U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
-------------- --------------
Commission File Number: 0-20999
---------
CHADMOORE WIRELESS GROUP, INC.
------------------------------
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1058165
- ------------------------------- --------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2875 EAST PATRICK LANE SUITE G, LAS VEGAS, NEVADA 89120
-------------------------------------------------------
(Address of principal executive offices)
(702) 740-5633
---------------------------
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
AS OF NOVEMBER 13, 1998 ISSUER HAD 36,111,282 SHARES OF COMMON STOCK, $.001 PAR
VALUE, OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [ ] No [X]
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Financial Statements of Chadmoore Wireless Group, Inc.
and Subsidiaries (A developmental stage company):
Consolidated Balance Sheets:
As of September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations:
For the Nine Months Ended September 30, 1998 and 1997 and for
the Period January 1, 1994 (inception) through September 30, 1998 4
Consolidated Statements of Operations:
For the Three Months Ended September 30, 1998 and 1997 5
Consolidated Statement of Non-Redeemable Preferred Stocks, Common
Stocks and other Shareholders' Equity
for the Nine Months ended September 30, 1998 6
Consolidated Statements of Cash Flows:
For the Nine Months Ended September 30, 1998 and 1997 and for the
Period January 1, 1994 (inception) through September 30, 1998 7-8
Notes to Unaudited Consolidated Financial Statements 9-16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION 17-26
PART II - OTHER INFORMATION 27
ITEM 1. LEGAL PROCEEDINGS 27
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS 27
ITEM 5. OTHER INFORMATION 27
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K 28-29
SIGNATURES 30
2
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
SEPTEMBER 30, DECEMBER 31,
1998 1997
UNAUDITED RESTATED
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,514,858 $ 959,390
Accounts receivable, net of allowance for doubtful accounts of $13,300
and $45,000, respectively 522,977 265,935
Other receivables 92,996 99,223
Inventory 136,479 89,133
Deposits and prepaids 244,666 130,858
------------ ------------
Total current assets 2,511,976 1,544,539
Property and equipment, net 10,047,616 5,809,168
FCC licenses, net of accumulated amortization of $436,384 and $231,917,
respectively 33,281,799 6,726,954
Rights to acquire FCC licenses 7,817,518 27,893,926
Debt issuance costs, net of accumulated amortization of $27,742 and $0,
respectively 117,110 --
Non-current deposits and prepaids 32,928 32,928
------------ ------------
Total assets $ 53,808,947 $ 42,007,515
============= ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND NON REDEEMABLE
PREFERRED STOCKS, COMMON STOCKS AND OTHER SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and capital lease obligations $ 6,682,981 $ 2,638,414
Accounts payable 2,346,650 1,165,425
Accrued liabilities 1,070,890 1,106,029
Unearned revenue 395,842 107,057
Licenses - options payable 350,000 350,000
License option commission payable 3,412,000 3,412,000
Accrued interest 425,000 173,686
Other current liabilities 887,178 131,273
------------ ------------
Total current liabilities 15,570,541 9,083,884
Long-term debt, excluding current installments 8,244,638 4,614,157
Minority interests 506,615 352,142
------------ ------------
Total liabilities 24,321,794 14,050,183
Redeemable preferred stock:
Series C 4% cumulative, 10,119,614 shares issued and outstanding
outstanding, net of discount of $3,272,784 821,234 --
Non-Redeemable Preferred Stocks, Common Stocks, and other Shareholders Equity:
Preferred Stock, $.001 par value. Authorized 40,000,000 shares:
Series A issued and canceled 250,000 shares, 0 shares outstanding at
September 30, 1998 and December 31, 1997 -- --
Series B issued and outstanding 36,218 shares at September 30, 1998 and
219,000 shares at December 31, 1997 36 219
Common stock, $.001 par value. Authorized 100,000,000 shares; issued
and outstanding 35,915,676 shares at September 30, 1998 and
21,163,847 shares at December 31, 1997 35,915 21,164
Additional paid-in capital 67,099,401 60,303,498
Stock subscribed -- 32,890
Deficit accumulated during the development stage (38,469,433) (32,400,439)
-------------- ------------
Total Non-Redeemable Preferred Stocks, Common Stocks, and
other Shareholders Equity 28,655,919 27,957,332
Total liabilities, Redeemable Preferred Stock and Non-Redeemable
Preferred Stocks, Common Stocks, and other Shareholders Equity $ 53,808,947 $ 42,007,515
============= ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Unaudited Consolidated Statements of Operations
For the Nine Months Ended September 30, 1998 and 1997 and for the Period from
January 1, 1994 (inception) through September 30, 1998
PERIOD FROM
9 MONTHS ENDED SEPTEMBER 30, JANUARY 1, 1994
---------------------------- THROUGH
1998 1997 SEPTEMBER 30, 1998
RESTATED RESTATED
------------------- ------------------- -------------------
<S> Revenues: <C> <C> <C>
Radio services $ 1,504,684 $ 490,789 $ 2,816,569
Equipment sales 409,553 731,370 2,040,510
Maintenance and installation 226,377 276,213 841,954
Management fees -- -- 472,611
Other -- 4,053 57,862
------------ ------------ ------------
2,140,614 1,502,425 6,229,506
------------ ------------ ------------
Costs and expenses:
Cost of sales 704,938 781,050 2,471,844
Salaries, wages, and benefits 2,092,797 1,868,647 7,433,855
General and administrative 3,116,063 2,275,827 19,777,809
Depreciation and amortization 830,558 591,940 2,123,771
Cost of settlement of license dispute -- -- 143,625
------------ ------------ ------------
6,744,356 5,517,464 31,950,904
------------ ------------ ------------
Loss from operations (4,603,742) (4,015,039) (25,721,398)
------------ ------------ ------------
Other income (expense):
Minority interest (69,543) 16,184 (50,177)
Interest expense (net) (1,212,795) (1,061,646) (5,910,262)
Standstill agreement expense (182,914) -- (182,914)
Loss on reduction of management agreements and
licenses to estimated fair value -- (7,166,956) (7,166,956)
Gain on settlement of debt -- 169,764 887,402
Writedown of investment in JJ&D, LLC -- -- (443,474)
Gain on sale of assets -- -- 330,643
Loss on retirement of note payable -- -- (32,404)
Other, net -- 315 (179,893)
------------ ------------ ------------
(1,465,252) (8,042,339) (12,748,035)
------------ ------------ ------------
Net loss $ (6,068,994) $(12,057,378) $(38,469,433)
------------ ------------ ------------
Calculation of net loss applicable to common shareholders:
Preferred stock preferences $ -- $ -- $ (1,203,704)
Series B Preferred stock dividend (131,503) -- (131,503)
Series C Preferred stock dividend and accretion of
amount payable upon redemption (109,179) -- (109,179)
------------ ------------ ------------
Net loss applicable to common shares (6,309,676) (12,057,378) (39,913,819)
============ ============ ============
Net loss per basic and diluted shares $ (0.21) $ (0.61) $ (2.99)
============ ============ ============
Basic and diluted weighted average number of common
shares outstanding 30,184,770 19,664,951 13,335,983
============ ============ =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Unaudited Consolidated Statements of Operations
For the Three Months Ended September 30, 1998 and 1997
3 MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997
RESTATED
------------------- -------------------
<S> Revenues: <C> <C>
Radio services $ 635,324 $ 194,259
Equipment sales 173,543 151,534
Maintenance and installation 84,124 74,320
Other -- 428
----------- -----------
892,991 420,541
----------- -----------
Costs and expenses:
Cost of sales 303,233 235,560
Salaries, wages and benefits 803,686 698,291
General and administrative 1,356,901 868,212
Depreciation and amortization 357,186 268,598
----------- -----------
2,821,006 2,070,661
----------- -----------
Loss from operations (1,928,015) (1,650,120)
----------- -----------
Other income (expense):
Minority interest (34,946) 16,184
Interest expense (net) (399,607) (96,431)
Gain on settlement of debt -- 169,764
----------- -----------
(434,553) 89,517
----------- -----------
Net loss $(2,362,568) $(1,560,603)
=========== ===========
Calculation of net loss applicable to common shareholders:
Series B Preferred Stock dividend (48,147) --
Series C Preferred Stock accretion payable upon redemption (66,992) --
----------- -----------
$(2,477,707) $(1,560,603)
=========== ===========
Basic and diluted weighted average number of
common shares outstanding 35,817,198 19,966,574
----------- -----------
Net loss per basic and diluted shares $ (0.07) $ (0.08)
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Unaudited Consolidated Statements of Non-Redeemable Preferred Stocks, Common Stocks, and other Shareholders' Equity
For the Nine months ended September 30, 1998
TOTAL
DEFICIT NON-REDEEMABLE
PREFERRED STOCK COMMON STOCK ACCUMULATED PREFERRED STOCKS,
------------------- ---------------------- ADDITIONAL DURING COMMON STOCKS, AND
OUTSTANDING OUTSTANDING PAID-IN DEVELOPMENT STOCK OTHER SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE SUBSCRIBED EQUITY
------- ------ ------------ ------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 219,000 $219 21,163,847 $21,164 $60,303,498 $ (32,400,439) $ 32,890 $27,957,332
1997, as restated
Shares issued under employee
compensation plan -- -- 123,500 124 63,572 -- -- 63,696
Shares issued for
subscribed stock -- -- 11,400 11 32,879 -- (32,890) --
Shares issued for exercise of
license option -- -- 800,000 800 351,200 -- -- 352,000
Shares issued for conversion
of preferred stock (182,782) (183) 3,912,225 3,912 (3,729) -- -- --
Shares issued for preferred
stock dividend -- -- 83,254 83 (83) -- -- --
Shares issued for standstill
agreement -- -- 310,023 310 182,604 -- -- 182,914
Compensation expense for
options issue -- -- -- -- 15,040 -- -- 15,040
Shares issued for services -- -- 290,765 291 160,634 -- -- 160,925
Shares issued for exercise
of license option -- -- 31,000 31 15,159 -- -- 15,190
Shares issued for purchase
of fixed assets -- -- 335,000 335 188,715 -- -- 189,050
Shares issued for cash -- -- 8,854,662 8,854 5,925,833 -- -- 5,934,687
Accretion of amounts payable
upon redemption -- -- -- -- (109,179) -- -- (109,179)
Accrued dividends -- -- -- -- (26,742) -- -- (26,742)
Net loss -- -- -- -- -- (6,068,994) -- (6,068,994)
------- ------ ------------ ------- ----------- ------------- ---------- -------------
Balance at September 30, 1998 36,218 $ 36 35,915,676 $35,915 $67,099,401 $ (38,469,433) $ -- $28,665,919
======= ====== ============ ======= =========== ============= ========== =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Unaudited Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997 and for the Period from
January 1, 1994 (inception) through September 30, 1998
PERIOD FROM
9 MONTHS ENDED SEPTEMBER 30, JANUARY 1, 1994
------------------------------------------- THROUGH
1998 1997 SEPTEMBER 30, 1998
--------------------- --------------------- --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(6,068,994) $(12,057,378) $(38,469,433)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest 69,543 (16,184) 50,177
Depreciation and amortization 830,558 541,536 2,123,771
Non-cash interest expense -- 767,986 3,802,469
Writedown of management agreements and licenses to
estimated fair value -- 7,166,956 7,166,956
Writedown of investment in JJ&D, LLC -- -- 443,474
Release of license options -- -- 330,882
Writedown of prepaid management rights -- -- 81,563
Gain on extinguishment of debt -- (169,764) (839,952)
Gain on sale of assets held for resale -- -- (330,643)
Shares issued for settlement of license dispute -- -- 127,125
Standstill agreement 182,914 -- 182,914
Amortization of debt discount 849,968 165,911 1,116,480
Equity in losses from minority investments -- -- 1,322
Stock compensation 7,710 -- 7,710
Expenses associated with:
Stock issued for services -- -- 2,605,036
Options issued for services 15,040 -- 4,052,504
Changes in operating assets and liabilities:
Increase in accounts receivable and other receivables (204,491) (23,225) (401,185)
Increase in inventory (47,346) 88,717 (58,498)
Increase in deposits and prepaid expenses (58,322) 16,834 (179,317)
Increase in accounts payable and accrued liabilities 1,027,071 1,142,069 3,300,335
Increase in unearned revenue 288,785 -- 395,842
Increase in license options commission payable -- -- 524,800
Increase in accrued interest 251,314 73,973 743,263
Increase in other current liabilities 850,462 128,824 1,002,155
----------- ----------- -----------
Net cash used in operating activities (2,005,788) (2,173,745) (12,220,250)
------------ ----------- -----------
Cash flows from investing activities:
Purchase of assets from General Communications, Inc. -- -- (352,101)
Investment in JJ&D, LLC -- -- (100,000)
Purchase of Airtel Communications, Inc. assets -- -- (50,000)
Purchase of CMRS and 800 SMR Network, Inc. -- -- (3,547,000)
Purchase of SMR station licenses -- -- (1,398,575)
Purchase of license options (195,124) (121,250) (1,881,569)
Sale of management agreements and options to acquire
licenses -- -- 500,000
Purchase of property and equipment (4,440,894) (657,435) (9,065,069)
Sale of property and equipment -- 430,649 827,841
Purchase of assets held for resale -- -- (219,707)
Sale of assets held for resale -- -- 700,000
Increase in other non-current assets -- 6,000 (11,123)
----------- ----------- -----------
Net cash used in investing activities (4,636,018) (342,036) (14,597,303)
------------ ----------- -----------
</TABLE>
(Continued)
7
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
Unaudited Consolidated Statements of Cash Flows, Continued For the Nine Months
Ended September 30, 1998 and 1997 and for the Period from January 1, 1994
(inception) through September 30, 1998
PERIOD FROM
JANUARY 1, 1994
9 MONTHS ENDED SEPTEMBER 30, THROUGH
1998 1997 SEPTEMBER 30, 1998
------------------- ------------------- ------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds upon issuance of securities $7,500,000 $ -- $11,816,543
Equity issuance costs (705,000) -- (705,000)
Proceeds upon issuance of preferred stock -- -- 3,848,895
Proceeds upon exercise of options - related parties -- -- 62,500
Proceeds upon exercise of options - unrelated parties -- -- 3,075,258
Decrease in stock subscriptions receivable, net
of stock subscribed -- -- (637,193)
Purchase and conversion of CCI stock -- -- 45,000
Advances from related parties -- -- 767,734
Payment of advances from related parties -- -- (73,000)
Increase in debt issuance costs (144,852) -- (144,852)
Payments of long-term debt and capital lease
obligations (1,435,225) (273,258) (2,404,491)
Proceeds from issuance of notes payable -- -- 375,000
Proceeds from issuance of long-term debt 1,982,351 1,555,000 12,306,017
---------- ---------- -----------
Net cash provided by financing activities 7,197,274 1,281,742 28,332,411
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 555,468 (1,234,039) 1,514,858
Cash and cash equivalents at beginning of period 959,390 1,463,300 --
---------- ---------- -----------
Cash and cash equivalents at end of period $1,514,858 $ 229,261 $ 1,514,858
========== ========== ===========
See Note 8 for supplemental disclosure on non-cash investing and financing activities
</TABLE>
8
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Chadmoore Wireless Group, Inc. and subsidiaries and consolidated
partnerships (the "Company"), ( a development stage company), which have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission Form 10-QSB. All material adjustments, consisting of normal
recurring accruals which are, in the opinion of management, necessary to
present fairly the financial condition and related results of operations, cash
flows and Non-Redeemable Preferred Stocks, Common stocks and other
Shareholders' Equity for the respective interim periods presented are
reflected. The current period results of operations are not necessarily
indicative of the results for any other interim period or for the full year
ended December 31, 1998. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements included in the Annual Report on Form 10-KSB and 10-KSB/A for the
period ending December 31, 1997.
