U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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.
Name of small business issuer in its charter
COLORADO 84-1058165
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2875 E. PATRICK LANE, SUITE G, LAS VEGAS, NV 89120
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (702) 740-5633
Securities registered under Section 12(b) of the Exchange Act: NONE
Title of each class and name of each exchange on which registered: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $3,148,668
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. As of March 31, 1999, the aggregate market value of the Company's Common
Stock held by non-affiliates was $6,320,778. State the number of shares
outstanding of each of the issuer's classes of common equity as of the latest
practicable date. As of March 31, 1999, 37,496,928 shares of Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [ ] No [X]
<PAGE>
FORM 10-KSB
INDEX
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Market for Common Equity and Related Stockholder Matters
PART II
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
PART IV
Item 13. Exhibits and Reports on Form 8-K
Signatures
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ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Chadmoore Wireless Group, Inc., together with its subsidiaries (collectively
"Chadmoore" or the "Company"), is one of the largest holders of frequencies in
the United States in the 800 megahertz ("MHz") band for commercial specialized
mobile radio ("SMR") service. The Company's operating territory covers
approximately 55 million people in 180 markets, primarily in secondary and
tertiary cities throughout the United States ("Operating Territory"). Also known
as dispatch, one-to-many, or push-to-talk, Chadmoore's commercial SMR service
provides reliable, cost-effective, real-time voice communications for cost-
conscious companies with mobile workforces that have a need to frequently
communicate with their entire fleet, discrete subgroups or individuals of their
fleet. For a flat fee averaging approximately $15.00 per user per month,
customers enjoy unlimited air-time for communicating instantaneously with their
chosen fleets or subgroups.
The Company commenced operations in 1994 as Chadmoore Communications, Inc.
("CCI"), a Nevada corporation, to capitalize on the market opportunity created
when the Federal Communications Commission ("FCC") froze licensing of additional
SMR spectrum in 1993 in anticipation of transitioning from the traditional
application process to spectrum auctions. In April 1994, CCI took operational
control of an existing SMR system in Memphis, Tennessee and in March 1996
acquired a second existing SMR system in Little Rock, Arkansas. In doing so, CCI
established credibility as an SMR operator, gained valuable operating and
marketing experience, and further positioned itself to capitalize on the
anticipated constraint in capacity resulting from the FCC's license freeze, and
the contemplated auction.
Having established credibility as an operator, CCI succeeded in negotiating the
acquisition of rights to approximately 2,300 channels from approximately 1,200
individual licensees during its first 18 months of operation. (See LICENSES AND
RIGHTS TO LICENSES). To facilitate financing for such acquisitions, in February
1995 CCI entered into and reorganized under an Agreement and Plan of
Reorganization ("Reorganization") with CapVest International, Ltd. ("CapVest"),
a Colorado company incorporated in 1987. In the Reorganization, CCI shareholders
owning 85% of the outstanding shares of CCI exchanged their shares for 89% of
the shares of CapVest, causing CCI to become a majority-owned subsidiary of
CapVest. Also in February 1995, the Board of Directors of CapVest resigned, new
members were appointed to fill the vacancies, CCI management assumed
responsibility for CapVest's affairs, and on April 21, 1995, the shareholders of
CapVest approved the change of its corporate name to "Chadmoore Wireless Group,
Inc."
In June 1996, the Company consummated the acquisition of approximately 5,500
additional channels by acquiring all of the issued and outstanding stock of CMRS
Systems, Inc. ("CMRS") and 800 SMR Network, Inc. ("800") (See LICENSES AND
RIGHTS TO LICENSES.) During 1997, substantially all of the assets of 800 were
transferred to CMRS. The Company continues to operate primarily through CCI and
CMRS, and through subsidiaries thereof.
The Company's publicly held common stock $.001 par value per share (the "Common
Stock") trades over-the-counter and is reported on the Electronic Bulletin Board
of the National Association of Securities Dealers under the symbol "MOOR". The
Company's principal executive offices are located at 2875 East Patrick Lane,
Suite G, Las Vegas, NV, 89120, and its telephone number at that address is (702)
740-5633.
PRINCIPAL SERVICES AND MARKETS
The Company's principal service is to provide two-way wireless voice
communications for business users to communicate between a central dispatch
point and a mobile workforce or among members of the mobile workforce.
Individual users can choose to communicate with a group, selected sub-groups or
individuals in any of those groups. The customer base for SMR service is
typically stable, diverse, and cost-conscious, small to medium size businesses,
public service providers and local governments that have significant field
operations and need to provide their personnel with the ability to communicate
directly in real-time on a
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one-to-one or one-to-many basis. Chadmoore provides its dispatch service for a
flat fee which is particularly attractive to many of the businesses described
above.
The Company believes the SMR service it offers presents an affordable
communication solution for cost-conscious businesses desiring the ability to
facilitate communications simultaneously with all or among subgroups of their
workers.
The Company's primary objectives are to continue developing, operating and
aggressively loading SMR systems within its Operating Territory in a manner that
effectively deploys capital, maximizes recurring revenue per dollar of invested
capital, and generates positive cash flow at the system level as quickly as
possible. Furthermore, the traditional analog dispatch business provides a
real-time voice communications solution that is practical, cost effective and
reliable. The traditional SMR dispatch business has been a robust and growing
segment of the wireless communications industry for over 15 years, with annual
growth averaging approximately 15% prior to the advent of the FCC's spectrum
freeze in 1993. With the focus on digital technology by several large system
providers and the conversion of enormous amounts of already occupied spectrum
from the platform that previously served millions of analog users, the Company
believes that the needs of the traditional SMR customer are being ignored. By
focusing on the segment of the wireless industry that is suffering a forced
migration from analog to a more expensive digital technology, and the ensuing
capacity shortfall in many markets, the Company believes it has targeted an
under- served segment of the marketplace. In addition, the Company has
sufficient capacity utilizing a state of the art analog technology to support
its planned growth for the foreseeable future. In assessing these objectives and
its spectrum position, the Company adopted and continues its strategy focusing
on the traditional analog SMR business.
In Management's opinion, several key factors and considerations support this
strategy, including (i) an established market base of approximately 19 million
users in the U.S. is estimated to rely on analog SMR service for dispatch
applications, (ii) capacity constraints that have created pent-up demand, (iii)
before the FCC's licensing freeze, demand for SMR that had expanded consistently
at a rate of approximately 15% 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 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 productivity tool, (vi) outsourcing to commercial
SMR operators can be economical for owners of private systems, (vii) analog SMR
technology and infrastructure 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, as opposed to per
minute billing common in mobile telephony, (ix) excellent system economics are
attainable as analog SMR service is simple and cost-effective to deploy, (x)
system economics that 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, and voice mail, can be offered using the same
infrastructure, thereby generating operating leverage, (xii) an experienced,
trained, and motivated distribution network is already in place primarily in the
form of Motorola Sales and Service ("MSS") shops (See DISTRIBUTION), and (xiii)
nothing precluding the Company from migrating to digital or other technology as
future capacity requirements dictate on a market by market basis, although such
a migration would require significant additional capital expenditures.
