions:
* 763,584 issued in connection with the private placement unit sales (see
"private placement").
* 30,000 issued as part of the conversion of CCI common stock to
Chadmoore Wireless Group, Inc. common stock.
* 51,667 issued in addition to common shares issued lieu of cash payment
on notes payable (note 9).
* 55,250 issued in lieu of cash payment for consulting services.
* 208,833 issued in connection with the private placement unit sales, but
were subscribed at December 31, 1996.
Each warrant can be exercised for one share of the Company's common stock. The
following is a summary of warrants outstanding and their terms as of December
31, 1997:
NUMBER
WARRANTS OF SHARES
Outstanding at December 31, 1994 --
Granted at $2.50-$5.00 per share 1,109,334
Less exercised --
Lapsed or canceled --
Outstanding at December 31, 1995 1,109,334
Granted at $1.50 - $4.00 per share 822,584
Less exercised --
Lapsed or canceled --
----------
Outstanding at December 31, 1996 1,931,918
Granted at $1.00-$2.50 per share 483,750
Granted at average trading price as defined 223,937
Less exercised --
Lapsed or canceled --
----------
Outstanding at December 31, 1997 2,639,605
==========
I. MINORITY INTEREST
Prior to the reverse merger, the Company sold restricted common stock in its
subsidiary, CCI, to a third party totaling 700,000 shares. The holder of such
shares has not yet elected to convert these shares of CCI to shares of Chadmoore
Wireless Group, Inc. As per the amended and restated stock subscription
agreement dated January 13, 1996, the third party has options to purchase 2.1
million shares of restricted common stock of CCI. The options are exercisable
ranging from six months from the closing date of the amended and restated stock
subscription agreement through eight years from such date. As of July 13, 1996,
700,000 options that were exercisable at $1.50 per share were unexercised by the
third party and thus expired on that date. Options to purchase 1.4 million
shares of CCI remain outstanding at December 31, 1997 at the following exercise
prices:
NUMBER OPTION
OF OPTIONS OPTION TYPE EXERCISE PRICE EXPIRATION DATE
700,000 A $ 2.50 1/13/2000
700,000 B $ 4.00 1/13/2004
The Company has entered into ten joint venture agreements with its dealers
("Minority Venturer"), to finance, install, optimize and aggressively load SMR
systems in selected markets. The Company has ownership percentages ranging from
60% to 93% in such joint ventures, and has complete operating responsibility in
all cases, subject to ultimate licensee control, if applicable. The Minority
Venturer is responsible for loading the system and must meet mutually agreeable
minimum loading standards.
The Company contributed the channels necessary to provide initial commercial
service. The Minority Venturer contributed a percentage of the system equipment
equal to their ownership interest and financed the balance of the capital
requirement necessary to bring the individual market to initial commercial
service with a liability which was discounted on a present value basis at a 15%
imputed interest rate. This financing will be repaid only from positive cash
flow from the system in that market.
To keep the motivational aspects of the dealer partner program but reduce the
effective capital cost to the Company, in selected markets for which full-scale
roll-out has yet to occur the Company anticipates implementing a modified dealer
partner arrangement in which the dealer would contribute approximately 25% to
60% (depending on market size) towards initial market roll-out costs in return
for a 10% interest in the local system. This investment is a capital
contribution, and is not recouped from system earnings. Based on the speed and
extent of loading subscribers onto such system, the dealer partner would have
incentive opportunities to earn up to an additional 10% interest in the system.
J. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128).