As discussed in Note 5 the Company has restated its previously issued Form
10-QSB for the nine monts ended September 30, 1997 in its September 30, 1998
Form 10-QSB to comply with a SEC announcement with respect to issuing
convertible debentures which are convertible into common stock at a discount.
B. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires companies
to classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position and is effective for financial
statements issued for fiscal years beginning after December 15, 1997. The
Company adopted SFAS 130 for the quarter ended March 31, 1998. As of September
30, 1998 the Company has no comprehensive income amounts.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 establishes additional standards for segment reporting in
financial statements and is effective for fiscal years beginning after December
15, 1997. The 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.
C. CASH EQUIVALENTS
For the purposes of the statement of cash flows the Company considers all
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents.
D. RECLASSIFICATIONS
Certain amounts in the 1997 Unaudited Consolidated Financial Statements have
been reclassified to conform to the 1998 presentation.
E. LOSS PER SHARE
Basic and diluted loss per share were computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). Prior
years have been restated to reflect the application of SFAS 128. As discussed
in Note 5, earnings per share for the three months ended September 30, 1997
were restated to comply with a SEC announcement regarding beneficial conversion
features embedded in convertible securities.
F. CUSTOMER ACQUISITION COSTS
All customer acquisition costs are expensed in the period they are incurred.
(2) FCC LICENSES AND RIGHTS TO ACQUIRE FCC LICENSES
The Company has entered into various option agreements to acquire FCC licenses
for SMR channels ("Option Agreements"). These Option Agreements allow the
Company to purchase licenses, subject to FCC approval, within a specified
period of time after the agreement is signed. During the nine months ended
September 30, 1998, the Company had exercised Option Agreements for
approximately 760 channels for consideration of cash, notes payable and the
Company's common stock ("Common Stock") totaling approximately $7,163,678. In
relation to the exercise of the options for the licenses, the Company has also
incurred commission costs totaling approximately $1,564,000, which are included
in FCC licenses.
As of September 30, 1998, of the approximately 4,800 licenses under the
Company's control, approximately 3,750 licenses had transferred to the Company
and approximately 820 were in the process of being transferred to the Company,
pending FCC approval. The remaining approximately 230 licenses continue to be
maintained under Option and/or Management Agreements (defined below), for which
the Company has decided to delay exercise based on various economic and
operating considerations.
The Company amended several Option Agreements whereby the Company would make
quarterly installment payments toward the purchase of channels. With respect to
these agreements, the Company is in default thereof. Approximately $350,000 of
accrued installment payments has been recorded at September 30, 1998 in
"Licenses - options payable". If the holder requests remedy, in writing, the
Company has thirty days to remedy any deficiency by sending monies totaling all
outstanding installment payments due such holder. The Company addresses each
request on a case by case basis and determines, based on various factors,
whether to pay the outstanding installment payments, purchase the license in
full with a promissory note or cancel the Option Agreement. As of September 30,
1998, holders of such amended Option Agreements have not elected to terminate
the options or exercise other available remedies. If the Company elects to
cancel the Option Agreement all consideration paid is retained by the licensee
and expensed accordingly by the Company. If the Company were to exercise the
remaining outstanding Option Agreements for approximately 230 channels, as of
September 30, 1998, the obligations would total approximately $5.5 million.
Upon entering into Option Agreements, the Company also entered into management
agreements with the licensees ("Management Agreements"). The Management
Agreements give the Company the right to manage the SMR systems, subject to the
direction of the licensees, for a period of time prior to the transfer of the
licenses to the Company as stated in the agreements, usually 2 to 5 years.
During such period, revenues received by the Company are shared with the
licensee only after certain agreed-upon costs to construct the channels have
been recovered by the Company.
(3) REVENUES AND COSTS OF SALES
The Company had revenues from equipment sales of $409,553 and $731,370 for the
nine months ended September 30, 1998 and 1997, respectively. The cost of sales
associated with these revenues were $278,574 and $509,005 for the nine months
ended September 30, 1998 and 1997, respectively. The Company had revenues from
equipment sales of $173,543 and $151,534 for the three months ended September
30, 1998 and 1997, respectively. The cost of sales associated with these
revenues were $103,345 and $108,255 for the three months ended September 30,
1998 and 1997, respectively.
(4) PROPERTY AND EQUIPMENT
Property and equipment, which is recorded at cost and depreciated over its
estimated useful lives, generally 5-10 years, consists primarily of SMR system
components, which have an estimated useful life of 10 years. The recorded
amount of property and equipment capitalized and the related accumulated
depreciation is as follows:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
SMR systems and equipment $9,532,187 $5,768,117
SMR systems in process 967,200 --
Buildings and improvements 335,900 335,900
Land 102,500 102,500
Furniture and office equipment 285,925 249,164
Automobiles 18,766 --
Leasehold improvements 59,759 9,759
---------- ----------
11,302,237 6,465,440
Less accumulated depreciation (1,254,621) (656,272)
----------- ----------
$10,047,616 $5,809,168
=========== ==========
(5) LONG-TERM DEBT
In February 1997, the Company executed a Securities Placement Agreement to
place a minimum of $1,000,000 and maximum of $4,000,000 of the Company's three
year, 8% convertible Debentures. Principal and interest are convertible into
shares of the Company's common stock. In addition, the Securities Purchase
Agreement calls for the issuance of 75,000 warrants to purchase shares of the
Company's common stock at an exercise price of $2.50 per share for each
$1,000,000 of 8% convertible Debentures placed. The warrants are exercisable
for three years from date of grant. On February 19, 1997, the Company placed
$1,000,000 of the 8% Convertible Debentures and received $860,000, net of
$140,000 of placement fees. The Company granted 75,000 warrants in connection
with the placement. In addition, the Company granted 30,000 warrants at an
exercise price of $1.50 per share in connection with the placement. On February
24, 1997, the Company placed an additional $750,000 of the 8% Convertible
Debentures and received $670,000, net of $80,000 in placement fees. The Company
granted 56,250 warrants in connection with the placement. In addition, the
Company granted 22,500 warrants at an exercise price of $1.50 per share in
connection with the placement. Principal and accrued interest are convertible
at a conversion price for each share of common stock equal to the lesser of (a)
$1.37 or (b) a discount of 25% for principal and accrued interest held up to 90
days from the closing date, a discount of 27-1/2% for principal and accrued
interest held for 91 to 130 days from the closing date or a discount of 30-1/2%
for principal and accrued interest held for more than 131 days. The discount
will apply to the average closing bid price for the 5 trading days ending on
the date before the conversion date, as represented by the National Association
of Securities Dealers and Electronic Bulletin Board.
In a 1997 announcement, the staff of the Securities and Exchange Commission
("SEC") indicated that when convertible debentures are convertible at a
discount from the then current common stock market price, a "beneficial
conversion feature", should be recognized as a return to the 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. A beneficial conversion
feature of approximately $767,986 embedded in the convertible debentures issued
during February 1997 was not recorded in the Company's previously filed
September 30, 1997 Form 10-QSB. Because of the SEC announcement, the Company
has restated its Form 10-QSB for September 30, 1997 in its September 30, 1998
Form 10-QSB to reflect such announcement.
The debt discount of $767,986 associated with the issuance of convertible
debentures has been amortized to interest expense for the nine months ended
September 30, 1997. For the three months ended September 30, 1997 there was no
amortization of the debt discount. Interest expense for the nine months ended
September 30, 1997 has been restated from $293,660 to $1,061,646. There was no
effect on earnings per share for the nine months ended September 30, 1997.
Earnings per share for the three months ended September 30, 1997 has been
restated from a loss per common share of $0.12 to $0.08.
During the nine months ended September 30, 1998 the Company entered into notes
payable with license holders for approximately $6,200,000, net of a discount of
approximately $2,180,000; these notes represent the final payment to exercise
license options for approximately 760 licenses. As of September 30, 1998 the
Company had entered into notes payable totaling approximately $9,390,000, net
of a discount of approximately $3,150,000, calculated at an imputed interest
rate of 15%.
As of September 30, 1998 the total outstanding amounts of the MarCap Facility
and Motorola Loan Facility were $1,792,896 and $645,748, respectively. The
Company incurred debt issuance costs related to the drawdowns totaling
$144,852. These costs will be amortized over the lives of the loans.
As reported in the Company's Form 10-KSB and 10-KSB/A for the year ended
December 1997, the Company restructured a Convertible Debenture and the holder
accepted a new debenture. The holder of the new debenture has presented the
Company with a default and acceleration notice. However, the Company believes
such note holder does not have the right to cause acceleration pursuant to such
purported notice. The Company is currently in discussions with the holder with
respect to this matter.
(6) EQUITY TRANSACTIONS
A. PREFERRED STOCK CONVERSIONS
On December 23, 1997, the Company completed a private placement of Series B
Convertible Preferred Stock (the "Series B Preferred") through Settondown
Capital International ("Settondown"). The Series B Preferred provides for
liquidation preference of $10.00 per share and cumulative dividends at 8.0% per
annum from the date of issuance, payable quarterly in cash or Common Stock, at
the then-current market price, at the option of the Company.