Prior to adopting its analog technology platform, the Company 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 infrastructures create
segmentation and awareness in the marketplace, (ii) full-scale digital
conversion strategies generally require turning off existing SMR systems in
order to utilize the frequencies for digital service, creating a pool of
established users and equipment which the Company believes to be potentially
available to other providers including Chadmoore, (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 initial and continuing capital costs of such digital
technology, (v) the Company believes that it can add analog infrastructure on
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an as-needed, just-in-time basis and for significantly less capital cost, (vi) a
significantly lower pricing advantage for analog versus digital service can be
marketed to the cost-conscious end-user, (vii) other than digital encryption,
the Company believes that essentially the same feature set can be offered to the
Company's customers, 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 can
continue to offer traditional SMR users the low-cost, fixed-rate communications
solution to which they are accustomed.
In general, the Company prioritizes markets based on five key parameters: (i)
the quality of the potential dealers, (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.
As of the date of this filing, the Company had constructed, or 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. As of March 31, 1999, the Company has implemented full-scale systems
and generates revenue, from in excess of 31,000 subscribers, in the following 82
markets.
Abilene, TX Grand Junction, CO Montgomery, AL
Asheville, NC Grand Rapids, MI Murrells Inlet, SC
Atlantic City, NJ Greenville, NC Myrtle Beach, SC
Augusta, GA Greenville, SC Naples, FL
Austin, TX Gulfport, MS Nashville, TN
Baraboo, WI Harrisburg, PA Norfolk, VA
Baton Rouge, LA Hilton Head, SC Omaha, NE
Bay City, MI Huntsville, AL Pine Bluff, AR
Beaumont, TX Jackson, MS Port Allen, LA
Biloxi, MS Jackson, TN Port Neches, TX
Birmingham, AL Jacksonville, FL Portland, ME
Bloomington, IL Jacksonville, NC Quincy, IL
Bowling Green, KY Kankakee, IL Raleigh/Cary, NC
Bradley, IL Lafayette, IN Richmond, VA
Brentwood, TN Lafayette, LA Roanoke, VA
Champaign, IL Lake Charles, LA Rochester, MN
Charleston, SC Lewiston, ME Rockford, IL
Charlotte, NC Lexington, KY Saint Cloud, MN
Charlottesville, VA Little Rock, AR Shady Grove, AR
Chesapeake, VA Louisville, KY Montgomery, AL
Columbia, SC Macon, GA South Bend, IN
Corpus Christi, TX Madison, WI Springfield, IL
Decatur, IL Mankato, MN Syracuse, NY
Eugene, OR Maui, HI Tallahassee, FL
Fayetteville, AR Memphis, TN Tucson, AZ
Florence, SC Milwaukee, WI Tyler, TX
<PAGE>
Fort Myers, FL Mobile, AL Wilmington, NC
Fort Wayne, IN
During 1998, the Company contracted with a third party vendor to complete full
scale construction of the initial system in the Company's prioritized markets
for an average approximate cost of $75,000 per market. As core capacity in a
market is approached, additional channels can be integrated into the main system
using the same basic controller (system computer) which reduces the average
capital cost per channel. The Company believes that such system economics enable
the Company to add capacity incrementally as demand dictates and maximize
recurring revenues with minimum 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. The
Company believes these two factors will allow it to generate strong operating
leverage as the system expands.
The Company generates revenue primarily from monthly billing for dispatch
services on a per unit (radio) basis. In selected markets, additional revenue is
generated from telephone interconnect service based on air-time charges, and in
the case of the Memphis and Little Rock markets (in which direct rather than
indirect distribution is used -- see DISTRIBUTION), from the sale of radio
equipment, installation, and equipment service.
DISTRIBUTION AND SALES AND MARKETING
Once commercial service has been implemented in a market, Chadmoore's
executional focus turns to loading the system by acquiring new users. In
general, the Company utilizes an indirect distribution network of
well-established local SMR and radio communication dealers, most of which are
Motorola sales and service ("MSS") shops, to penetrate its markets and help
service new and existing customers. The Company believes that this distribution
channel enables it to take advantage of existing infrastructure and human
resources, reduce capital requirements, reduce fixed operating costs, outsource
lower-margin equipment sales and service, enhance flexibility, and speed
roll-out while bringing to the Company immediate market knowledge and presence,
significant industry experience, and an introduction to an established base of
potential customers and leads. Chadmoore selects its dealers on the basis of
loading history, reputation in the community, infrastructure for supporting
customers, motivation level, and references from vendors and customers.
In markets where the Company plans on operating, but where a suitable dealer or
independent agent is not available, the Company intends to establish its own
marketing presence or to offer such markets as expansion opportunities for top
dealers serving the Company in other cities. In addition, the Company's
management team recognizes that additional staff and resources will be required
to properly support sales, marketing, engineering, accounting, and similar
disciplines to achieve its 1999 business plan objectives.
Chadmoore supports its dealer network through strong field management and by
providing an array of professional sales and marketing tools including a
comprehensive, national marketing and advertising program, dealer education and
support, and training programs, to enhance end-user recognition. In addition,
the Company has established two service marks, Power to Talk SM,
Teamlink-Connecting Your Business SM and Teamlink SM. Power to Talk builds on
the well known industry acronym for "Push to Talk", while Teamlink emphasizes
the one to many or group talk capabilities of SMR.
During 1997 and 1998, for selected dealers in priority markets, the Company
implemented a dealer partner program to finance initial system construction. In
this program, partners made contributions that financed 100% of the initial
system build-out. Depending on the market, the partners then recoup 60% to 93%
of the initial investment from system earnings after operating expenses, and
retain a 7% to 40% interest in the system thereafter. Of key significance, the
partner is repaid its capital contribution only after the system is cash
positive. The result is a long-term partnering relationship that motivates the
Company and the partners to develop the market and load systems rapidly, provide
excellent service and customer retention, and market value-added services to the
installed base. Management believes that such emphasis coupled with
<PAGE>
other dealer programs has, in part, been responsible for its lower than industry
average churn rate (the rate at which customers disconnect service).
COMPETITIVE BUSINESS CONDITIONS AND COMPANY'S INDUSTRY POSITION
In Management's evaluation, key factors relevant to competition in the wireless
communication industry are pricing, size of the coverage area, quality of
communication, reliability and availability of service. 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") has acquired a large
number of SMR systems and is in the process of implementing a conversion from
analog SMR technology to Motorola's digital integrated Dispatch Enhanced Network
("iDEN") system. Other cellular operators and PCS providers are implementing
digital transmission protocols on their systems as well, primarily to address
capacity issues. Chadmoore believes that Nextel is focusing on higher-end, white
collar and cellular-like telephony users, thereby creating a market segmentation
opportunity for the Company. As a result, the Company competes with Nextel
primarily on the basis of price and customer need for affordable group talk.
Another potential wireless competitor for Chadmoore is Southern Company, which
is implementing a digital architecture and pursuing Nextel-like strategies on a
regional or primary market basis. Southern Company is a large utility focusing
on wide-area communications for its own vehicle fleet in the Southeastern United
States, while selling excess capacity to other businesses spanning the same
geographic region. As with Nextel, Chadmoore intends to compete with Southern
Company primarily based on price and market segmentation.