SFAS No. 128 supersedes APB Opinion No. 15 and specifies the computation,
presentation and disclosure requirements for earnings per share (EPS). It
replaces the presentation of primary EPS with a presentation of basic EPS and
fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is computed
by dividing income available to common stockholders by the weighted average
number of shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock and is computed similarly
to fully diluted EPS under APB Opinion No. 15. The following is a
reconciliation of the basic and diluted EPS computations for income/(loss)
available to Common Stockholders. Loss per share for 1997 and 1996 were
restated to comply with a SEC announcement regarding beneficial conversion
features embedded in a convertible security. <TABLE> <CAPTION>
Period from
January 1, 1994
December 31, December 31, through
1997 1996 December 31,
1997
<S> <C> <C> <C>
Basic and Diluted Earnings per Share:
Shares outstanding at beginning of
period 17,823,445 8,387,064 --
Shares issued for conversion of debentures 1,372,412 852,609 1,559,093
Shares issued for option exercised 308,773 1,528,536 1,976,903
Shares issued for restructuring of
convertible debentures 296,301 -- 74,025
Shares issued for stock subscribed 230,474 -- 57,579
Shares issued for license dispute 28,574 -- 7,170
Canceled shares -- (378,567) (473,662)
Shares issued in connection with
private placement -- 450,784 669,565
Preferred Stock converted to common stock -- 547,135 380,493
Shares issued for cash -- 822,483 4,940,138
Shares issued for assets purchased -- 174,172 655,698
Shares issued for services 1,623 -- 340,645
------------ ----------- ------------
Weighted average common shares outstanding 20,061,602 12,384,216 10,187,647
============ =========== ============
</TABLE>
The following potentially dilutive securities were not included in the
computation of dilutive EPS because the effect of doing so would be
antidilutive.
December 31, December 31,
1997 1996
Options 4,758,327 6,162,364
Warrants 2,639,603 1,931,917
Convertible Preferred Stock 4,562,500 --
Convertible debentures -- 1,053,640
----------- ----------
11,960,430 9,147,921
(9) INCOME TAXES
A reconciliation of the Company's income tax provision as compared to the tax
provision calculated by applying the statuatory federal income tax rate (35%) to
the net loss before income taxes for the year ended December 31, 1997 and 1996
are as follows:
1997 1996
------------- -------------
Computed "expected" income tax benefit at 35% $(5,137,750) $(3,352,649)
Change in valuation allowance 5,034,975 2,290,580
Non deductible expenses for tax purposes 102,775 1,062,069
============= =============
$ - $ -
============= =============
The major components of the deferred tax assets and liabilities at December 31,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 10,392,915 $ 8,167,451
Management agreements 2,508,435
-
Accruals net currently deductible for tax purposes 591,074
-
Investment in JJ&D & LLC 155,216
-
Allowance for doubtful accounts
15,750 -
FCC licenses
- 25,624
Other
- 5,259
------------- -------------
13,663,390 8,198,334
Less valuation allowance (13,146,926) (8,111,951)
------------- -------------
Deferred tax assets $ 516,464 $ 86,383
============= =============
Deferred tax liabilities:
Property and equipment (321,173)
(86,383)
FCC licenses (160,212)
-
Other
(35,079) -
------------- -------------
Deferred tax liabilities (516,464) (86,383)
------------- -------------
Net Deferred Tax Assets $ - $ -
============= =============
</TABLE>
Since inception, the Company has incurred net operating losses for both
financial reporting and income tax purposes. As of December 31, 1997, the
Company has net operating loss carry forwards for income tax reporting purposes
totaling approximately $29 million. A deferred tax asset is provided when, in
management's opinion, it is more likely than not that the deferred tax asset
will be realized. To the extent the Company is not able to determine that it is
more likely than not that net deferred tax assets will be realized prior to
expiration, a valuation allowance is recorded to reduce the net deferred tax
asset to the amount which is more likely than not to be realized.
(10) RELATED PARTY TRANSACTIONS
During 1997, the Company traded, with a stockholder in JJ&D, one hundred
channels, with a cost basis of $1 million, in exchange for certain specialized
SMR equipment with a similar market value and no gain or loss was recognized on
the transaction. These channels were non-strategic to the Company's business
plan.