Holders of the Series B Preferred are entitled to convert any portion of the
Series B Preferred into Common Stock beginning 45 days from the closing date
and up to two years at the average market price of the Common Stock for the
five (5) day trading period ending on the day prior to conversion. If the
difference between the average price and the current market price is greater
than 20%, the lookback is increased to 20 days. The Series B Preferred also
provides that holders are restricted from converting an amount of Series B
Preferred which would cause them to exceed 4.99% beneficial ownership of the
Common Stock. In the event that any securities remain outstanding on the second
anniversary of the closing date, all remaining securities must be converted on
such date. During the nine months ended September 30, 1998 the holders of the
Series B Preferred Stock converted 182,782 shares of Series B Preferred into
3,912,225 shares of Common Stock. Dividends on such shares of Series B
Preferred were $42,561, which was paid with 83,254 shares of Common Stock. In
addition, dividends of $22,306 have accrued on the Series B Preferred as of
September 30, 1998.
B. EQUITY INVESTMENT
On May 4, 1998, pursuant to an Investment Agreement ("Agreement"), dated May 1,
1998 between the Company and Recovery Equity Investors II L.P. ("Recovery"),
Recovery purchased, for $7,500,000 from the Company 8,854,662 shares of common
stock, 10,119,614 shares of mandatorily redeemable Series C preferred stock, an
eleven-year warrant to purchase up to 14,612,796 shares of common stock at an
exercise price of $.001, a three-year warrant to purchase up to 4,000,000
shares of common stock at an exercise price of $1.25, and a five and one-half
year warrant to purchase up to 10,119,614 shares of common stock at an exercise
price of $0.3953. The warrants contain certain provisions which restrict
conversion and/or provide adjustments to the conversion price and number of
shares. In conjunction with the Agreement, the Company commissioned an
appraisal which determined a fair value for each security issued pursuant to
the Agreement. Consistent with this determination, the Company has allocated
the proceeds of $7,500,000 to the securities based on relative fair values as
follows:
Common Stock $ 2,055,936
Series C Preferred Stock 685,312
Eleven year warrants 3,251,528
Three year warrants 38,698
Five and one-half year warrants 1,468,526
------------
TOTAL $ 7,500,000
============
(7) MANDATORILY REDEEMABLE PREFERRED STOCK
As discussed in Note 6B, on May 1, 1998, the Company issued 10,119,614 shares
of 4% cumulative Series C Preferred Stock, which is madatorily redeemable by
written notice to the Company on the earlier of (i) May 1, 2003 or the
occurrence of (ii) the listing of the Company's common stock on a National
Securities Exchange or an equity financing by the Company that results in gross
proceeds in excess of $2 million. The Series C Preferred Stock has a redemption
price equal to $.3953 and is entitled to cumulative annual dividends equal to
4% payable semi-annually. Dividends on the Series C preferred Stock shall
accrue from the issue date, without interest, whether or not dividends have
been declared. Unpaid dividends, whether or not declared, shall compound
annually at the dividend rate from the dividend payment date on which such
dividend was payable. As long as any shares of Series C Preferred Stock is
outstanding, no dividend or distribution, whether in cash, stock or other
property, shall be paid, declared and set apart for payment for any junior
securities.
The difference between the relative fair value of the Redeemable Preferred
Stock at the issue date and the mandatory redemption amount is being accreted
by charges to additional paid-in-capital, using the interest method. At the
redemption date, the carrying amount of such shares will equal the mandatory
redemption amount plus accumulated dividends unless the shares are exchanged
prior to the redemption date. Since the Company had no retained earnings such
amount is charged to additional paid-in capital.
For the nine months ended September 30, 1998 the Company has accrued dividends
and recorded accretion of amounts payable upon redemption of $26,742 and
$109,179 respectively.
(8) NON-CASH EVENTS
During the nine months ended September 30, 1998 the Company had the following
non-cash investing and financing activities. The issuance of 108,500 shares of
Common Stock to employees. The issuance of $6,220,589 of notes payable, net of
discount, to exercise options to purchase FCC licenses. Conversion of 182,782
shares of Series B convertible preferred stock into 3,912,225 shares of common
stock. Issuance of 83,254 shares of common stock for Series B preferred stock
dividends. Issuance of 11,400 shares of common stock for $32,890 of common
stock previously subscribed. Issuance of 800,000 shares of common stock with a
value of $352,000, for exercise of license option. Reclassification of minority
interest of approximately $14,915 into property and equipment. Issuance of
31,000 shares of common stock with a value of $15,190 to a license holder.
Issuance of 290,765 shares of common stock for prepaid professional services
with a value of $160,925. Issuance of 335,000 shares of common stock with a
value of $189,050 and licenses with a cost of $100,000 for fixed assets.
During the nine months ended September 30, 1997 the Company had the following
non-cash investing and financing activities. The conversion of $1,150,000 of
convertible debt to equity. Issuance of 231,744 shares of common stock for
$255,945 of common stock subscribed. Exercise of 323,857 options to purchase
common stock which had $161,929 of prepaid exercise price. Reclassification
$108,027 of deposits to property and equipment.
During the nine months ended September 30, 1998 and 1997, and inception to
date, the Company paid no cash for taxes. During the nine months ended
September 30, 1998 and 1997, and inception to date, the Company paid $168,113,
$107,339, and $600,670, respectively for interest.
(9) RELATED PARTY TRANSACTIONS
The Company paid $633,642 to Private Equity Partners ("PEP"), for professional
services associated with equity and debt financings, for the nine months ended
September 30, 1998. The managing partner of PEP is a director of the Company.
On May 1, 1998, the Company and Recovery entered into a Shareholders Agreement
which stipulated that the Company and each of the Shareholders shall take all
action necessary to cause the Board to consist of two Directors to be
designated by the Recovery Shareholders, two Directors designated by the Chief
Executive Officer of the Company, and two independent Directors.
On May 1, 1998, the Company and Recovery entered into an Advisory Agreement
commencing on May 1, 1998 and ending on the fifth anniversary. The Advisory
Agreement stipulates the Consultant shall devote such time and effort to the
performance of providing consulting and management advisory services for the
Company as deemed necessary by Recovery. In consideration of the consultants
provision of the services to the Company, the Company shall pay the consultant
an annual fee of $312,500 beginning on the first anniversary which shall be
paid in advance, in equal monthly installments, reduced by the Series C
preferred stock dividends paid in the preceding twelve months.
(10) COMMITMENTS AND CONTINGENCIES
A. LICENSE OPTION AND MANAGEMENT AGREEMENT CONTINGENCIES
Goodman/Chan Waiver. Nationwide Digital Data Corp. and Metropolitan
Communications Corp. among others (collectively, "NDD/Metropolitan"), traded in
the selling of SMR application preparation and filing services to the general
public. Most of the purchasers in these activities had little or no experience
in the wireless communications industry. Based on evidence that
NDD/Metropolitan had been unable to fulfill their construction and operation
obligations to over 4,000 applicants who had received FCC licenses through
NDD/Metropolitan, the Federal Trade Commission ("FTC") filed suit against
NDD/Metropolitan in January, 1993, in the Federal District Court for the
Southern District of New York ("District Court").
The District Court appointed Daniel R. Goodman (the "Receiver") to preserve the
assets of NDD/Metropolitan. In the course of the Receiver's duties, he together
with a licensee, Dr. Robert Chan, who had received several FCC licenses through
NDD/Metropolitan's services, filed a request to extend the construction period
for each of 4,000 SMR stations. At that time, licensees of most of the stations
included in the waiver request ("Receivership Stations") were subject to an
eight-month construction period. On May 24, 1995, the FCC granted the request
for extension. The FCC reasoned that the Receivership Stations were subject to
regulation as commercial mobile radio services stations, but had not been
granted the extended construction period to be awarded to all CMRS licensees.
Thus, in an effort to be consistent in its treatment of similarly situated
licensees, the FCC granted an additional four months in which to construct and
place the Receivership Stations in operation (the "Goodman/Chan Waiver"). The
Goodman/Chan Waiver became effective upon publication in the Federal Register
on August 27, 1998.
The FCC has never released a list of stations it considers to be Receivership
Stations, despite repeated requests by the Company. On November 16, 1998, by a
Public Notice the Commission announced that it would release a list of
receivership stations to the public in ten days; provided that no objection to
the release is posed on behalf of receivership licenses by the Receiver. As of
the date of this report, the FCC had not yet released the list as the ten day
period for publication and for potential appeals by the Receiver had not yet
expired. However, on the basis of a previous request to the Receiver and a
seperate request for assistance to the FCC's licensing division by the Company,
the FCC and the Receiver examined and marked a list provided by the Company.
The FCC's and the Receiver's markup indicated those stations held by the
Company or subject to Management and Option Agreements, which the FCC and/or
the Receiver considered to be, at that time, Receivership Stations and/or
stations considered "similarly situated" and thus elgible for releif. From that
unofficial communication from the Receiver 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 is now proceeding with timely construction of
those stations which the Company feels reasonably certain are Receivership
Stations. From the official communication from the FCC, the Company believes
that approximately 650 licenses are considered "similarly situated".
Initial review of the Commissions's Goodman/Chan Order indicated a potentially
favorable outcome for the Company as it pointed to a grant of relief for a
significant number of the Company's owned and/or managed licenses which were
subject to the outcome of the Goodman/Chan decision. At present, Management
believes that a substantial number of these licenses will be afforded relief
pursuant to the Order. However, on October 9, 1998 a release from the Offices
of the Commercial Service Division of the FCC's
Wireless Telecommunication Bureau announced that because of a technicality
relating to the actual filing dates of the construction deadline waiver
requests by certain of the subject licensees, some licenses which the FCC staff
earlier had stated would be eligible for construction extension waivers due to
the similarity of circumstances between those licensees and the Goodman/Chan
licensees, would not actually be granted final construction waivers. The
Commission has subsequently begun a process of deleting certain of the
Company's licenses from this category from its official licensing database.
Prior to the release of the October 9, 1998, Public Notice, the Company
contructed and placed into operation certain licenses from this category based
on information received from the FCC and the Receiver. The Company is in the
process of determining which licenses have in fact been deleted; however, due
to the disparity between the FCC's lists and its subsequent treatment of such
lists, the Company is uncertain as to which, if any, will remain deleted under
the FCC's current procedures.
In response, on November 9, 1998, Chadmoore filed a Petition for
Reconsideration at the FCC seeking reversal of the action announced in the
Commercial Wireless Division's Public Notice, and the Company has asked that
relief be reinstated for its affected licenses. Additionally, on October 28,
1998, the Company filed motions with the United States Court of Appeals for the
District of Columbia Circuit as well as the United States Federal District
Court of the District of Columbia seeking a stay of Commission action on the
subject licenses and the release of an accurate and complete list of stations
until reconsideration proceedings at the FCC, and if ultimately necessary,
appeal proceedings through the federal courts may be completed. Other similarly
situated licensees also have filed petitions for relief. No specific timetable
is available in order to assist the Company's management to predict with any
reasonable degree of accuracy when final action on these proceedings will be
forthcoming. The Company does not believe it to be probable that they will not
be provided relief on all of the licenses potentially subject to the Goodman
Chan Proceedings. However there can be no assurance that relief will be
granted.
Approximately 650 of those licenses purchased by or under management contracts
with the Company are among those which the FCC now states will not be afforded
relief pursuant to the Commercial Division's October 9, 1998 Public Notice.
Thus, it is possible that the Company's owned and/or managed licenses which are
encompassed within the denial of relief pursuant to the October 9, 1998 Public
Notice, could be permanently canceled by the FCC for failure to comply with its
construction requirements. If these licenses are in fact cancelled by the FCC,
it would result in the loss of licenses with a book value of approximately
$6,200,000 and the loss of certain subscribers to the Company's services, which
while not considered probable, could result in a material adverse effect on the
Company's financial condition, results of operations and liquidity and could
result in possible fines and/or forfeitures levied by the FCC. The Company has
prepared these estimates based on the best information available at the time of
this filing. Once again, there has been no list published by the FCC, in this
matter, which the Company feels it may rely upon. Therefore, the Company has
commenced the above described litigation to clarify this matter. Based on the
preceding, no provision has been made in the accompanying unaudited
consolidated financial statements for the ultimate outcome of the Goodman/Chan
proceeding.