Most other analog SMR providers within the Company's Operating Territory consist
of local small businesses, often passed from generation to generation, that
Chadmoore believes in general lack the spectrum, professional marketing,
management expertise, and resources brought to the marketplace by the Company to
effectively compete in its market segment. In fact, available capacity and
operating capabilities of existing SMR providers constitute key factors in
Chadmoore's market prioritization matrix. The Company intends to compete with
existing analog SMR providers primarily on the basis of customer service,
capacity to meet customer growth, additional value-added services, professional
marketing and dealer support.
RECENT DEVELOPMENTS
On March 2, 1999, pursuant to the a Senior Secured Loan Agreement ("GATX
Facility"), among the Company and GATX Capital Corporation ("GATX"), Chadmoore
borrowed $13.5 million from GATX. Pursuant to the agreement, within 120 days of
the funding, GATX, at its sole discretion, has the option to make available up
to $13.5 million in additional funds. Loans under the GATX facility will be made
at an interest rate fixed at the time of the funding based on five-year US
Treasury notes plus 5.5%, with a five-year amortization schedule following an
interest-only period, and warrants to purchase up to 1,822,500 shares of the
Company's common stock at an exercise price of $0.39 per share were issued to
GATX. The loan is secured by substantially all the assets of the Company;
provided, however, that if the additional $13.5 million is not made available
within 120 days of March 2, 1999, certain assets including channels, equipment
and the customer base will be released from security and the number of warrants
will be reduced proportionately. If certain assets are released, the Company may
sell channels deemed to be non-strategic to its business plan, or use the
collateral to secure other financing.
<PAGE>
In conjunction with the GATX Facility the Company has paid and terminated the
Motorola Loan Facility and the MarCap Facility (see Item 7, Footnote 5). All
security interests related to the Motorola Loan Facility and the MarCap Facility
were concurrently released, by Motorola and MarCap, respectively.
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 from the Company, for $7.5 million, 8,854,662 shares of
common stock, 10,119,614 shares of 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 per share, a three-year warrant to purchase up to
4,000,000 shares of common stock at an exercise price of $1.25 per share, 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 per share (see Item 7, Footnotes 6B and
8).
During April 1999, Jan S. Zwaik resigned as Chief Operating Officer and as a
director of the Company and entered into a one year Consulting Agreement. All
obligations under Mr. Zwaik's employment agreement have been terminated.
LICENSES AND RIGHTS TO LICENSES
Within its Operating Territory, Chadmoore controls approximately 4,800 channels
in the 800 MHz band through ownership of the licenses or in the case of
approximately 10% of its licenses through generally irrevocable five and
ten-year options ("Options") to acquire licenses (subject to FCC rules,
regulations, and policies), coupled with management agreements until such
Options have been exercised or expire. 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 ("Management Agreements"). Any acquisition of an SMR license by the
Company pursuant to exercise of an Option is subject, among other things, to FCC
approval. Until an Option is exercised and the corresponding license is
transferred to Chadmoore, the Company acts under the direction and ultimate
control of the license holder in accordance with FCC rules and regulations.
Once an SMR station is operating, the Company may exercise its Option to acquire
the license at any time prior to the expiration of the Option. As of March 31,
1999, the Company had exercised Options on all except approximately 475 channels
which continue to be under Option and Management Agreements.
The Company presently intends to exercise all such remaining Options, but such
exercise is subject to certain considerations. The Company may elect not to
exercise an Option 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 SMR service in such market. If the Company
does not exercise an Option, its grantor may retain the consideration previously
paid by the Company. Moreover, if the Company defaults in its obligations under
an Option, 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 for the
full Option price, provided the grantor gives timely notice. The Options 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. 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 Options 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.
GOVERNMENT REGULATION
The Company's operations are subject to government regulation primarily by the
FCC. The licensing, operation, assignment, and acquisition of 800 MHz SMR
licenses are regulated under the Communications Act of 1934, as amended in 1996
(the "Communications Act"). The rules and regulations governing the operation of
SMR stations are primarily set forth in Part 1 & 90 of the FCC's rules, 47
C.F.R. '90.1, et seq. In May, 1993, the FCC began revising its rules relating to
the licensing and operation of 800 MHz SMR
<PAGE>
stations. Since that time, the FCC has adopted new rules converting
interconnected SMR service from a private radio service to a commercial mobile
radio service and has proposed other new rules allowing operational flexibility
and mandating future licensing by competitive bidding. The FCC periodically has
various dockets under consideration, which could result in changes to the FCC's
rules, regulations, and policies. Certain rule, regulation or policy changes by
the FCC could potentially affect the operations and financial standing of the
Company.
All SMR and commercial mobile radio service licenses are issued as conditional
licenses. The conditional licenses become licenses without condition only upon
timely and proper completion of station construction and minimal loading. If a
licensee fails to complete construction of a station timely and properly, the
license for that station cancels automatically, without any further action by
the FCC.
Prior to imposition of its commercial mobile radio service regulation system,
the FCC issued SMR licenses for five-year terms. Since January 2, 1995,
commercial mobile radio service licenses have been issued for ten-year terms.
Substantially all of the commercial mobile radio service licenses managed by the
Company was issued for five-year terms. Each license may be renewed at the end
of the license term upon application to the FCC. While the FCC generally grants
renewal of SMR licenses in routine fashion and the Company is aware of no reason
why its licensees will not be entitled to a similar renewal expectancy, there
can be no certainty that the FCC will continue its current renewal practices or
extend them to the Company.
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. Moreover, the FCC
released a list on October 9, 1998 which purported to clarify the status of
relief eligibility for licenses subject to the August 27, 1998 decision.
Subsequently the FCC also released a purported final list of the Receivership
Stations.
However, on the basis of a previous request to the Receiver and a separate
previous request for assistance to the FCC's Licensing Division, by the Company,
the FCC and the Receiver examined and marked a license list provided by the
Company. The FCC's and the Receiver's markups indicated those stations held by
the Company or subject to Options and Management Agreements, which the FCC
and/or the Receiver considered to be, at that time, Receivership Stations and/or
stations considered "similarly situated" and thus eligible for relief. From the
communication from the FCC Licensing Division and 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 proceeded with timely construction of
those stations which the Company feels reasonably certain are Receivership
Stations. The Company received relief on approximately 150 licenses under the
Goodman/Chan proceedings and from the official communication from the FCC, the
Company believes that approximately 650 licenses should be eligible for relief
as "similarly situated". Initial review of the Commission'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
<PAGE>
which were subject to the outcome of the Goodman/Chan decision. However, on
October 9, 1998 a release from the Office of the Commercial Wireless Division of
the FCC's Wireless Telecommunication Bureau announced that because of a legal
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
constructed 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
as well as continuing modification of the FCC's license database, 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 October 9, 1998 Public Notice, and the Company has asked that relief
be reinstated for its affected licenses. Additionally, on February 1, 1999, the
Company in conjunction with other affected parties filed a Petition with the
United States Court of Appeals for the District of Columbia Circuit seeking
reversal of the FCC's decision and a remand of the decision to the FCC with
specific instructions from the court to reinstate the licenses for which relief
had been denied. Oral argument before the Court is scheduled for May 4, 1999.