(11) COMMITMENTS AND CONTINGENCIES
A. LICENSE OPTION CONTINGENCIES
Goodman/Chan Waiver. Nationwide Digital Data Corp. and Metropolitan
Communications Corp. among others (collectively, "NDD/Metropolitan"), traded in
the selling of SMR application preparation and filing services to the general
public. Most of the purchasers in these activities had little or no experience
in the wireless communications industry. Based on evidence that NDD/Metropolitan
had been unable to fulfill their construction and operation obligations to over
4,000 applicants who had received FCC licenses through NDD/Metropolitan, the
Federal Trade Commission ("FTC") filed suit against NDD/Metropolitan in January,
1993, in the Federal District Court for the Southern District of New York
("District Court").
The District Court appointed Daniel R. Goodman ("the Receiver"), to preserve the
assets of NDD/Metropolitan. In the course of the Receiver's duties, he together
with a licensee, Dr. Robert Chan, who had received several FCC licenses through
NDD/Metropolitan's services, filed a request to extend the construction period
for each of over 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 CMRS stations, but had not been granted the extended
construction period to be awarded 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 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 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 roll-out 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.
Approximately 5,500 channels managed by 800 and CMRS were included in a five
year Extended Implentation Plan granted by the FCC on March 31, 1995, under
Section 90.629 of the FCC rules, 47 G.F.R. 90.629. Under the Extended
Implentation Plan the stations had to be constructed in accordance with a
five-year construction plan. In December of 1995, the company filed the required
documents, as requested by the FCC, re-justifying the extended construction
plan. In May of 1997, the FCC denied the re-justification plan and granted six
months from the date of the denial to complete construction of the stations
managed by 800 and CMRS. Under the Commission's decision, licenses for any
stations not constructed before the six month deadline of November 20, 1997
would be canceled.
As a result of the ruling, the Company restructured its build-out plan and
prioritized the channels based on detailed criteria relating to engineering
specifications, demographics, competition, market conditions and dealer
characteristics. Based on the results of prioritization and the construction
deadline stipulated by the FCC, the Company believed the value of certain
licenses under the Management Agreements and Options to Acquire Licenses had
been permanently impaired. For the approximately 5,500 channels, management
allocated a portion of the original purchase price based on estimated fair
market value determined by the criteria mentioned above. Based on this process,
management estimated the Company would be able to meet FCC construction
requirements on approximately 2,800 channels, before November 20, 1997. These
channels were allocated an aggregate value of $25,329,931. The remaining
channels, approximately 2,700, were determined to be permanently impaired. As a
result, the company recorded an impairment charge allowance of $7,166,956. As
of November 20, 1997 the Company had met all of the FCC's construction
requirements for approximately 3,800 of the 5,500 channels. As a result the
Company exceeded its estimate by approximately 1,000 channels. The cost basis
of the management agreements and options to acquire licenses will not be
adjusted to reflect the excess of the actual build out over the estimate, in
accordance with SFAS No. 121 "Impairment of Long-Lived Assets and Long-Lived
Assets to be disposed of".
B. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
On June 16, 1995, CCI filed a request for approval of an extended implementation
plan for the construction of over two thousand SMR stations with the FCC. On
December 15, 1995, the FCC denied that request. On January 21, 1996, CCI
appealed the denial to the U.S. Court of Appeals for the District of Columbia
Circuit. Briefs were filed and oral argument was heard on November 5, 1996. The
Court has not issued an opinion. Based on relevant precedent, the Company
believes there is substantial basis for the appeal. It cannot predict when the
Court will issue an opinion, or whether that opinion will be favorable to the
Company. If the Court denies the Appeal, the licenses for a small number of the
stations CCI manages may be automatically canceled. Licenses for other stations
CCI manages have been preserved by the Goodman/Chan Waiver or were otherwise
timely constructed and not subject to the above.