B. LEGAL PROCEEDINGS
Airnet, Inc. v. Chadmoore Wireless Group, Inc. Case No. 768473, Orange County
Superior Court On April 3, 1997, Airnet, Inc. ("Airnet") served a summons and
complaint on the Company, alleging claims related to a proposed merger between
Airnet and the Company that never materialized. In particular, Airnet has
alleged that a certain "letter of intent" obligated the parties to complete the
proposed merger. The Company denies this allegation. In its complaint, Airnet
has alleged the following purported causes of action against the Company:
breach of contract, breach of the implied covenant of good faith and fair
dealing, intentional interference with prospective economic advantage,
intentional interference with contractual relationship, including breach of
contract, false promise and conversion. Airnet has also purported to seek the
following relief from the Company: $28,000,000 in compensatory damages plus
interest, punitive damages, costs of suit and attorney's fees. The Company
challenged the sufficiency of the complaint as to most of the purported causes
of action on the grounds that these purported causes of action fail to state
facts sufficient to constitute a cause of action. The Company also challenged
the sufficiency of the punitive damages allegations on the grounds that the
compliant fails to state facts sufficient to support these allegations. Rather
than oppose these challenges to its complaint, Airnet elected to file a first
amended complaint. Believing that Airnet's amendments were immaterial the
Company renewed its challenges to Airnet's pleading. On September 9, 1997, the
court sustained the Company's demurrers to Airnet's claims for damages based on
the Company's alleged failure to complete the merger and to Airnet's claims for
conversion. At Airnet's request, the court allowed Airnet to amend its pleading
a second time to attempt to state these claims, and Airnet's new complaint
asserts claims for breach of contract, anticipatory breach of contract,
intentional interference with prospective economic advantage, interference with
contractual relationship, inducing breach of contract and false promise. The
Company again filed demurrers challenging certain of the claims in Airnet's
pleading. On January 16, 1998, the Court overruled the Company's demurrers to
the Second Amended Complaint.
On February 2, 1998, the Company answered the Second Amended Complaint with a
general denial and by asserting the following affirmative defenses: failure to
state a claim, uncertainty, statutes of limitations, laches, lack of capacity,
lack of standing, waiver, estoppel, knowledge and acquiescence, unclean hands,
unjust enrichment, fraud, misrepresentations, res judicata, justification,
privilege, no action intended or reasonably calculated to cause injury, lack of
causation, acts of third parties, failure to allege a contract, no meeting of
the minds, statute of frauds, lack of privity, fraud in the inducement,
mistake, lack of consideration, failure of consideration, failure of conditions
precedent, concurrent, subsequent, Airnet's intentional misrepresentation,
Airnet's negligent misrepresentations, performance excused by Airnet's failure
to perform, performance excused by recision, performance excused by
modification, antecedent breaches by Airnet, accord and satisfaction,
privileged communications, justified communications, no damages, failure to
mitigate and offset.
On February 2, 1998, the Company filed a Cross-Complaint against Airnet as well
as three other named cross-defendants related to Airnet: Uninet, Inc.,
("Uninet") Anthony Schatzlein ("Schatzlein") and Dennis Houston ("Houston").
The Company's Cross-Complaint alleges various causes of action including fraud,
breach of oral contract, fraud and defamation which arise out of the proposed
merger and the events surrounding it. On March 2, 1998, cross-defendants
Airnet, Uninet, Schatzlein and Houston answered the Cross-Complaint with a
general denial and a single affirmative defense -- that the Cross-Complaint
does not state facts sufficient to constitute a cause of action.
The Company intends to vigorously defend the Second Amended Complaint and to
pursue the claims set forth in the Cross-Complaint. Although the Company
intends to defend the action vigorously, it is still in its early stages and no
substantial discovery has been conducted in this matter. Accordingly, at this
time, the Company is unable to predict the outcome of this matter. A
non-binding mediation was conducted before a retired judge of the superior
court on August 21, 1998. Although a confidential settlement in principal of
all of the claims in the lawsuit was reached it has not been finalized.
Chadmoore Communications, Inc. v. John Peacock Case No. CV-S-97-00587-HDM
(RLH), United States District Court for the District of Nevada
In September 1994, CCI entered into a two year consulting agreement (the
"Consulting Agreement") with John Peacock ("Peacock") to act as a consultant
and technical advisor to CCI concerning certain specialized mobile radio
("SMR") stations. In May, 1997 CCI filed a complaint against Peacock for
declaratory relief in the United States District Court for the District of
Nevada, seeking a declaration of the respective rights and obligations of CCI
under the Consulting Agreement. CCI is seeking this judicial declaration based
upon Peacock's contention that he is entitled to certain bonus compensation
under the Consulting Agreement. Peacock contends that this bonus compensation
is due regardless of whether an SMR license is granted based upon his
activities as a consultant. CCI contends that the Consultant Agreement is clear
that such bonus compensation is only awarded upon the "grant" of an SMR
license. Peacock contends that he is entitled to bonus compensation of four
hundred five thousand ($405,000). In lieu of answering the complaint, Peacock
filed a motion seeking dismissal of the action based on the assertion that he
is not subject to jurisdiction in Nevada courts. After briefing, that motion
was denied by the Court, and the parties are now proceeding with discovery.
On September 26, 1997, Peacock answered the Complaint and asserted the
following affirmative defenses: failure to state a claim, failure to perform,
intentional concealment or failure to disclose material facts, estoppel,
unclean hands, lack of subject matter, claims not authorized by declaratory
relief statutes, improper venue, forum non conveniens, rescission and
reformation, and choice of law.
On or about January 28, 1998, Peacock filed a motion to add a counterclaim to
this litigation. The counterclaim purported to allege causes of action based on
breach of the Consultant Agreement, fraud and breach of fiduciary duty. CCI
objected to Peacock's improper attempt to add tort claims to this litigation
and Peacock agreed to withdrawn them, amend its proposed counterclaim by
stipulating, and assert only a breach of contract claim based on the Consulting
Agreement. The Amended Counterclaim was deemed filed with the Court, on March
15, 1998. On May 11, 1998 Chadmoore cited its Reply to Peacock's Counsels
claim, denying liability and asserting Thirty-eight affirmative defenses,
including defenses based on Peacock's alleged fraud and failure to perform. For
then with its Reply, Chadmoore filed a counterclaim against Peacock and two
entities related to Peacock - Peacock's Radio and Wild's Computer Services,
Inc. and Peacock's Radio, a Partnership. Chadmoore's counterclaim asserts
claims for Fraud, Breech of Fiduciary Duty, and Breech of Contract. Chadmoore's
counterclaim seeks general and punitive damages. On October 20, 1998, the court
ordered the parties to appear before a magistrate for a settlement conference,
which is currently scheduled for December 1, 1998.
If the case is not settled, 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.
(11) MANAGEMENT PLANS
The accompanying unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered recurring losses from operations, has a negative working capital of
$13,058,565 , and has a $38,469,433 deficit accumulated during the development
stage that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are described below. The
unaudited consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
The Company believes that over the next 12 months, depending on the rate of
market roll-out during such period, it will require approximately $14 million
to $16 million in additional funding for full-scale implementation of its SMR
services and ongoing operating expenses. To meet such funding requirements, the
Company anticipates continued utilization of its existing borrowing facility
with Motorola, Inc. ("Motorola"), a vendor financing arrangement with HSI
GeoTrans, Inc. ("GeoTrans"), sales of selected SMR channels deemed
non-strategic to its business plan, and additional debt funding as needed.
During the third quarter of 1998, the Company pursued discussions with several
institutional debt funding sources and has since reached the letter of intent
stage, but has yet to enter into any commitments for additional debt financing
as of the date of this filing. There can be no assurances that the Company will
be able to successfully obtain additional debt funding or will be otherwise
able to obtain sufficient financing to consummate the Company's business plan.
Based on the foregoing, the Company believes that it should have adequate
resources to continue establishing its SMR business and emerge from the
development stage during 1999. However, while the Company believes that it has
developed adequate contingency plans, the failure to obtain additional debt
financing could have a material adverse effect on the Company, including the
risk of bankruptcy. Such contingency plans include pursuing similar financing
arrangements with other institutional investors and lenders that have expressed
interest in providing capital to the Company, selling selected channels, and
focusing solely on the 82 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
The following is a discussion of the consolidated financial condition and
results of operations of Chadmoore Wireless Group, Inc., together with its
subsidiaries (collectively "Chadmoore" or the "Company"), for the three months
ended and nine months ended September 30, 1998, and 1997.
Statements contained herein that are not historical facts are forward-looking
statements as that term is defined by the Private Securities Litigation Reform
Act of 1995. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, the forward-looking statements
are subject to risks and uncertainties that could cause actual results to
differ from those projected. The Company cautions investors that any
forward-looking statements made by the Company are not guarantees of future
performance and that actual results may differ materially from those in the
forward-looking statements. Such risks and uncertainties include, without
limitation, fluctuations in demand, loss of subscribers, the quality and price
of similar or comparable wireless communications services, well-established
competitors who have substantially greater financial resources and longer
operating histories, regulatory delays or denials, ability to complete intended
market roll-out, access to sources of capital, adverse results in pending or
threatened litigation, consequences of actions by the FCC, risks associated
with the year 2000 issues and general economics. See the Company's Form 10-KSB
and 10-KSB/A for the year ended December 1997.
During the nine months ended September 30, 1998, 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 30% of 1998 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.
(1) PLAN OF OPERATION
A. INTRODUCTION
The Company is the second-largest holder of frequencies in the United States in
the 800 megahertz ("MHz") band for commercial specialized mobile radio ("SMR")
service. With control of approximately 4,800 channels in the 800 MHz band
through ownership of the licenses or through generally irrevocable options to
acquire licenses (see Licenses and Rights to Licenses), the Company's
frequencies, cover approximately 55 million people in 180 markets throughout
the United States, with focus on secondary and tertiary cities ("Operating
Territory").
B. PRINCIPAL SERVICE AND MARKETS
Also known as dispatch, one-to-many, or push-to-talk, Chadmoore's commercial
SMR service enables reliable, cost-effective, real-time communications for
smaller and medium-sized enterprises ("SMEs") that rely on mobile workforces.
For a flat fee of approximately $15.00 per subscriber unit per month, customers
enjoy unlimited air-time for communicating instantaneously with their teams.
Dispatch is a two-way wireless communication service primarily for business
users who have a need to communicate between a central dispatch point and a
mobile workforce. Users can choose to communicate with a group, selected
sub-groups or individuals. The customer base for dispatch service is typically
stable, diverse, and cost-conscious, including general and specialty
contractors, HVAC service providers, security services, courier and other
delivery services, distribution and transportation firms, real estate and
insurance agents, farmers, and other SMEs that have significant field
operations and need to provide their personnel with the ability to communicate
directly in real-time on a one-to-one or one-to-many basis. Consequently, the
Company believes that SMR represents an attractive and affordable communication
solution for smaller and middle market businesses, especially in the secondary
and tertiary cities on which Chadmoore is focusing.
The Company's primary objectives are to continue developing, operating, and
aggressively loading SMR systems within its Operating Territory and to do so in
a manner that effectively deploys capital, maximizes recurring revenues per
dollar of invested capital, and generates positive cash flow at the system
level as quickly as possible. In assessing these objectives and its spectrum
position, the Company adopted its strategy to focus on the traditional analog
SMR business.
Several key factors are believed by the Company to support this strategy,
including (i) an established market base of approximately 20 million users in
the U.S. estimated to already rely on analog SMR service for dispatch
applications, (ii) capacity constraints creating pent-up demand, (iii) before
the FCC's licensing freeze, demand for SMR that had expanded consistently at a
rate of approximately 15% to 18% per year for the prior 10 years, (iv) basic
businesses of the nature served by SMR have endured for decades, and are
expected to continue to indefinitely into the future, particularly in the
secondary and tertiary cities focused on by Chadmoore, (v) favorable economic
and demographic conditions have stimulated significant business formation, with
SMR positioned as a cost-effective entry-level productivity tool for SMEs, (vi)
outsourcing to commercial SMR providers is becoming economical for users on
private systems, (vii) analog SMR technology is proven, dependable, and widely
available, (viii) analog dispatch service provides unlimited one-to-many
communications for a known, flat fee of approximately $15 per user per month,
(ix) excellent system economics are attainable as analog SMR service is simple
and cost-effective to deploy, (x) such system economics enable the Company to
add capacity incrementally as demand dictates, resulting in a relatively low
cost of infrastructure, (xi) additional services such as sub-fleet billing,
interconnect (telephony), automatic vehicle location, mobile data, voice mail,
short messaging (paging), and telemetry can be offered using the same
infrastructure, thereby generating operating leverage, (xii) an experienced,
trained, and motivated distribution network was already in place primarily in
the form of Motorola Sales and Service ("MSS") shops, and (xiii) nothing
precludes the Company from migrating to digital or other technology as future
capacity requirements dictate on a market by market basis.