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 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 Options and
Management Agreements with the Company are among those which the FCC now states
will not be afforded relief pursuant to the Commercial Wireless 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 fine and/or
forfeiture levy attempts 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 audited consolidated financial statements (see Item 7
Footnote 12) for the ultimate outcome of the Goodman/Chan proceeding.
The Receiver has requested that the Company replace some of the existing Options
and Management Agreements with Goodman/Chan licensees with promissory notes. The
Company engaged in discussions with the Receiver in this regard, but did not
reach a final determination and concluded that no further discussions are
warranted at this time. However, there can be no assurances that the Receiver
would not decide to take actions in the future to challenge the Company's
Options and Management Agreements with Goodman/Chan licensees, including the
Company's rights to licenses under such agreements, in an effort to enhance the
value of the Receivership estate. See "LEGAL PROCEEDSINGS."
Regulation of radio towers. The transmitters for SMR stations typically are
located on free-standing or building roof-top towers. The towers are regulated
by both the FCC and the Federal Aviation Administration ("FAA"). The regulations
concern geographic location, height, construction and lighting standards, and
maintenance. Failure to comply with tower regulations can result in assessment
of fines against the tower owner or operator and has, historically, resulted in
fines assessed against individual licensees located on an offensive tower. The
owners of towers are responsible for compliance with FCC and FAA regulations.
The Company does not own any towers, but serves as manager for two towers in
<PAGE>
Memphis, Tennessee. The Company conducts periodic inspections of the towers it
manages. The Company maintains appropriate liability insurance, in amounts
customary in the industry, to protect it from third-party claims arising from
operation of its SMR stations and from towers it manages.
Other Federal regulations. The Company is generally subject to the jurisdiction
of various federal agencies and instrumentalities in addition to the FCC and the
FAA including but not limited to the United States Environmental Protection
Agency, the United States Department of Labor, the United States Occupational
Safety and Health Administration, the United States Equal Employment Opportunity
Commission, the United States Securities and Exchange Commission and others.
While the Company believes that it is operating in conformity with all material
applicable rules and regulations, policies, rule changes, and other actions of
these agencies, future action by these agencies could adversely effect the
operations and financial standing of the Company.
State regulations. At present, state and local governments cannot regulate the
rates charged by SMR operators. Such governments may, however, exercise
regulatory powers over health, safety, consumer protection, taxation, and zoning
regulations with respect to SMR stations. Currently, the Company's systems are
not subject to any state or local regulatory restraint (other than generally
applicable laws and regulations). However, there can be no assurances that such
systems will not become subject to various states and local regulatory
authorities in the future.
Regulatory developments. In March, 1996, the Communications Act went into
effect. This Act effected significant change in regulation and market entry for
communications service providers. Despite this effect on the telecommunications
industry as a whole, the Company does not anticipate any material adverse effect
on its business arising from the Communications Act. Legislation or materially
different rules may be proposed and enacted at any time and may have a material
adverse affect on the operations of the Company. At this time, the Company is
unaware of any pending legislation or rule-making proceedings that would have a
material adverse affect on the current operations of the Company.
RESEARCH AND DEVELOPMENT
The Company has not incurred, and does not expect to incur, significant research
and development expenses in connection with the equipment for its existing
analog SMR systems or the potential implementation of digital SMR systems.
COPYRIGHTS, PATENTS, PROPRIETARY INFORMATION, AND TRADEMARKS
The Company has registered service marks for several brand names associated with
its business, the primary such names including "TeamLink", "TeamLink- Connecting
Your Business" and PTT "Power To Talk Communications".
EMPLOYEES
As of March 31, 1999, the Company had 50 full-time employees. None of the
Company's employees is covered by a collective bargaining agreement and the
Company believes its relationship with its employees is good.
RISK FACTORS
The securities of the Company are speculative and involve a high degree of risk,
including, but not necessarily limited to, the factors affecting operating
results described below. The statements which are not historical facts contained
in this report, including statements containing words such as "believes,"
"expects," "intends," "estimates," "anticipates," or similar expressions, are
"forward looking statements" (as defined in the Private Securities Litigation
Reform Act of 1995) that involve risks and uncertainties including, but not
limited to, the factors set forth below (see also "Forward Looking Statements").
<PAGE>
Limited Revenues; Limited Relevant Operating History; Significant and Continuing
Operating Losses; Negative Cash Flow; Accumulated Deficit. Since its inception,
the Company has been engaged primarily in the acquisition of FCC Licenses and
the construction of facilities to begin commercial operation of such licenses
and, therefore, has had limited revenues from sales of its services.
Accordingly, the Company has a limited relevant operating history upon which an
evaluation of its prospects can be made. Such prospects must be considered in
light of the risks, expenses and difficulties frequently encountered in the
establishment of a new business in the wireless communications industry, which
is a continually evolving industry characterized by an increasing number of
market entrants and intense competition, as well as the risks, expenses and
difficulties encountered in the commercialization of services in new markets.
The Company has incurred operating losses in each quarter since inception and on
December 31, 1998, the Company had an accumulated deficit of approximately
$40,721,597. Since such date, losses have increased and are continuing through
the date of this report. Accordingly, it is anticipated that the Company will
continue to incur significant losses at least until it is able to load
sufficient customers to support overhead. There can be no assurance that the
Company will be successful in generating revenues at a sufficient quantity or
margin or that the Company will ever achieve profitable operations.
Significant Capital Requirements; Need for Additional Capital; Explanatory
Paragraph in Accountant's Report. The Company's capital requirements have been
and will continue to be significant. The Company has been dependent primarily on
the private placement of equity securities and debt financings. The Company
anticipates, based on its current proposed growth plans and assumptions relating
to its growth and operations, that the proceeds from the existing private
placements and borrowings and planned revenues will not be sufficient to satisfy
the Company's contemplated cash requirements for the next 12 months and that the
Company will be required to raise additional funds within the next 12 months. In
addition, in the event that the Company's plans change or its assumptions prove
to be inaccurate (due to unanticipated expenses, delays, problems, or
otherwise), the Company would be required to seek additional funding sooner than
anticipated. Any such additional funding could be in the form of additional
equity capital. The Company is currently pursuing potential funding
opportunities. However, there can be no assurance that any of such opportunities
will result in actual funding or that additional financing will be available to
the Company when needed, on commercially reasonable terms, or at all. If the
Company is unable to obtain additional financing if needed, it will likely be
required to curtail its marketing and expansion plans and possibly cease its
operations. Any additional equity financings may involve substantial dilution to
the Company's then-existing shareholders. The Company's independent public
accountants have included an explanatory paragraph in their reports on the
Company's financial statements for the years ended December 31, 1998 and 1997,
which express substantial doubt about the Company's ability to continue as a
going concern. The Company's consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Item 7 Footnote 2 to the consolidated financial statements, the
Company has suffered recurring losses from operations, has a working capital
deficiency and accumulated deficit that raises substantial doubt about its
ability to continue as a going concern.
Risk of Implementation of Analog Network; Risk of Developing Technology. The
Company's success is dependent on the commercial acceptance of its analog SMR
services. Consumer acceptance of the Company's services will be affected by
technology-based differences and also by the operational performance and
reliability of system transmissions on the Company's analog SMR network. In
addition, the development of new technology in the wireless communications
market could significantly affect the Company's ability to implement its
marketing strategy. In such an event, the Company may be required to spend
additional capital to enhance its system to compete with such new technology.