On April 3, 1997, Airnet, Inc. ("Airnet") served a summons and complaint on the
Company, alleging claims related to a proposed merger between Airnet and the
Company that never materialized. In particular, Airnet has alleged that a
certain "letter of intent" obligated the parties to complete the proposed
merger. The Company denies this allegation. In its complaint, Airnet has alleged
the following purported causes of action against the Company: breach of
contract, breach of the implied covenant of good faith and fair dealing,
intentional interference with prospective economic advantage, intentional
interference with contractual relationship, including breach of contract, false
promise and conversion. Airnet has also purported to seek the following relief
from the Company: $28,000,000 in compensatory damages plus interest, punitive
damages, costs of suit and attorney's fees. The Company challenged the
sufficiency of the complaint as to most of the purported causes of action on the
grounds that these purported causes of action fail to state facts sufficient to
constitute a cause of action. The Company also challenged the sufficiency of the
punitive damages allegations on the grounds that the compliant fails to state
facts sufficient to support these allegations. Rather than oppose these
challenges to its complaint, Airnet elected to file a first amended complaint.
Believing that Airnet's amendments were immaterial the Company renewed its
challenges to Airnet's pleading. On September 9, 1997, the court sustained the
Company's demurrers to Airnet's claims for damages based on the Company's
alleged failure to complete the merger and to Airnet's claims for conversion. At
Airnet's request, the court allowed Airnet to amend its pleading a second time
to attempt to state these claims, and Airnet's new complaint asserts claims for
breach of contract, anticipatory breach of contract, intentional interference
with prospective economic advantage, interference with contractual relationship,
inducing breach of contract and false promise. The Company again filed demurrers
challenging certain of the claims in Airnet's pleading. On January 16, 1998, the
Court overruled the Company's demurrers to the Second Amended Complaint.
On February 2, 1998, the Company answered the Second Amended Complaint with a
general denial and by asserting the following affirmative defenses: failure to
state a claim, uncertainty, statutes of limitations, laches, lack of capacity,
lack of standing, waiver, estoppel, knowledge and acquiescence, unclean hands,
unjust enrichment, fraud, misrepresentations, res judicata, justification,
privilege, no action intended or reasonably calculated to cause injury, lack of
causation, acts of third parties, failure to allege a contract, no meeting of
the minds, statute of frauds, lack of privity, fraud in the inducement, mistake,
lack of consideration, failure of consideration, failure of conditions
precedent, concurrent, subsequent, Airnet's intentional misrepresentation,
Airnet's negligent misrepresentations, performance excused by Airnet's failure
to perform, performance excused by recision, performance excused by
modification, antecedent breaches by Airnet, accord and satisfaction, privileged
communications, justified communications, no damages, failure to mitigate and
offset.
On February 2, 1998, the Company filed a Cross-Complaint against Airnet as well
as three other named cross-defendants related to Airnet: Uninet, Inc.,
("Uninet") Anthony Schatzlein ("Schatzlein") and Dennis Houston ("Houston"). The
Company's Cross-Complaint alleges various causes of action including fraud,
breach of oral contract, fraud and defamation which arise out of the proposed
merger and the events surrounding it. On March 2, 1998, cross-defendants Airnet,
Uninet, Schatzlein and Houston answered the Cross-Complaint with a general
denial and a single affirmative defense -- that the Cross-Complaint does not
state facts sufficient to constitute a cause of action.
The Company intends to vigorously defend the Second Amended Complaint and to
pursue the claims set forth in the Cross-Complaint. At this time, the outcome of
this litigation cannot be predicted with certainty. Although the Company intends
to defend the action vigorously, it is still in its early stages and no
substantial discovery has been conducted in this matter. Accordingly, at this
time, the Company is unable to predict the outcome of this matter.
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. Once the Amended Counterclaim is filed with the Court, CCI will have
the right to assert claims for affirmative relief against Peacock.
CCI intends to vigorously pursue its Complaint and defend against the
counterclaim. At this time, discovery has not been completed and the Company is
unable to predict the outcome of this matter.