Prior to adopting its analog technology platform, the Company had considered
but decided against implementing a digital infrastructure ("digital SMR"). This
decision was based, in part, on the Company's evaluation of the following
factors: (i) competitors converting to digital SMR were expected by the Company
to create further segmentation and awareness in the marketplace, (ii)
full-scale digital conversion strategies generally require turning off existing
SMR systems in order to utilize frequencies within a digital architecture,
creating a pool of established users which the Company believes to be
potentially available to other providers, (iii) the capital costs per
subscriber associated with such digital technology are substantially higher
than those for analog systems, (iv) the Company believes that the increasingly
competitive nature of the wireless communications industry increases the risks
associated with the higher capital costs of such digital technology, (v) a four
to five times lower pricing advantage for analog versus digital service can be
marketed to the cost-conscious end-user, (vi) other than digital encryption,
the Company believes that essentially the same feature set can be offered to
the customer using analog technology, (vii) the Company believes that it can
add infrastructure on an as-needed, just-in-time basis and for significantly
less capital cost, and (viii) nothing precludes the Company from migrating to a
digital SMR platform as future capacity requirements dictate on a market by
market basis, although such a migration would require additional expenditures.
Because virtually all of the channels acquired by the Company were initially
unused, with few or no existing customers on such frequencies, Chadmoore did
not need to adopt a digital infrastructure in order to create room for growth.
Rather, with ample available frequencies at its disposal, the Company could
continue to offer traditional SMR users the low-cost, fixed-rate communications
solution to which they are accustomed.
As of September 30, 1998, the Company had constructed, and based on detailed As
of September 30, 1998, the Company had constructed, and based on detailed
criteria relating to engineering, demographics, competition, market conditions,
and dealer characteristics, had developed a prioritized roll-out plan for a
total of 180 markets in the United States covering approximately 55 million
people. This population number, based on 1996 U.S. Census Bureau estimates for
Metropolitan Statistical Area figures, represents the number of people residing
in the Operating Territory and is not intended to be indicative of the number
of users or potential penetration rates as the Company establishes operating
SMR systems. Of these 180 markets, the Company has implemented full-scale
systems and distribution, servicing approximately 23,000 subscribers (an
increase in excess of 177% since December 31, 1997) in the following 82 markets
as of November 13, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Abilene TX Grand Rapids MI Murrells Inlet SC
Ashville NC Greenville NC Myrtle Beach SC
Atlantic City NJ Greenville SC Naples FL
Augusta GA Gulfport MS Nashville TN
Austin TX Harrisburg PA Norfolk/Chesapeake VA
Bangor ME Hilton Head SC Omaha NE
Baraboo WI Huntsville AL Pine Bluff AR
Baton Rouge/Port Allen LA Jackson MS Portland ME
Bay City MI Jackson TN Quincy IL
Beaumont TX Jacksonville FL Richmond VA
Biloxi MS Jacksonville NC Roanoke VA
Binghamton NY Kankakee/Bradley IL Roanoke Rapids NC
Birmingham AL Lafayette IN Rochester MN
Bowling Green KY Lafayette LA Rockford IL
Brentwood TN Lake Charles LA Saint Cloud MN
Champaign IL Lexington KY Savannah GA
Charleston SC Lincoln NE Silverhill AL
Charlotte NC Little Rock AR South Bend IN
Charlotteville VA Louisville KY Springfield IL
Chattanooga TN Macon GA St. Paul MN
Columbia SC Madison WI Syracuse NY
Corpus Christi TX Mankato MN Tallahassee FL
Decatur IL Maui HI Tucson AZ
Eugene OR Memphis TN Tyler TX
Fayetteville AR Milwaukee WI Victoria TX
Florence SC Mobile AL Waco TX
Fort Myers FL Montgomery AL Wilmington NC
Fort Wayne IN
</TABLE>
Chadmoore generates revenue primarily from billing for dispatch services on a
per unit (radio) basis. In selected markets, additional revenue is generated
from telephone interconnect service based on air-time charges as used, and in
the case of the Memphis and Little Rock markets (in which direct rather than
indirect distribution is used), from the sale of radio equipment, installation,
and equipment service as well.
As initial capacity in a market is approached, the Company can integrate
additional channels under its control into the main system using the same basic
controller (system computer), which reduces the average capital cost per
channel. The Company believes that such system economics enable the Company to
add capacity incrementally as demand dictates and maximize recurring revenues
per dollar of capital invested. At the same time, capacity increases
geometrically as channels are added due to the greater statistical probability
of a channel being available for any user at any given time. In the Company's
belief, these two factors generate strong operating leverage as the system
expands.
In general, the Company prioritizes its markets based on five key parameters:
(i) the quality of the potential dealer, (ii) the lack of available capacity
from other SMR providers in the market, (iii) business and population
demographics, (iv) channel density, availability of tower space, topography,
and similar engineering considerations, and (v) the overall business case
including anticipated pricing, demand, infrastructure and operating costs,
return on investment, and potential for value-added services.
C. DISTRIBUTION
Once commercial service has been implemented in a market, Chadmoore's
executional focus turns to acquiring new users. In general, the Company
utilizes an indirect distribution network of well-established local dealers,
most of which are MSS shops, to penetrate its markets. The Company believes
that this distribution channel enables it to capitalize on substantial existing
infrastructure, reduce capital requirements, reduce fixed operating costs,
outsource lower-margin equipment sales and service, enhance flexibility, and
speed roll-out, while also bringing the Company immediate market knowledge and
presence, significant industry experience, and an established base of customers
and prospects to sell into. Chadmoore selects its dealers on the basis of
loading history, infrastructure for supporting customers, motivation level, and
references from vendors and customers. In markets in which the Company
operates, but where a suitable dealer or independent agent is not available,
the Company intends to establish its own marketing presence or offer such
markets as expansion opportunities for top dealers serving the Company in other
cities, in each case to the extent the Company finds practical. In addition,
the Company's management team recognizes that additional staff will be required
to properly support marketing, sales, engineering, accounting, and similar
disciplines to achieve its marketing objectives.
Through corporate and field management, Chadmoore supports its dealers with a
range of selling tools and incentives. The Company has engaged Moscato Marsh &
Partners, Inc. of New York ("Moscato") for advertising, marketing, and
promotional services as well as administering the local market launch in the
remaining 98 markets. Several elements of Chadmoore's customer acquisition
strategy are incorporated into Moscato's program, including further development
of its "Power To Talk" (PTT) service mark, creation and distribution of local
dealer support kits, design and planning of local market promotional, media,
and public relations programs in all of the Company's 180 markets, production
of collateral materials and national advertisements in trade publications, and
development of a full-time field marketing administrative program on a local
market basis.
During 1997 for selected dealers in priority markets, the Company implemented a
dealer partner program in order to finance system construction ahead of plan.
In this program, dealers made substantial direct contributions that financed
100% of the initial system build-out. Depending on the market, the dealer
generally recoups 60% to 80% of such investment from system earnings after
operating expenses, and retains a 20% to 40% interest in the system thereafter.
Of key significance, the dealer is repaid only if the system is profitable. The
result: a long-term partnering relationship that motivates the Company to
support the dealers, and that the Company believes motivates dealers to load
systems rapidly, provide excellent service and customer retention, and market
value-added services to the installed base. Company management believes that
such emphasis has, in part, been responsible for a Chadmoore churn rate (the
rate at which customers disconnect service) well below industry average.
To keep the motivational aspects of the dealer partner program but reduce the
effective capital cost to the Company, in selected markets for which full-scale
roll-out has yet to occur the Company has implemented a modified dealer partner
arrangement in which the dealer contributes approximately 25% to 60% (depending
on market size) towards initial market roll-out costs in return for a 10%
interest in the local system. This investment is a capital contribution, and
not recouped from system earnings. Based on the speed and extent of loading
subscribers onto the system, the dealer partner also has incentive
opportunities to earn up to an additional 10% interest in the system.
D. COMPETITIVE BUSINESS CONDITIONS AND COMPANY'S INDUSTRY POSITION
In management's evaluation, key factors relevant to competition in the wireless
communication industry are pricing of service, size of the coverage area,
quality of communication, reliability and availability of service (i.e. waiting
time for a "clear" channel, absence of busy signals, and absence of
transmission disconnects or failures). The Company's success depends in large
measure on its ability to compete with numerous wireless service providers in
each of its markets, including cellular operators, PCS service providers,
digital SMR service providers, paging services, and other analog SMR operators.
The wireless communications industry is highly competitive and comprised of
many companies, most of which have substantially greater financial, marketing,
and other resources than the Company. While the Company believes that it has
developed a differentiated and effective business plan, there can be no
assurances that it will be able to compete successfully in its industry.
Since the late 1980s, Nextel Communications Inc. ("Nextel") in particular has
acquired a large number of SMR systems and is in the process of a conversion
from analog SMR technology to Motorola's digital integrated Dispatch Enhanced
Network ("iDEN") system. Other cellular operators and PCS providers are
implementing digital transmission protocols on their systems as well. Chadmoore
believes that Nextel is focusing on higher-end, cellular-like telephony users,
thereby creating a market segmentation opportunity for the Company. As a
result, the Company competes with Nextel primarily on the basis of targeted
end-user and price.
Another potential wireless competitor for Chadmoore is Southern Company.
Southern Company is implementing a digital architecture and pursuing a
Nextel-like strategy on a regional or primary market basis. Southern Company is
a large utility focusing on wide-area communications for its own vehicle fleet
in the Southeastern U.S., while selling excess capacity to other businesses
traveling the same geographic region. Chadmoore intends to compete with
Southern Company primarily based on targeted end-user, price and to a certain
extent, geographic differentiation.
Most other analog SMR providers consist of local small businesses, often passed
from generation to generation, that Chadmoore believes lack the spectrum,
professional marketing, management expertise, and resources brought to the
marketplace by the Company. In Management's opinion, available capacity and
operating capabilities of existing SMR providers constitute key factors in
Chadmoore's market prioritization matrix. The Company intends to compete with
existing analog SMR providers primarily on the basis of customer service,
available spectrum, capacity to meet customer growth, and professional
marketing and dealer support.
E. LICENSES AND RIGHTS TO LICENSES
Within its 180 target markets, Chadmoore controls approximately 4,800 channels
in the 800 MHz band through ownership of licenses or through generally
irrevocable five and ten-year options to acquire licenses ("Option
Agreements"), subject to FCC rules, regulations, and policies, coupled with
management agreements ("Management Agreements") that remain in effect until
such Option Agreements have been exercised or expire. The Management Agreements
give the Company the right to manage the SMR systems, subject to the direction
of the licensees, for a period of time prior to the transfer of the licenses to
the Company as stated in the agreements, usually 2 to 5 years. During such
period, revenues received by the Company are shared with the licensee only
after certain agreed-upon costs to construct the channels have been recovered
by the Company. These like-term Management Agreements with the license holders
are intended to enable the Company to develop, maintain, and operate the
corresponding SMR channels subject to the licensee's direction. Any acquisition
of an SMR license by the Company pursuant to exercise of an Option Agreement is
subject, among other things, to approval of the acquisition by the FCC. Until
an Option Agreement is exercised and the corresponding license is transferred
to Chadmoore, the Company acts under the direction and ultimate control of the
license holder and in accordance with FCC rules and regulations.
Once an SMR station is operating, the Company may exercise its Option Agreement
to acquire the license at any time prior to the expiration of the Option
Agreement. As of September 30, 1998, the Company had exercised Option
Agreements on approximately 4,570 channels, of which approximately 3,750 had
transferred to the Company and approximately 820 were in the process of being
transferred to the Company, pending FCC approval. The remaining approximate 340
channels continue to be utilized under Option and Management Agreements, for
which the Company has decided to delay exercise based on economic
considerations.
The Company presently intends to exercise all such remaining Option Agreements,
but such exercise is subject to certain considerations. The Company may elect
not to exercise an Option Agreement for various business reasons, including the
Company's inability to acquire other licenses in a given market, making it
economically unfeasible for the Company to offer an SMR system in such market.
If the Company does not exercise an Option Agreement, its grantor may retain
the consideration previously paid by the Company. Moreover, if the Company
defaults in its obligations under an Option Agreement, the grantor may retain
the consideration previously paid by the Company as liquidated damages.
Further, if the SMR system is devalued by the Company's direct action, the
Company is also liable under the Option Agreement for the full Option Agreement
price, provided the grantor gives timely notice. The Option Agreements also
authorize a court to order specific performance in favor of the Company if a
grantor fails to transfer the license in accordance with the Option Agreement.
However, there can be no assurance that a court would order specific
performance, since this remedy is subject to various equitable considerations.
To the extent that Option and Management Agreements remain in place, no
assurance can be given that they will continue to be accepted by the FCC or
will continue in force.