This would subject the Company to the risks normally associated with the
acquisition of additional capital. See "--Significant Capital Requirements; Need
for Additional Capital; Explanatory Paragraph in Accountants' Report." The use
of analog wireless communications equipment for commercial and consumer
applications represents a relatively new business activity characterized by
emerging markets and an increasing number of market entrants who have introduced
or are developing an array of new wireless communications products and services,
some of which will compete against the Company's services and any other services
which may be developed by the Company. Achieving market acceptance for the
Company's services will require substantial marketing efforts and expenditure of
funds to create awareness and demand by potential customers. There can be no
assurance that the Company's PTT products will ever gain wide commercial
<PAGE>
acceptance, however, the Company is encouraged in this regard by the current
subscriber levels in excess of 31,000 units. The inability to successfully
complete development of a product or application or a determination by the
Company, for financial, technical or other reasons, not to complete commercial
building of licenses held by the Company, particularly in instances in which the
Company has made significant capital expenditures, could have a material adverse
affect on the Company (See "--Dependence on Licensed Software").
Dependence on Ability to Compete; System Build-Out. Chadmoore's success depends
on its analog mobile network's ability to compete with other wireless
communications systems in each relevant market and the Company's ability to
successfully market its wireless communications services. Chadmoore is
continuing to focus its marketing efforts on attracting customers from its
previously identified targeted groups of potential subscribers, chiefly business
users. Following implementation of its system in each market and optimization
activities, Chadmoore's SMR system will compete with established and future
wireless communications operators, including Nextel Communications, Inc., to
attract customers to its service in each of the markets in which the Company
operates such SMR services or competing services such as PCS. The Company's
ability to compete effectively with other wireless communications service
providers, however, will depend on a number of factors, including the successful
deployment of its identified market areas, the continued satisfactory
performance of the Company's technology, and the development of cost-effective
direct and indirect channels of distribution for its products and services.
Although the Company has made significant progress in these areas to date, no
assurance can be given that such objectives will be achieved. See "Risk Factors
- -- Forward-Looking Statements."
While the Company believes that the mobile dispatch service currently being
provided on its analog SMR network is similar in function to and achieves
performance levels competitive with those being offered by other current
wireless communications service providers in the Company's market areas, there
are (and will in certain cases continue to be) differences between the services
provided by the Company and by cellular and/or PCS system operators and the
performance of their respective systems. In addition, if either PCS or cellular
operators provide two-way dispatch services in the future, the Company's
advantage may be impaired. In addition, Nextel does provide two-way dispatch
service and has bundled several services under its digital network that the
Company's system does not provide. As a result of these differences, there can
be no assurance that services provided on the Company's networks will be
competitive with those available from other providers of mobile telephone
services. As part of its marketing strategy, Chadmoore will continue to
emphasize the benefits to its customers of low cost and superior customer
service. The Company's system is not compatible with PCS or other
telecommunications systems and, therefore, the Company will not be able to offer
roaming abilities in any market other than its current markets or markets in
which it enters into agreements with other analog SMR systems, of which there
can be no certainty. Accordingly, Chadmoore will not be able to provide
automatic roaming service comparable to that currently available from cellular
operators, which have roaming agreements covering each other's markets
throughout the United States. Moreover, the cellular systems in each of the
Company's markets, as well as in the markets in which Chadmoore expects to
provide services in the future, have been operational for a number of years,
currently service a significant subscriber base and typically have significantly
greater financial and other resources than those available to the Company.
Subscriber units on the Company's network will not be compatible with cellular
or PCS systems, and vice versa. This lack of interoperability may impede the
Company's ability to attract cellular subscribers or those new mobile telephone
subscribers that desire the ability to access different service providers in the
same market. Moreover, because many of the Company's competitors have
substantially greater financial resources than Chadmoore, such operators may be
able to offer prospective customers equipment subsidies or discounts that are
substantially greater than those, if any, that could be offered by the Company.
Thus, Chadmoore's ability to compete based on the price of subscriber units may
be limited. Chadmoore cannot predict the competitive effect that any of these
factors, or any combination thereof, will have on the Company. Cellular
operators and certain PCS operators and entities that have been awarded PCS
licenses each control more spectrum than is allocated for SMR service in each of
the relevant market areas. Each cellular operator is licensed to operate 25 MHz
of spectrum and certain PCS licensees have been licensed for 30 MHz of spectrum
in the markets in which they are licensed, while no more than 21.5 MHz is
available in the 800 MHz band to all SMR systems, including the Company's
systems, in those markets. See"-- Forward-Looking Statements."
<PAGE>
Management of Growth and Attraction and Retention of Key Personnel. Management
of the Company's growth may place a considerable strain on the Company's
management, operations and systems. The Company's ability to execute its
business strategy will depend in part upon its ability to manage the demands of
a growing business. Any failure of the Company's management team to effectively
manage growth could have a material adverse effect on the Company's business,
financial condition or results of operations. The Company's future success
depends in large part on the continued service of its key management, sales,
product development and operational personnel. The Company believes that its
future success also depends on its ability to attract and retain skilled
technical, managerial and marketing personnel, including, in particular,
additional personnel in the area of technical support. Competition for qualified
personnel is intense. The Company has from time to time experienced difficulties
in recruiting qualified skilled technical personnel. Failure by the Company to
attract and retain the personnel it requires could have a material adverse
effect on the financial condition and results of operations of the Company.
Technological Advances and Evolving Industry Standards. The wireless
communications industry, and in particular the SMR industry, is characterized by
rapid technological developments, changes in customer requirements, evolving
industry standards and frequent new product introductions. In the future, the
Company may be required to enhance its existing systems and to develop and
introduce new products that take advantage of technological advances and respond
promptly to new customer requirements and evolving industry standards. There can
be no assurance that the Company will be able to keep pace with the rapid
evolution of the wireless communications industry.
Reliance on One Principal Supplier in Implementation of System. Pursuant to
equipment purchase agreements between Chadmoore and Motorola, Motorola provides
the system infrastructure and subscriber handset equipment to the Company or its
dealers in the majority of its markets. The Company expects that it will need to
rely on Motorola to manufacture a substantial portion of the equipment necessary
to construct its system for the foreseeable future. The equipment purchase
agreements include commitments from the Company to purchase from Motorola
significant amounts of system infrastructure equipment. The Company has, among
other things, agreed (subject to certain conditions) to purchase $10 million of
Motorola equipment over a 42 month period. There can be no assurances that the
Company will be able to locate a replacement supplier.
Dependence on Governmental Regulation. The licensing, operation, acquisition and
sale of Chadmoore's SMR licenses are regulated by the FCC. FCC regulations have
undergone significant changes during the last four years and continue to evolve
as new FCC rules and regulations are adopted pursuant to Omnibus Budget
Reconciliation Act of 1993 and Telecommunications Act. The Company's ability to
conduct its business is dependent, in part, on its compliance with FCC rules and
regulations. See "Business--Government Regulation." Future changes in regulation
or legislation affecting the Company's system, including Congress' and the FCC's
recent allocation of additional commercial mobile radio services spectrum, could
materially adversely affect Chadmoore's business. In addition, should the FCC
fail to renew any of the Company's licenses or pass rules or regulations that
limit the Company's ability to conduct its business, this could have a material
adverse effect on the Company.