Pursuant to the FCC's jurisdiction over telecommunications activities, the
Company is involved in pending matters before the FCC which may ultimately
affect the Company's operations. These pending matters include the "Goodman
Chan" decision and the Company's pending Finders Preference requests. Details
concerning the status of these proceedings at the FCC are given in "Item 1
Government Regulation".
(12) MANAGEMENT PLANS
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has suffered
recurring losses from operations, has a negative working capital of $7,539,345,
and has a $32,400,439 deficit accumulated during the development stage that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described below. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The Company believes that during 1998, depending on the rate of market roll-out
during the period, it will require approximately $8 million to $10 million in
additional funding, of which approximately $3.5 million is available and an
additional $4.5 million to $6.5 million is required, 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 facilities with Motorola, Inc. ("Motorola") and MarCap
Corporation ("MarCap"), 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 equity and debt financings
which are currently in progress.
The Company believes that it should have adequate resources to continue
establishing its SMR business and emerge from the development stage during 1999.
However, while the Company believes that it has developed adequate contingency
plans, the failure to consummate the aforementioned potential financing as
currently contemplated, or at all, could have a material adverse affect 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 Company's current 22
markets in which full-scale service has already been implemented. This latter
course might entail ceasing further system expansion in such markets 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.
(13) SUBSEQUENT EVENTS.
On January 13, 1998, the Company entered into a letter of intent with Recovery
Equity Partners II, L.P. ("Recovery"), an institutional private equity fund. The
letter provides that Recovery may invest up to $10 million of equity capital
into the Company. Under the terms of this potential transaction, which remains
subject to certain contingencies, Recovery would purchase $5 million of the
Company's common stock at closing, with an option to purchase an additional $5
million of the Company's common stock, commencing in April 1999, at a higher
price. Based on certain performance criteria, the option for the second $5
million of investment by Recovery would be callable by the Company.
Among other factors, Recovery's equity investment in the Company is contingent
upon the Company raising at least $10 million of debt financing, which the
Company is currently attempting to obtain. On March 4, 1998, the Company entered
into a letter of intent with Foothill Capital Corporation ("Foothill") by which
Foothill would provide $10 million of secured debt financing to the Company
subject to certain conditions being met. Collateral for such debt financing
would consist of substantially all the Company's assets other than those already
pledged to other creditors. Closing of the contemplated transactions with
Recovery and Foothill, are subject to satisfactory completion of due diligence,
formal approval by their respective internal approval committees, satisfactory
completion of documentation, and (in the case of Foothill only) satisfactory
appraisal of collateral.
On March 9, 1998, the Company entered into a vendor financing arrangement with
GeoTrans, a wholly owned subsidiary of Tetra Tech, Inc., whereby GeoTrans will
perform turn-key implementation of full-scale SMR system operations for the
Company in up to 10 markets per month and 145 total markets. During 1997,
GeoTrans completed preliminary construction services for the Company in 78
markets. The financing mechanism in the Company's arrangement with GeoTrans
specifies a $4,000 down-payment per market by the Company and approximately
$18,000 per market to be drawn by the Company under its Motorola financing
facility, with GeoTrans financing the balance of approximately $49,000 per
market on 120-day payment terms, with incentives to the Company of up to a 3%
discount for early payment. Collateral for such financing arrangement consists
of 183 channels in nine primarily non-strategic markets with a fair market value
estimated by the Company of $4.4 million.
On February 10, 1998, the Company and several holders of the Series B Preferred
entered into an amendment providing that such holders would not convert any
Series B Preferred into common stock of the Company prior to March 11, 1998. In
consideration for such amendment, the Company issued to the Series B Preferred
holders pursuant to Regulation S an aggregate of approximately 315,000 shares of
the Company's common stock and Warrants to purchase an additional approximately
380,000 shares of the Company's common stock , the terms of which Warrants are
the same as terms of the Warrants issued in the December 23, 1997 private
placement described above.