(2) RESULTS OF OPERATION
A. NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE MONTHS ENDED SEPTEMBER 30,
1997
Total revenues for the nine months ended September 30, 1998 increased 42.5% to
$2,140,614 from $1,502,425 for the nine months ended September 30, 1997,
reflecting increases of $1,013,895, or 206.6%, in Radio Services (recurring
revenues from air-time subscription by customers), offset in part by declines
of $321,817, or 44.0%, in Equipment Sales and $49,836, or 18.0%, in Maintenance
and Installation services. Consistent with the Company's plan of operation to
focus on recurring revenues by selling its commercial SMR service through
independent local dealers, the proportion of total revenues generated by Radio
Services increased to 70.3% for the nine months ended September 30, 1998 from
32.7% for the nine months ended September 30, 1997. In the majority of its
markets the Company sells through independent dealers, the local dealer rather
than the Company sells, installs, and services the radio equipment and records
the revenues and costs associated therewith and the Company receives only the
recurring revenue associated with the sale of airtime. The Company anticipates
that the proportion of total revenues from recurring revenues will continue to
increase in future periods as additional markets are rolled out utilizing
indirect distribution through such local dealers.
The 206.6% increase in Radio Services revenues, to $1,504,684 for the nine
months ended September 30, 1998 from $490,789 for the nine months ended
September 30, 1997, was driven by an increase in the number of subscribers
utilizing the Company's SMR systems. During the nine months ended September 30,
1998, the number of subscriber units increased 12,116, or 146.0%, to 20,413
from 8,297. The increase in subscribers, was attributed to full-scale
implementation of service by the Company in 55 new markets during the period
and continued subscriber growth in existing markets. Pricing per subscriber
unit in service remained comparable over the periods.
The 44.0% decrease in revenues from Equipment Sales, to $409,553 for the nine
months ended September 30, 1998 from $731,370 for the nine months ended
September 30, 1997, and the 18.0% decrease in revenues from Maintenance and
Installation services, to $226,377 for the nine months ended September 30, 1998
from $276,213 for the nine months ended September 30, 1997, was attributed to
the Company's continued focus on Radio Service revenue as well as insufficient
working capital during the first quarter of 1998.
The Company anticipates that Equipment Sales and Maintenance and Installation
service will continue to account for a declining share of total revenues in the
future, because since acquiring full-service operations in its first two
markets, the Company has utilized and intends to continue utilizing indirect
distribution through local dealers in substantially all markets. As noted
previously, in such cases, the local dealer rather than the Company sells,
installs, and services the radio equipment and records the revenues and costs
associated therewith.
Cost of sales decreased by $76,112, or 9.7%, to $704,938 for the nine months
ended September 30, 1998 from $781,050 for the nine months ended September 30,
1997. This decrease was due to lower Equipment and Maintenance and Installation
revenues, which have higher cost of sales associated with them, compared to
Radio Services revenues. As a result, the gross margin (total revenue less cost
of sales, as a percentage of total revenue) increased by 19.1 percentage
points, to 67.1% for the nine months ended September 30, 1998 from 48.0% for
the nine months ended September 30, 1997.
Salaries, wages, and benefits expense increased by $224,150, or 12.0%, to
$2,092,797 for the nine months ended September 30, 1998 from $1,868,647 for the
nine months ended September 30, 1997, primarily due to a higher number of
employees to support the Company's expansion into additional markets as
discussed above. Relative to total revenues, salaries, wages, and benefits
expense measured 97.8% for the nine months ended September 30, 1998 compared
with 124.4% for the nine months ended September 30, 1997. In future years the
Company expects salaries, wages, and benefits expense as a percent of total
revenues to continue to decline as the Company realizes economies of scale
gained from an increasing subscriber base managed through essentially the same
infrastructure.
General and administrative expenses, increased $840,236, or 36.9%, to
$3,116,063 for the nine months ended September 30, 1998 from $2,275,827 for the
nine months ended September 30, 1997. This increase is partially attributed to
an increase in site expenses for non-revenue generating sites as the majority
of these site expenses, for 1997, were incurred in the second half of the year
when the Company initiated the construction of its channels. The Company
expects such general and administrative site costs to decrease as these sites
generate revenue and related site costs become cost of sales. Additionally,
general and administrative expenses increased in conjunction with the Company's
expansion into additional markets. Relative to total revenues, general and
administrative expenses measured 145.6% for the nine months ended September 30,
1998 compared with 151.5% for the nine months ended September 30, 1997. The
Company expects general and administrative expenses as a percent of total
revenues to decline in future years as the Company realizes economies of scale
gained from an increasing subscriber base managed through essentially the same
infrastructure.
Depreciation and amortization expense increased $238,618, or 40.3% to $830,558
for the nine months ended September 30, 1998 from $591,940 for the nine months
ended September 30, 1997, reflecting greater capital expenditures associated
with construction and implementation of operating systems equipment.
Due to the foregoing, total operating expenses increased $1,226,892 , or 22.2%,
to $6,744,356 for the nine months ended September 30, 1998 from $5,517,464 for
the nine months ended September 30, 1997, and the Company's loss from
operations increased by $588,703 , or 14.7%, to $4,603,742 from $4,015,039, for
such respective periods.
Net interest expense increased $151,149, or 14.2%, to $1,212,795 for the nine
months ended September 30, 1998 from $1,061,646 for the nine months ended
September 30, 1997, The increase is attributed to additional notes payable to
licensees from the exercise of Option Agreements aggregating approximately
$919,135 off-set by a beneficial conversion feature of $767,986 embedded in the
convertible debenture issued during February 1997.
Based on the foregoing, the Company's net loss, excluding the recording of a
one-time charge of $7,166,956 during the second quarter of 1997, increased
$1,178,572 , or 24.1%, to $6,068,994 , or $0.21 per basic and diluted share,
for the nine months ended September 30, 1998 from $4,890,422, or $0.25 per
basic and diluted share, for the nine months ended September 30, 1997.
Including such one-time charge during the second quarter of 1997, the Company's
net loss decreased $5,988,384 , or 49.7%, during the nine months ended
September 30, 1998 from $12,057,378, or $0.61 per basic and diluted share, for
the nine months ended September 30, 1997.
B. THREE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS THREE MONTHS ENDED SEPTEMBER
30, 1997
Total revenues for the three months ended September 30, 1998 increased 112.3%
to $892,991 from $420,541 for the three months ended September 30, 1997,
reflecting increases of $441,065, or 227.0% in Radio Services, $9,804, or 13.2%
in Maintenance and Installation services and $22,009, or 14.5% in Equipment
Sales. Consistent with the Company's plan of operation to focus on recurring
revenues by selling its commercial SMR service through independent local
dealers, the proportion of total revenues generated by Radio Services increased
to 71.1% for the three months ended September 30, 1998 from 46.2% for the three
months ended September 30, 1997. The Company anticipates that the proportion of
total revenues from recurring revenues will continue to increase in future
periods as additional markets are rolled out utilizing indirect distribution
through such local dealers.
The 227.0% increase in Radio Services revenues, to $635,324 for the three
months ended September 30, 1998 from $194,259 for the three months ended
September 30, 1997, was driven by an increase in the number of subscribers
utilizing the Company's SMR systems in both new and existing markets. Pricing
per subscriber unit in service remained comparable over the periods.
The 14.5% increase in revenues from Equipment Sales, to $173,543 for the three
months ended September 30, 1998 from $151,534 for the three months ended
September 30, 1997, was partially attributed to the rebuilding of an adequate
sales force in the Company's direct distribution markets as well as sufficient
working capital.
The Company anticipates that Equipment Sales and Maintenance and Installation
service will continue to account for a declining share of total revenues in the
future, because since acquiring full-service operations in its first two
markets, the Company has utilized and intends to continue utilizing indirect
distribution through local dealers in substantially all markets. As noted
previously, in such cases, the local dealer rather than the Company sells,
installs, and services the radio equipment and records the revenues and costs
associated therewith.
Cost of sales increased by $67,673, or 28.7%, to $303,233 for the three months
ended September 30, 1998 from $235,560 for the three months ended September 30,
1997. This increase is primarily due to the commercialization of 55 additional
markets since September 30, 1997. This is partially offset by lower Equipment
Sales, which have higher cost of sales associated with them, compared to Radio
Services revenues. Gross margin increased by 22.0 percentage points, to 66.0%
for the three months ended September 30, 1998 from 44.0% for the three months
ended September 30, 1997. This is attributable to the increased percentage to
total revenues of Radio Services, which has a higher gross margin than
Equipment Sales.
Salaries, wages, and benefits expense increased by $105,395 or 15.1%, to
$803,686 for the three months ended September 30, 1998 from $698,291 for the
three months ended September 30, 1997, primarily due to a higher number of
employees to support the Company's expansion into additional markets. Relative
to total revenues, salaries, wages, and benefits expense measured 90.0% for the
three months ended September 30, 1998 compared with 166.0% for the three months
ended September 30, 1997. In future years the Company expects salaries, wages,
and benefits expense as a percent of total revenues to decline as the Company
realizes economies of scale gained from an increasing subscriber base managed
through essentially the same infrastructure.
General and administrative expenses, increased $488,689 , or 56.3%, to
$1,356,901 for the three months ended September 30, 1998 from $868,212 for the
three months ended September 30, 1997. This increase is partially attributed to
an increase in site expenses for non-revenue generating sites. The Company
expects such general and administrative site costs to decrease as these sites
generate revenue and related site costs become cost of sales. Additionally,
general and administrative expenses increased in conjunction with the Company's
expansion into additional markets. Relative to total revenues, general and
administrative expense measured 152.0% for the three months ended September 30,
1998 compared with 206.5% for the three months ended September 30, 1997. The
Company expects general and administrative expenses as a percent of total
revenues to decline in future years as the Company realizes economies of scale
gained from an increasing subscriber base managed through essentially the same
infrastructure.
Depreciation and amortization expense increased $88,588, or 33.0%, to $357,186
for the three months ended September 30, 1998 from $268,598 for the three
months ended September 30, 1997, reflecting greater capital expenditures
associated with construction and implementation of operating systems equipment.
Due to the foregoing, total operating expenses increased $750,345 or 36.2%, to
$2,821,006 for the three months ended September 30, 1998 from $2,070,661 for
the three months ended September 30, 1997, and the Company's loss from
operations increased by $277,895 , or 16.8%, to $1,928,015 from $1,650,120, for
such respective periods.
Net interest expense increased $303,176, or 314.4%, to $399,607 for the three
months ended September 30, 1998 from $96,431 for the three months ended
September 30, 1997, which is attributable additional notes payable to licensees
resulting from the exercise of Option Agreements.
Based on the foregoing, the Company's net loss increased $801,965 , or 51.4%,
to $2,362,568, or $0.07 per basic and diluted share, for the three months ended
September 30, 1998 from $1,560,603, or $0.08 per basic and diluted share, for
the three months ended September 30, 1997.
(3) LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1998 and 1997, the Company used net
cash in operating activities of $2,005,788 and $2,173,745, respectively. The
Company continues to fund operations through financing activities as the
Company continues to be in the development stage. The major use of cash for the
nine months ended September 30, 1998 and 1997 was the acquisition of
communication assets. The major source of cash for the nine months ended
September 30, 1998 and 1997 were proceeds from the issuance of long-term debt
and equity.
The Company believes that over the next 12 months, depending on the rate of
market roll-out during such period, it will require approximately $14 million
to $16 million in additional funding for full-scale implementation of its SMR
services and ongoing operating expenses. To meet such funding requirements, the
Company anticipates continued utilization of its existing borrowing facility
with Motorola, Inc. ("Motorola"), a vendor financing arrangement with HSI
GeoTrans, Inc. ("GeoTrans"), sales of selected SMR channels deemed
non-strategic to its business plan, and additional financing as needed.
During the third quarter of 1998, the Company pursued discussions with several
institutional debt funding sources and has since reached the letter of intent
stage, but has yet to enter into any binding commitments for additional debt
financing as of the date of this filing. In the event the Company is unable to
secure the aforementioned debt funding, it will pursue other financing
opportunities. However, there can be no assurance that the Company will be able
to obtain financin in a timely manner, or at all. If the Company is unable to
obtain additional financing, when needed, it would likely be required to
substantially curtail its plans for implementation of its SMR services. If
additional financing is not available at all, it could cause the Company to
liquidate assets or seek bankruptcy protection. In addition, any equity
financing or convertible debt financing may involve substantial dilution the
the Company's then-existing security holders.