Assets Primarily Consist of Intangible FCC Licenses. The Company's assets
consist primarily of intangible assets, principally FCC licenses, the value of
which will depend significantly upon the success of the Company's business and
the growth of the SMR and wireless communications industries in general. In the
event of default on indebtedness or liquidation of the Company, there can be no
assurance that the value of these assets will be sufficient to satisfy its
obligations. Chadmoore had a negative net tangible book value of $12,034,252 as
of December 31, 1998. Under the terms of the GATX Facility, as discussed below,
the Company has granted a security interest in all proceeds from the sale of the
Company's licenses. Therefore, shareholders would not share in the proceeds from
such liquidation.
Lack of Dividend History; No Dividends. The Company has never paid dividends on
its Common Stock and intends to utilize any earnings for growth of its business.
Therefore, the Company does not intend to pay cash dividends for the foreseeable
future. This lack of dividends and a dividend history may adversely affect the
liquidity and value of the Company's Common Stock.
<PAGE>
Potential Control by Significant Stockholders. Based on securities ownership
information relating to the Company, the Shareholders Agreement dated May 1,
1998 between the Company, Recovery Equity Investors II, L.P ("REI"), and Robert
W. Moore (the `Shareholders Agreement") and giving effect to the exercise in
full of (i) eleven-year warrant to purchase up to 14,612,796 shares of Common
Stock at an exercise price of $0.001 per share of Common Stock; (ii) a
three-year warrant to purchase up to 4,000,000 shares of Common Stock at an
exercise price of $1.25 per share of Common Stock; and (iii) a five and one-half
year warrant to purchase up to 10,119,614 shares of Common Stock at an exercise
price of $0.39 per share of Common Stock, REI would hold approximately 43.3% of
the Common Stock outstanding. In connection with the consummation of the REI
investment and the Shareholders Agreement, REI has the right to designate not
less than 2 members of the Company's Board of Directors (the "Board"). As a
result, based upon REI's potential stock ownership position, as well as its
ability to designate at least 2 of the members of the Board, REI is in a
position potentially to exert some measure of influence over the Company's
affairs. Based upon the potential REI ownership position, REI could act together
with other shareholders and such parties could have a sufficient voting interest
in the Company, among other things, to (1) exert effective control over the
approval of amendments to the Company's Certificate of Incorporation, as amended
(the "Chadmoore Charter"), mergers, sales of assets or other major corporate
transactions as well as other matters submitted for stockholder vote, (2) defeat
a takeover attempt, and (3) otherwise control whether particular matters are
submitted for a vote of the stockholders of Chadmoore. Other than the
Shareholder's Agreement, the Company is not aware of any current or pending
agreements among REI and any other shareholders with respect to the ownership or
voting of Common Stock and the Company knows of no entity or person that has a
present intention to seek to exercise such control.
Dependence on Key Personnel. The Company believes that its continued success
will depend to a significant extent upon its present management and in
particular the services of Robert W. Moore, the Company's Chief Executive
Officer. The Company carries a key man life insurance policy on Mr. Moore. The
loss of any senior management personnel could have a material adverse affect on
the Company. Further, in order to successfully implement and manage its business
plan, the Company will be dependent upon, among other things, successfully
recruiting and retaining qualified managerial and sales personnel having
experience in business activities such as those contemplated by the Company.
Competition for the type of qualified individuals sought by the Company is
intense. There can be no assurance that the Company will be able to retain
existing employees or that it will be able to find, attract and retain qualified
personnel on acceptable terms.
Possible Volatility of Market Price. The Company's Common Stock has been traded
on the OTC Bulletin Board since July 1996. The Company believes that factors
such as (but not limited to) announcements of developments related to the
Company's business, fluctuations in the Company's quarterly or annual operating
results, failure to meet securities analysts' expectations, general conditions
in the international marketplace and the worldwide economy, announcements of
technological innovations or new systems or enhancements by the Company or its
competitors, developments in patents or other intellectual property rights and
developments in the Company's relationships with clients and suppliers could
cause the price of the Company's Common Stock to fluctuate, perhaps
substantially. In recent years the stock market has experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. Such fluctuations could adversely affect the market price of
the Company's Common Stock.
Risks Associated with Year 2000 Issues. In light of the progress made to date,
the Company does not anticipate delays and postponements in finalizing and
implementing Year 2000 resolutions by the middle of the fourth quarter of 1999.
Until the Company's renovation and validation phases are substantially complete,
however, the Company cannot fully and accurately estimate any uncertainty in
timely resolving its Year 2000 challenges or in finalizing and implementing
related Year 2000 resolutions. Additionally, any failure by third parties which
have a material relationship with the Company to achieve full Year 2000
compliance may be a potential risk if such failure were to adversely affect the
ability of such third parties to provide any products or services that are
critical to the Company's operations. Finally, where the Company is not in a
position to validate or certify that technology provided by third parties is
fully Year 2000 compliant, the Company is seeking to obtain assurances from such
third parties that their systems are or will be Year 2000 compliant no later
than the end of the third quarter of 1999. If these third parties fail to
<PAGE>
appropriately address Year 2000 challenges, there could be a material adverse
effect on the Company's financial condition and results of operations. Such
risks include, but are not limited to: (i) inability of subscribers to make or
receive dispatch calls; (ii) inability of sites, switches and other interfaces
to accurately record call records of subscriber phone calls; and (iii) inability
of billing systems to accurately report and bill subscribers for phone usage.
Other risks associated with the inability of the Company or material third
parties to develop and deploy Year 2000 solutions in a timely and successful
manner may involve or result in conditions that could preclude the Company from:
(a) obtaining equity or debt financing; (b) deploying an alternative technology
that is Year 2000 compliant; (c) implementing commercial buildouts in new
markets or introducing new services in existing markets; and (d) pursuing
additional business opportunities.
The Company cannot independently assess the impact of Year 2000 challenges and
compliance activities and programs involving operators of utilities and other
service providers (such as electric utilities and voice and data utilities). The
Company therefore must rely on utility providers' estimates of their own Year
2000 challenges and the status of their related compliance activities and
programs in the Company's own Year 2000 assessment process. Because the
Company's systems will be dependent upon the systems of other service providers,
any disruption of operations in the computer programs of such service providers
would likely have an impact on the Company's systems. Moreover, there can be no
assurance that such impact will not have a material adverse effect on the
Company's operations.
Concerns About Mobile Communications Health Risk. Allegations have been made,
but not proven, that the use of portable mobile communications devices may pose
health risks due to radio frequency emissions from such devices. Studies
performed by wireless telephone equipment manufacturers and at least one
independent European study, have rebutted these allegations, and a major
industry trade association and certain governmental agencies have stated
publicly that the use of such phones poses no undue health risk. The actual or
perceived risk of mobile communications devices could adversely affect the
Company through a reduced subscriber growth rate, a loss of current subscribers,
reduced network usage per subscriber or through reduced financing available to
the mobile communications industry.