On January 12, 1998, the Company consummated an agreement with 32 of 33 licensee
corporations that were due approximately 8% of the outstanding common stock of
CMRS, as the balance of consideration due for the Company's exercising options
to acquire licenses from such licensee corporations, for such licensee
corporations to accept $150,000 in lieu of such stock in CMRS. Upon signing, the
Company had five days to fund such transaction. Due to limited time and internal
resources, the Company sought an investor that could immediately meet the
$150,000 in payments. Already familiar with the Company from its earlier
investment, Settondown agreed to provide the financing to acquire the
approximately 8% minority interest in CMRS, provided that the Company in turn
enter into an exchange agreement with Settondown to issue 800,000 shares of the
Company's common stock in return for the minority interest in CMRS. These
transactions closed on February 10, 1998, in conjunction with which Settondown
also agreed to limit its selling of such shares of common stock of the Company
to no more than 50,000 shares per month for the first six months following
issuance thereof. An effect of these transactions was to eliminate an
approximately 8% minority interest in CMRS in return for the issuance of 800,000
shares of the Company's common stock. CMRS remains a wholly owned subsidiary of
the Company with no further obligations to the 32 licensee corporations,
considerably simplifying the Company's capital structure as a result. Management
believes the transactions were advantageous because the valuation placed by the
Company on the eight percent of CMRS common stock which would otherwise have
been issued to the license holders was greater than the consideration actually
provided by the Company as a result of the transactions. However, no assurances
can be given that the Company's valuation of such eight percent of CMRS common
stock would be generally accepted, especially given the absence of a public
market in CMRS shares and market uncertainties regarding the valuation of assets
such as those held by CMRS. The one remaining licensee continues to operate
under the Company's Management and Option Agreement. Negotiations are currently
underway to exercise the Option. If a satisfactory resolution cannot be achieved
the Company intends to continue to operate under the current Management and
Option Agreement, subject to the licensee's direction.
On 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 any
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) new covenants for the Motorola and MarCap facilities, based on the
Company's business plan as if no additional equity and debt financing were
raised by April 30, 1998, that would take effect after April 30, 1998. On March
5, 1998, Motorola provided the Company with written acknowledgment of the
notification required by the Company as described in clause (iii) above. As a
result of these modifications, the Company is in full compliance with the
Motorola and MarCap facilities.
Subsequent to December 31, 1997, the Company made additional draws under the
MarCap Facility totaling $1,563,000.
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 Motorola facility
was extended from 30 months to 42 months from the effective dates thereof. As of
March 19, 1998, $363,100 was outstanding under the Motorola Facility. 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 million of Motorola equipment for its SMR systems under
the Motorola Facility during 1998.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
NONE
27.1 Financial Data Schedule (31)
- -------------
<PAGE>
FORM 10-KSB/A
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized:
Chadmoore Wireless Group, Inc.
(formerly CapVest International, Ltd.)
By: /s/ Robert W. Moore
Robert W. Moore
President and CEO
By: /s/ Richard C. Leto
Richard C. Leto
Chief Financial Officer
By: /s/ Rick D. Rhodes
Rick D. Rhodes
Chief Regulatory Officer
By: /s/ Jan S. Zwaik
Jan S. Zwaik
Chief Operating Officer
Date: November 24, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.
/s/ Robert W. Moore Date: November 24, 1998
Robert W. Moore, President,
Chief Executive Officer and Director
/s/ Richard C. Leto Date: November 24, 1998
Richard C. Leto
Chief Financial Officer
/s/ Rick D. Rhodes Date: November 24, 1998
Rick D. Rhodes
Chief Regulatory Officer
/s/ Jan S. Zwaik Date: November 24, 1998
Jan S. Zwaik, Chief Operating
Officer, Director
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule (31)
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 959,390
<SECURITIES> 0
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219
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