In the Company's 1997 Form 10-KSB and 10-KSB/A the Company's independent
auditors opinion included an explanatory paragraph which expressed substantial
doubt about the Company's ability to continue as a going concern. As discussed
in Note 11 to the unaudited consolidated financial statements, the Company has
suffered recurring losses from operations, has a negative working capital, and
has a deficit accumulated during the development stage that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 11. The unaudited
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
On March 9, 1998, the Company entered into a vendor financing arrangement with
GeoTrans, a wholly owned subsidiary of Tetra Tech, Inc., whereby GeoTrans is
performing turn-key implementation of full-scale SMR operating systems for the
Company in up to 10 markets per month and 145 total markets. The financing
mechanism in the Company's arrangement with GeoTrans specifies a $4,000
down-payment per market by the Company and approximately $18,000 per market to
be drawn by the Company under its Motorola financing facility, with GeoTrans
financing the balance of approximately $49,000 per market on 120-day payment
terms, with incentives to the Company of up to a 3% discount for early payment.
Collateral for such financing arrangement consists of 183 channels in nine
primarily non-strategic markets with a fair market value estimated by the
Company of $4.4 million.
On October 30, 1997, two subsidiaries of the Company, CCI and CMRS, entered
into a First Amendment to the Financing and Security Agreement with MarCap
Corporation ("MarCap") which amended that certain Financing and Security
Agreement dated October 29, 1996 between CCI and Motorola (the "Motorola Loan
Facility"), the interest of Motorola therein having been assigned to MarCap,
pursuant to which MarCap extended to CCI and CMRS an additional loan facility
(the "MarCap Facility") in a maximum amount of $2,000,000 (plus certain fees
and legal expenses payable to MarCap). The MarCap Facility is secured by (i) a
pledge of all the stock of two subsidiaries and assignment of all limited
liability company membership interests in three limited liability companies,
which collectively hold licenses or rights to licenses in up to 452 channels in
12 markets having a value (per a third-party appraiser) of approximately
$8,800,000 (subsequently valued at approximately $10,400,000 by the same
third-party appraiser), (ii) a first lien on all non-Motorola equipment used in
systems for such markets, and (iii) a cross-pledge of all collateral previously
granted in favor of Motorola relating to the Motorola Facility, which
cross-pledge, until modified by letter agreement dated February 25, 1998
between the Company and MarCap as described further below, would unwind with
respect to collateral pledged under either the Motorola Facility or MarCap
Facility upon full repayment by the Company of all outstanding balances under
either such respective facility. The MarCap Facility is further guaranteed by
Chadmoore Wireless Group, Inc. and by Chadmoore Communications of Tennessee,
Inc. to the extent of its interest in the collateral previously pledged in
favor of Motorola.
On October 31, 1997, the initial draw under the MarCap Facility was made in the
amount of $481,440 and evidenced by a promissory note executed by the Company
in favor of MarCap. Subsequent draws of $250,000, $650,000 and $663,000 (plus
certain fees and legal expenses payable to MarCap) were made on February 6,
1998, March 6, 1998, and March 27, 1998, respectively.
On July 16, 1998, a draw under the Motorola Loan Facility was made in the
amount of $369,331. As of the date of this filing the Company has drawn a total
of $867,517 under this facility.
On February 25, 1998, the Company and MarCap entered into a letter agreement
relating to the Motorola and MarCap Facilities which provided for (i) complete
cross-collateralization of the Motorola and MarCap Facilities without the
aforementioned unwinding provision, (ii) a revised borrowing base formula for
the Motorola and MarCap Facilities, (iii) notification by the Company to
Motorola of the modifications being made pursuant to such letter agreement,
(iv) affirmation by the Company to utilize its diligent best efforts to raise
at least $5 million of equity and $15 million of aggregate financing by April
30, 1998, (v) waiver of existing covenants for the Motorola and MarCap
facilities through April 30, 1998 so long as the Company continues to utilize
its diligent best efforts to raise at least $5 million of equity and $15
million of aggregate financing by such date, (vi) affirmation by MarCap that it
will not object to the Company incurring $10 million in additional senior debt
so long as the Company is not in material default on the Motorola or MarCap
facilities, (vii) new covenants for the Motorola and MarCap facilities as of
April 30, 1998. On March 5, 1998, Motorola provided the Company with written
acknowledgment of the notification required by the Company as described in
clause (iii) above, and as a result, the Company is in full compliance with the
Motorola and MarCap facilities, and has classified the appropriate portion
(maturing after one year) as long term debt.On April 30, 1998, the Company and
MarCap agreed upon modifications to the provisions of the MarCap Facility. Such
modifications included (i) a shifting out of existing covenants by one quarter
to account for elapsed time that had been dedicated to securing financing
rather than SMR systems implementation, and (ii) a covenant by the Company to
utilize its diligent best efforts to obtain the then-proposed $7.5 million of
equity financing without the $15 million aggregate financing requirement. The
Company remains in full compliance with the Motorola and MarCap Facilities, 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
the Motorola Facility was extended from 30 months to 42 months from the
effective dates thereof. Depending on the Company's ability to continue funding
its minimum 50% down-payment requirement under the Motorola purchase agreement,
the Company anticipates funding approximately $2.0 million to-$2.5 million of
Motorola equipment for its SMR systems under the Motorola Facility for the next
12 months.
YEAR 2000 ISSUES
The Company is currently awaiting a proposal from a large computer systems
vendor about acquiring a fully integrated and scalable system (hardware,
software and service contract) ("System") to load subscribers, capture call
records and generate customer bills. The System will be Year 2000 compliant and
the Company expects it to be fully implemented in the second quarter of 1999.
If the Company does not acquire the System, it has a contingency plan to
upgrade its current computer systems or purchase individual software products
to address its needs. The Company has contacted the necessary software vendors,
about its contingency plan, and Management believes that all the necessary Year
2000 compliant software is currently available and can be implemented quickly.
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.
Based on the foregoing, the Company believes that it should have adequate
resources to continue establishing its SMR business and emerge from the
development stage during 1999. However, while the Company believes that it has
developed adequate contingency plans, the failure to obtain additional debt
financing could have a material adverse effect on the Company. 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 82 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.
<PAGE> PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Airnet, Inc. v. Chadmoore Wireless Group, Inc. Case No. 768473, Orange County
Superior Court On April 3, 1997, Airnet, Inc. ("Airnet") served a summons and
complaint on the Company, alleging claims related to a proposed merger between
Airnet and the Company that never materialized. In particular, Airnet has
alleged that a certain "letter of intent" obligated the parties to complete the
proposed merger. The Company denies this allegation. In its complaint, Airnet
has alleged the following purported causes of action against the Company:
breach of contract, breach of the implied covenant of good faith and fair
dealing, intentional interference with prospective economic advantage,
intentional interference with contractual relationship, including breach of
contract, false promise and conversion. Airnet has also purported to seek the
following relief from the Company: $28,000,000 in compensatory damages plus
interest, punitive damages, costs of suit and attorney's fees. The Company
challenged the sufficiency of the complaint as to most of the purported causes
of action on the grounds that these purported causes of action fail to state
facts sufficient to constitute a cause of action. The Company also challenged
the sufficiency of the punitive damages allegations on the grounds that the
compliant fails to state facts sufficient to support these allegations. Rather
than oppose these challenges to its complaint, Airnet elected to file a first
amended complaint. Believing that Airnet's amendments were immaterial the
Company renewed its challenges to Airnet's pleading. On September 9, 1997, the
court sustained the Company's demurrers to Airnet's claims for damages based on
the Company's alleged failure to complete the merger and to Airnet's claims for
conversion. At Airnet's request, the court allowed Airnet to amend its pleading
a second time to attempt to state these claims, and Airnet's new complaint
asserts claims for breach of contract, anticipatory breach of contract,
intentional interference with prospective economic advantage, interference with
contractual relationship, inducing breach of contract and false promise. The
Company again filed demurrers challenging certain of the claims in Airnet's
pleading. On January 16, 1998, the Court overruled the Company's demurrers to
the Second Amended Complaint.
On February 2, 1998, the Company answered the Second Amended Complaint with a
general denial and by asserting the following affirmative defenses: failure to
state a claim, uncertainty, statutes of limitations, laches, lack of capacity,
lack of standing, waiver, estoppel, knowledge and acquiescence, unclean hands,
unjust enrichment, fraud, misrepresentations, res judicata, justification,
privilege, no action intended or reasonably calculated to cause injury, lack of
causation, acts of third parties, failure to allege a contract, no meeting of
the minds, statute of frauds, lack of privity, fraud in the inducement,
mistake, lack of consideration, failure of consideration, failure of conditions
precedent, concurrent, subsequent, Airnet's intentional misrepresentation,
Airnet's negligent misrepresentations, performance excused by Airnet's failure
to perform, performance excused by recision, performance excused by
modification, antecedent breaches by Airnet, accord and satisfaction,
privileged communications, justified communications, no damages, failure to
mitigate and offset.
On February 2, 1998, the Company filed a Cross-Complaint against Airnet as well
as three other named cross-defendants related to Airnet: Uninet, Inc.,
("Uninet") Anthony Schatzlein ("Schatzlein") and Dennis Houston ("Houston").
The Company's Cross-Complaint alleges various causes of action including fraud,
breach of oral contract, fraud and defamation which arise out of the proposed
merger and the events surrounding it. On March 2, 1998, cross-defendants
Airnet, Uninet, Schatzlein and Houston answered the Cross-Complaint with a
general denial and a single affirmative defense -- that the Cross-Complaint
does not state facts sufficient to constitute a cause of action.
The Company intends to vigorously defend the Second Amended Complaint and to
pursue the claims set forth in the Cross-Complaint. Although the Company
intends to defend the action vigorously, it is still in its early stages and no
substantial discovery has been conducted in this matter, with certainty.
Accordingly, at this time, the Company is unable to predict the outcome of this
matter, with certainty. A non-binding mediation was conducted before a retired
judge of the superior court on August 21, 1998. Although a confidential
settlement in principal of all of the claims in the lawsuit was reached it has
not been finalized.
Chadmoore Communications, Inc. v. John Peacock Case No. CV-S-97-00587-HDM
(RLH), United States District Court for the District of Nevada
In September 1994, CCI entered into a two year consulting agreement (the
"Consulting Agreement") with John Peacock ("Peacock") to act as a consultant
and technical advisor to CCI concerning certain specialized mobile radio
("SMR") stations. In May, 1997 CCI filed a complaint against Peacock for
declaratory relief in the United States District Court for the District of
Nevada, seeking a declaration of the respective rights and obligations of CCI
under the Consulting Agreement. CCI is seeking this judicial declaration based
upon Peacock's contention that he is entitled to certain bonus compensation
under the Consulting Agreement. Peacock contends that this bonus compensation
is due regardless of whether an SMR license is granted based upon his
activities as a consultant. CCI contends that the Consultant Agreement is clear
that such bonus compensation is only awarded upon the "grant" of an SMR
license. Peacock contends that he is entitled to bonus compensation of four
hundred five thousand ($405,000). In lieu of answering the complaint, Peacock
filed a motion seeking dismissal of the action based on the assertion that he
is not subject to jurisdiction in Nevada courts. After briefing, that motion
was denied by the Court, and the parties are now proceeding with discovery.
On September 26, 1997, Peacock answered the Complaint and asserted the
following affirmative defenses: failure to state a claim, failure to perform,
intentional concealment or failure to disclose material facts, estoppel,
unclean hands, lack of subject matter, claims not authorized by declaratory
relief statutes, improper venue, forum non conveniens, rescission and
reformation, and choice of law.
On or about January 28, 1998, Peacock filed a motion to add a counterclaim to
this litigation. The counterclaim purported to allege causes of action based on
breach of the Consultant Agreement, fraud and breach of fiduciary duty. CCI
objected to Peacock's improper attempt to add tort claims to this litigation
and Peacock agreed to withdrawn them, amend its proposed counterclaim by
stipulating, and assert only a breach of contract claim based on the Consulting
Agreement. The Amended Counterclaim was deemed filed with the Court, on March
15, 1998. On May 11, 1998 Chadmoore cited its Reply to Peacock's Counsels
claim, denying liability and asserting Thirty-eight affirmative defenses,
including defenses based on Peacock's alleged fraud and failure to perform. For
then with its Reply, Chadmoore filed a counterclaim against Peacock and two
entities related to Peacock - Peacock's Radio and Wild's Computer Services,
Inc. and Peacock's Radio, a Partnership. Chadmoore's counterclaim asserts
claims for Fraud, Breech of Fiduciary Duty, and Breech of Contract. Chadmoore's
counterclaim seeks general and punitive damages. On October 20, 1998, the court
ordered the parties to appear before a magistrate for a settlement conference,
which is currently scheduled for December 1, 1998.
If the case is not settled, 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.