FORWARD-LOOKING STATEMENTS. A number of the matters and subject areas discussed
in the foregoing "Risk Factors" section and elsewhere in this Annual Report that
are not historical or current facts deal with potential future circumstances and
developments. The discussion of such matters and subject areas is qualified by
the inherent risks and uncertainties surrounding future expectations generally,
and also may materially differ from the Company's actual future experience
involving any one or more of such matters and subject areas. The Company has
attempted to identify, in context, certain of the factors that it currently
believes may cause actual future experience and results to differ from the
Company's current expectations regarding the relevant matter or subject area.
The operation and results of the Company's wireless communications business also
may be subject to the effect of other risks and uncertainties in addition to the
relevant qualifying factors identified elsewhere in the foregoing "Risk Factors"
section, including, but not limited to, general economic conditions in the
geographic areas and occupational market segments (such as, for example,
construction, delivery, and real estate management services) that the Company is
targeting for its SMR systems, the availability of adequate quantities of system
infrastructure and subscriber equipment and components to meet the Company's
systems deployment and marketing plans and customer demand, the success of
efforts to improve and satisfactorily address any issues relating to the
system's performance, the ability to achieve market penetration and average
subscriber revenue levels sufficient to provide financial viability to the SMR
system, access to sufficient debt or equity capital to meet the Company's
operating and financing needs, the quality and price of similar or comparable
wireless communications services offered or to be offered by the Company's
competitors, including providers of cellular and PCS service, future legislative
or regulatory actions relating to SMR services, other wireless communications
services or telecommunications generally and other risks and uncertainties
described from time to time in Chadmoore's reports filed with the Commission.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate office is located at 2875 East Patrick Lane, Suite G,
Las Vegas, Nevada 89120. The Company leases office and warehouse space at this
address which consists of approximately 16,000 square feet at a monthly rental
of approximately $17,500 under a five-year lease, which started in December
1997, with renewal and annual escalation provisions. Management believes that
the corporate office space will be sufficient to accommodate the growth
necessary to implement its plan of operation and has no expectation of needing
more space before the end of the lease term. In addition, the Company leases a
sales facility in Little Rock, Arkansas, which consists of 1,000 square feet
under a one-year lease expiring in November 1999 and a sales facility in
Southaven, Mississippi, which consists of 800 square feet under a one-year lease
expiring in March 2000. The Company, through a subsidiary, also owns an 8,000
square foot sales and service facility in Memphis, Tennessee.
The Company, through its subsidiaries, leases approximately 275 antenna sites
throughout the United States for the transmission of its SMR services. These
sites are located primarily on roof tops or are free standing facilities. The
terms of these leases range from month to month to 5 years, with options to
renew. The Company believes it is more economical to lease antenna sites rather
than own the sites.
ITEM 3. LEGAL PROCEEDINGS
Goodman/Chan Proceedings. 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 February 1,
1999, the Company in conjunction with other affected parties filed a Petition
with the United States Court of Appeals for the District of Columbia Circuit
seeking reversal of the FCC's decision and a remand of the decision to the FCC
with specific instructions from the court to reinstate the licenses for which
relief had been denied. Oral argument before the Court is scheduled for May 4,
1999. Other similarly situated licensees also have filed petitions for relief.
See Item 7, Footnote 12 for a detailed factual discussion of the Goodman/Chan
proceedings. (See also "government regulation").
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 denied this allegation.
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").
A non-binding mediation was conducted before a retired superior court judge on
August 21, 1998, and a confidential settlement was reached. On April 12, 1999,
the parties executed a written Settlement Agreement settling all claims and
cross claims. Pursuant to the terms of the settlement, the Company will issue
525,000 shares of its Common Stock and the parties will execute mutual general
releases.
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.
Subsequently, CCI added claims against Peacock and two related purported
entities arising out of Peacock's conduct with regard to the Consultant
Agreement and certain finder's preferences. Subsequently, Peacock added an
affirmative claim against CCI for breach of contract, alleging his entitlement
to certain bonus compensation that he alleges was not paid to him.
On January 22, 1999, CCI reached a settlement in principle of the dispute. The
settlement was reduced to a comprehensive written settlement agreement which
became effective on March 5, 1999. Under the terms of the settlement, Peacock
will
<PAGE>
receive (1) certain rights with respect to a finder's preference pending against
a five-channel SMR station in Memphis, Tennessee (WNZR202); (2) certain rights
with respect to other finder's preference proceedings which are determined by
CCI in its sole discretion to be undesirable; and (3) 10% of the independently
determined value of the wide area license, if any, issued as a result of a
certain finder's preference proceeding filed by CCI. Under the terms of the
settlement, CCI will receive a right of first refusal with respect to certain
assets belonging to Peacock. In addition, the settlement contains mutual general
releases and covenants to dismiss pending proceedings. On March 5, 1999, CCI and
Peacock executed a Voluntary Dismissal With Prejudice of all claims asserted in
the District Court litigation. However, despite CCI's demand, Peacock has
refused to dismiss a finder's preference proceeding concerning station WZC790 in
Memphis, Tennessee, which is owned by a subsidiary of the Company. The Company
is presently evaluating its options with respect to enforcement of the Agreement
in this regard. For his part, Peacock is contending that CCI is in breach of the
Settlement Agreement because it does not agree with Peacock's position with
respect to the finder's preference proceeding concerning station WZC790. Peacock
has filed a motion with the District Court seeking enforcement of the Settlement
Agreement, but it is not clear what relief Peacock is seeking.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER / SHAREHOLDER MATTERS
MARKET INFORMATION. The Company's Common Stock has been listed on the NASD
Electronic Bulletin Board since July 1996. The Company's Common Stock currently
trades under the symbol "MOOR". As of March 31, 1999, there were 403 holders of
record of Common Stock, including brokerage accounts. The transfer agent for the
Common Stock is American Securities Transfer and Trust, Inc., Lakewood, CO
80215-5513.
The following table sets forth, on a per share basis, the high and low sale
prices for the Company's Common Stock as reported by Bloomberg.
Fiscal Year 1997 High Bid Low Bid
-------- -------
First Quarter $ 1.51 $ 0.63
Second Quarter $ 0.99 $ 0.34
Third Quarter $ 0.80 $ 0.20
Fourth Quarter $ 1.31 $ 0.39
Fiscal Year 1998 High Bid Low Bid
-------- -------
First Quarter $ 0.62 $ 0.41
Second Quarter $ 0.58 $ 0.44
Third Quarter $ 0.47 $ 0.20
Fourth Quarter $ 0.35 $ 0.17
On December 31, 1998, the closing ask and bid price, on a per share basis, of
the Company's Common Stock was $0.25 and $0.20, respectively. The above prices
may not reflect actual transactions and represent prices between broker-dealers
and do not include retail mark-ups or mark-downs or any commissions to the
broker-dealer.
DIVIDEND INFORMATION. The Company has paid no cash dividends to date on its
Common Stock. The Company anticipates that for the foreseeable future its
earnings, if any, will be retained for use in its business and that no cash
dividends will be paid on the Common Stock.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the fiscal years ended December 31,
1998 and December 31, 1997, which should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and notes
thereto included elsewhere in this report.