Goodman/Chan Waiver. Nationwide Digital Data Corp. and Metropolitan
Communications Corp. among others (collectively, "NDD/Metropolitan"), traded in
the selling of SMR application preparation and filing services to the general
public. Most of the purchasers in these activities had little or no experience
in the wireless communications industry. Based on evidence that
NDD/Metropolitan had been unable to fulfill their construction and operation
obligations to over 4,000 applicants who had received FCC licenses through
NDD/Metropolitan, the Federal Trade Commission ("FTC") filed suit against
NDD/Metropolitan in January, 1993, in the Federal District Court for the
Southern District of New York ("District Court").
The District Court appointed Daniel R. Goodman (the "Receiver") to preserve the
assets of NDD/Metropolitan. In the course of the Receiver's duties, he together
with a licensee, Dr. Robert Chan, who had received several FCC licenses through
NDD/Metropolitan's services, filed a request to extend the construction period
for each of 4,000 SMR stations. At that time, licensees of most of the stations
included in the waiver request ("Receivership Stations") were subject to an
eight-month construction period. On May 24, 1995, the FCC granted the request
for extension. The FCC reasoned that the Receivership Stations were subject to
regulation as commercial mobile radio services stations, but had not been
granted the extended construction period to be awarded to all CMRS licensees.
Thus, in an effort to be consistent in its treatment of similarly situated
licensees, the FCC granted an additional four months in which to construct and
place the Receivership Stations in operation (the "Goodman/Chan Waiver"). The
Goodman/Chan Waiver became effective upon publication in the Federal Register
on August 27, 1998.
The FCC has never released a list of stations it considers to be Receivership
Stations, despite repeated requests by the Company. On November 16, 1998, by a
Public Notice the Commission announced that it would release a list of
receivership stations to the public in ten days; provided that no objection to
the release is posed on behalf of receivership licenses by the Receiver. As of
the date of this report, the FCC had not yet released the list as the ten day
period for publication and for potential appeals by the Receiver had not yet
expired. However, on the basis of a previous request to the Receiver and a
seperate request for assistance to the FCC's licensing division by the Company,
the FCC and the Receiver examined and marked a list provided by the Company.
The FCC's and the Receiver's markup indicated those stations held by the
Company or subject to Management and Option Agreements, which the FCC and/or
the Receiver considered to be, at that time, Receivership Stations and/or
stations considered "similarly situated" and thus elgible for releif. From that
unofficial communication from the Receiver 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 is now proceeding with timely construction of
those stations which the Company feels reasonably certain are Receivership
Stations. From the official communication from the FCC, the Company believes
that approximately 650 licenses are considered "similarly situated".
Initial review of the Commissions's Goodman/Chan Order indicated a potentially
favorable outcome for the Company as it pointed to a grant of relief for a
significant number of the Company's owned and/or managed licenses which were
subject to the outcome of the Goodman/Chan decision. At present, Management
believes that a substantial number of these licenses will be afforded relief
pursuant to the Order. However, on October 9, 1998 a release from the Offices
of the Commercial Service Division of the FCC's
Wireless Telecommunication Bureau announced that because of a technicality
relating to the actual filing dates of the construction deadline waiver
requests by certain of the subject licensees, some licenses which the FCC staff
earlier had stated would be eligible for construction extension waivers due to
the similarity of circumstances between those licensees and the Goodman/Chan
licensees, would not actually be granted final construction waivers. The
Commission has subsequently begun a process of deleting certain of the
Company's licenses from this category from its official licensing database.
Prior to the release of the October 9, 1998, Public Notice, the Company
contructed and placed into operation certain licenses from this category based
on information received from the FCC and the Receiver. The Company is in the
process of determining which licenses have in fact been deleted; however, due
to the disparity between the FCC's lists and its subsequent treatment of such
lists, the Company is uncertain as to which, if any, will remain deleted under
the FCC's current procedures.
In response, on November 9, 1998, Chadmoore filed a Petition for
Reconsideration at the FCC seeking reversal of the action announced in the
Commercial Wireless Division's Public Notice, and the Company has asked that
relief be reinstated for its affected licenses. Additionally, on October 28,
1998, the Company filed motions with the United States Court of Appeals for the
District of Columbia Circuit as well as the United States Federal District
Court of the District of Columbia seeking a stay of Commission action on the
subject licenses and the release of an accurate and complete list of stations
until reconsideration proceedings at the FCC, and if ultimately necessary,
appeal proceedings through the federal courts may be completed. Other similarly
situated licensees also have filed petitions for relief. No specific timetable
is available in order to assist the Company's management to predict with any
reasonable degree of accuracy when final action on these proceedings will be
forthcoming. The Company does not believe it to be probable that they will not
be provided relief on all of the licenses potentially subject to the Goodman
Chan Proceedings. However there can be no assurance that relief will be
granted.
Approximately 650 of those licenses purchased by or under management contracts
with the Company are among those which the FCC now states will not be afforded
relief pursuant to the Commercial Division's October 9, 1998 Public Notice.
Thus, it is possible that the Company's owned and/or managed licenses which are
encompassed within the denial of relief pursuant to the October 9, 1998 Public
Notice, could be permanently canceled by the FCC for failure to comply with its
construction requirements. If these licenses are in fact cancelled by the FCC,
it would result in the loss of licenses with a book value of approximately
$6,200,000 and the loss of certain subscribers to the Company's services, which
while not considered probable, could result in a material adverse effect on the
Company's financial condition, results of operations and liquidity and could
result in possible fines and/or forfeitures levied by the FCC. The Company has
prepared these estimates based on the best information available at the time of
this filing. Once again, there has been no list published by the FCC, in this
matter, which the Company feels it may rely upon. Therefore, the Company has
commenced the above described litigation to clarify this matter. Based on the
preceding, no provision has been made in the accompanying unaudited
consolidated financial statements for the ultimate outcome of the Goodman/Chan
proceeding.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
<PAGE>
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
(a)(1) A list of the financial statements and schedules thereto as filed in
this report reside at Item 1.
(a)(2) The following exhibits are submitted herewith:
4.10 Original Articles of Incorporation
4.11 Certificate of Designation of Rights and Preferences of Series C
Preferred Stock of the Registrant (incorporated by reference to Exhibit
4.1 of Registrant's Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 15, 1998 (the "Form 8-K")).
4.2 Form of Series C Preferred Stock Certificate (Incorporated by reference
to Exhibit 4.2 of the Form 8-K).
10.20 Form of Amendment No. 1 to Offshore Subscrption Agreement for Series
B 8% Convertible Preferred Stock dated on or about February 17, 1998
(Incorporated by reference to Exhibit 10.16 of the form 8-K)
10.21 Investment Agreement dated May 1, 1998, between the Registrant and
Recovery Equity Investors II, L.P. ("Recovery") (incorporated by
reference to Exhibit 10.1 of the Form 8-K).
10.22 Registration Rights Agreement, dated May 1, 1998, between the
Registrant and Recovery (incorporated by reference to Exhibit 10.2 of
the Form 8-K).
10.23 Stock Purchase Warrant, dated May 1, 1998, issued to Recovery for the
purchase of 4,000,000 shares of Common Stock (incorporated by reference
to Exhibit 10.2 of the Form 8-K).
10.24 Stock Purchase Warrant, dated May 1, 1998, issued to Recovery for the
purchase of 14,612,796 shares of Common Stock (incorporated by reference
to Exhibit 10.2 of the Form 8-K).
10.25 Stock Purchase Warrant, dated May 1, 1998, issued to Recovery for the
purchase of 10,119,614 shares of Common Stock (incorporated by reference
to Exhibit 10.2 of the Form 8-K).
10.26 Shareholders Agreement, dated May 1, 1998, by and among the Registrant
Recovery and Robert W. Moore (incorporated by reference to Exhibit 10.2
of the Form 8-K).
10.27 Advisory Agreement, dated May 1, 1999, between the Registrant and
Recovery (incorporated by reference to Exhibit 10.2 of the Form 8-K).
10.28 Indemnification Letter Agreement, dated May 1, 1998, between the
Registrant and Recovery (incorporated by reference to Exhibit 10.2 of
the Form 8-K).
11 Computation of per share amounts (1)
27.1 Financial Data Schedule 1998 (1)
27.2 Financial Data Schedule 1997 (1)
(1) Filed herewith.
<PAGE>
(b) Current Reports on Form 8-K
(i) Current Report on Form 8-K filed on February 24, 1998, reported pursuant to
the SEC's Division of Corporation Finance's interpretation of the
disclosure requirements set forth in SEC Release No. 34-37801, reporting
(a) On December 23, 1997, the Company concluded a private placement
conducted in accordance with Regulation S in which the Company sold (i)
219,000 shares of Series B Convertible Preferred Stock (the "Preferred
Stock") and (ii) warrants ("Warrants") to purchase 300,000 shares of the
Company's Common Stock, with the Company receiving proceeds of $1,650,000;
and (b) with respect to certain conversions of the Preferred Stock, the
Company issued shares of its Common Stock to various holders of some of
such Preferred Shares.
(ii) Current Report on Form 8-K filed on March 16, 1998 reporting (a) the terms
of amendments (the "Amendments") of the terms of the private placement
described in the Company's Current Report on Form 8-K filed on February
24, 1998 (the "Prior 8-K"), which Amendments extended the holding period
applicable to purchasers of the Preferred Stock (as defined in the Prior
8-K) and provided for the issuance of additional shares of Common Stock,
Warrants (as defined in the Prior 8-K) and Common Stock underlying
Warrants to such purchaser; (b) with respect to certain conversions of the
Preferred Stock, the Company issued shares of its Common Stock to various
holders of some of such Preferred Shares; and (c) the Company's agreement
to issue 800,000 shares of its Common Stock in accordance with Regulation
S to a single investor (the "Investor") who is not a U.S. Person, in
exchange for the delivery to the Company of 5,032 shares of common stock
of CMRS. CMRS had previously agreed to issue the CMRS Shares to the
Investor in exchange for the agreement of the Investor to pay, on behalf
of CMRS, a fee to a LDC Consulting, Inc.
(iii)Current report on Form 8-K on April 1, 1998 reporting (a) the sales of
equity securities pursuant to Regulation S and (b) the conversion of
Series B Convertible Preferred Stock.
(iv) Current report on Form 8-K on April 14, 1998 reporting (a) the sales of
equity securities pursuant to Regulation S and (b) the conversion of
Series B Convertible Preferred Stock.
(v) Current report on Form 8-K on April 29, 1998 reporting (a) the sales of
equity securities pursuant to Regulation S and (b) the conversion of Series
B Convertible Preferred Stock.
(vi)Current report on Form 8-K filed on May 15, 1998, reporting a $7.5 million
equity investment which closed on May 4, 1998.
(vii) Current report on Form 8-K on May 27, 1998 reporting (a) the sales of
equity securities pursuant to Regulation S and (b) the conversion of Series
B Convertible Preferred Stock.
(viii) Current report on Form 8-K on October 19, 1998 reporting (a) the sales
of equity securities pursuant to Regulation S and (b) the conversion of
Series B Convertible Preferred Stock
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Chadmoore Wireless Group, Inc.
(formerly CapVest International, Ltd.)
By: /s/ Robert W. Moore
Robert W. Moore
President and CEO
By: /s/ Richard C. Leto
Richard C. Leto
Chief Financial Officer
By: /s/ Rick D. Rhodes
Rick D. Rhodes
Chief Regulatory Officer
By: /s/ Jan S. Zwaik
Jan S. Zwaik
Chief Operating Officer
Date: November 23, 1998
8
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
11 Computation of per share amounts (1)
27.1 Financial Data Schedule 1998 (1)
27.2 Financial Data Schedule 1997 (1)
(1) Filed herewith.
(11) COMPUTATION OF PER SHARE AMOUNTS
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
------------------------------ ------------------------------
September 30 September 30
------------------------------ ------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) (6,068,994) (12,057,378) (2,362,568) (1,560,603)
Series B Preferred stock dividend (131,503) - (48,147) -
Series C Preferred stock dividend and
accretion of amount payable upon
redemption (109,179) - (66,992) -
----------- ----------- ----------- -----------
Adjusted net income (loss) (630906767) (12,057,378) (2,477,707) (1,560,603)
=========== =========== =========== ===========
Weighted average common shares
outstanding 30,184,770 19,664,951 35,817,198 19,966,574
Common equivalent shares representing 24,833,495 - 24,833,495 -
shares issuable upon exercise of stock
options
Less common equivalents shares (24,833,495) - (24,833,495) -
due to antidilutive shares
----------- ----------- ----------- -----------
Dilutive adjusted weighted average 30,184,770 19,664,951 35,817,198 19,966,574
shares
----------- ----------- ----------- -----------
Basic net income(loss) per share
(0.21) (0.61) (0.07) (0.08)
Diluted net income (loss) per share
(0.21) (0.61) (0.07) (0.08)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,514,858
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