Statements contained herein that are not historical facts are forward-looking
statements as that term is defined by the Private Securities Litigation Reform
Act of 1995. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, the forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
from those projected. The Company cautions investors that any forward-looking
statements made by the Company are not guarantees of future performance and that
actual results may differ materially from those in the forward-looking
statements. Such risks and uncertainties include, without limitation,
fluctuations in demand, loss of subscribers, the quality and price of similar or
comparable wireless communications services, the existence of well-established
competitors who have substantially greater financial resources and longer
operating histories, regulatory delays or denials, ability to complete intended
market roll-out, termination of proposed transactions, access to sources of
capital, adverse results in pending or threatened litigation, consequences of
actions by the FCC, general economics and the risks discussed under
"Business--Risk Factors" in this report.
RESULTS OF OPERATION
Total revenues for the fiscal year ended December 31, 1998 increased 65.7% or
$1,248,501 from $1,900,167 in 1997 to $3,148,668 in 1998, reflecting increases
of $1,571,365, or 210.3%, in service (recurring revenues from air-time
subscription by customers in 1998) offset, in part, by a decline of $322,864, or
28.0%, in equipment sales and maintenance. Consistent with the Company's plan of
operation to focus on recurring revenues by selling its commercial SMR service
through independent dealers, the proportion of total revenues generated by
service increased to 73.6% in 1998 from 39.3% in 1997. In such business model,
the local dealer rather than the Company sells, installs, and services the radio
equipment and records the revenues and costs associated therewith and the
Company receives only the recurring revenue associated with the sale of airtime.
The Company anticipates that the proportion of total revenues from recurring
revenues will continue to increase in future periods as additional markets are
rolled out utilizing indirect distribution through local dealers.
The 210.3% increase in Service revenues, from $747,335 in 1997 to $2,318,700 in
1998, was driven by an increase in the number of subscribers utilizing the
Company's SMR systems of approximately 18,700, or 225.3%, from approximately
8,300 at December 31, 1997 to approximately 27,000 at December 31, 1998. The
increase in subscribers, in turn, was primarily due to full-scale implementation
of service by the Company in 52 new markets during 1998 as well as continued
growth in existing markets. Pricing per subscriber unit remained comparable
during both years.
The 28.0% decrease in revenues from Equipment sales and maintenance from
$1,152,832 in 1997 to $829,968 in 1998, was attributable to the Company's
continued focus on Service revenue and the reallocation of capital from direct
markets to indirect markets to concentrate on increasing Service revenues. The
Company anticipates that Equipment sales and maintenance will remain relatively
constant and account for a declining share of total revenues in the future,
because since acquiring full-service operations in its first two markets, the
Company has utilized and intends to continue utilizing indirect distribution
through local dealers in substantially all markets.
Cost of service revenue increased by $312,360, or 96.7%, from $323,028 in 1997
to $635,388 in 1998. This increase was primarily due to SMR system site expenses
in the Company's 52 new markets rolled out during 1998. Gross margin on Service
revenue increased from 56.8% in 1997 to 72.6% in 1998, which is attributed to
the maturation of markets commercialized in 1997 and early 1998. In general,
Service revenue has a lower cost of sales associated with it and therefore a
higher gross margin percentage than Equipment sales and maintenance service.
Cost of equipment sales and maintenance decreased by $169,382, or 26.9%, from
$630,480 in 1997 to $461,098 in 1998. This decrease was due to the decrease in
Equipment sales and maintenance revenue from 1997 to 1998. Gross margin on
Equipment sales and maintenance remained relatively the same over the two
periods, decreasing 2.0% or 0.9 percentage points, from 45.3% in 1997 to 44.4%
in 1998.
General and administrative expenses increased by $1,179,637, or 17.5%, from
$6,729,585 in 1997 to $7,909,222 in 1998. Salaries, wages, and benefits expense
(a component of general and administrative expenses) increased by $180,843 or
6.5%, from $2,780,385 in 1997 to $2,961,228 in 1998. This increase is primarily
due to personnel additions, largely in operational areas, made in connection
with the Company starting to transition from aggregating SMR spectrum to
constructing, marketing,
<PAGE>
and rolling out commercial SMR service. Relative to total revenues, Salaries,
wages, and benefits expense was 94.0% in 1998 compared with 146.3% in 1997.
Remaining General and administrative expense increased 25.3% or $998,794, from
$3,949,200 in 1997 to $4,947,994 in 1998. The increase in the remaining General
and administrative expense was primarily due to increases of approximately
$710,000 in advertising and marketing, $570,000 in expense associated with
non-commercial markets which were established in the fourth quarter of 1997, and
$380,000 in compensation paid to dealers and partners in the Company's indirect
distribution channels. These increases were partially offset by declines of
approximately $510,000 in legal expenses and approximately $180,000 in other
professional services. These declines were due to a majority of the Company's
legal and professional services being associated with debt and equity financing
not expensed. The Company expects General and administrative expense as a
percentage of revenues to decline in future years as the costs associated with
market build out are reduced and as the Company realizes operating leverage
gained from an increasing subscriber base managed through essentially the same
infrastructure.
Depreciation and amortization expense increased $545,680 or 79.4%, from $687,679
in 1997 to $1,233,359 in 1998, reflecting larger amounts of licenses and
infrastructure placed in service associated with construction and implementation
of new commercial sites.
In 1997 the Company had a cost of settlement on license dispute of $143,625.
There was no such expense in 1998.
Due to the foregoing, total operating expenses increased $1,724,670 or 20.3%,
from $8,514,397 in 1997 to $10,239,067 in 1998, and the Company's loss from
operations increased by $476,169 or 7.2%, from $6,614,230 to $7,090,399, for
such respective periods.
In the second fiscal quarter of 1997, the Company recorded a charge of
$7,166,956 to reflect permanent impairment of value to management agreements and
options to acquire licenses for which the Company at such time was uncertain of
its ability to construct systems prior to an FCC-mandated construction deadline
of November 20, 1997, which would have resulted in forfeiture of such licenses
back to the FCC. On June 30, 1997, management determined that approximately
2,700 channels were permanently impaired. Licenses so selected by the Company
were chosen based on numerous strategic factors, including importance of the
markets in which such licenses were located, channel densities in such markets,
projected system revenues, and potential competitive impact. The impairment
charge was based on, among other things, management's estimate of the Company's
ability to meet FCC construction requirements in 158 markets by the deadline. As
of the November 20, 1997 construction deadline the Company had exceeded its
estimate and met all of the FCC's construction requirements for approximately
3,800 of the 5,500 affected channels. As a result, the Company exceeded its
estimate by approximately 1,000 channels and released approximately 1,700
channels back to the FCC. The impairment charge for the approximately 2,700
channels was accounted for as a permanent impairment. The cost basis of the
management agreements and options to acquire such licenses will not be adjusted
to reflect the excess of the actual build out over the estimate, in accordance
with SFAS No. 121 "Impairment of Long Lived Assets and Long Lived Assets to be
Disposed of ".
In the fourth quarter of 1997, the Company recorded a one-time non-cash
write-down of $443,474 associated with its investment in JJ&D LLC. This
write-down was almost exclusively purchased goodwill from the original purchase
price allocation. Management believes this investment is permanently impaired
based on the Company's expectation of JJ&D LLC's future performance.
Interest expense, net of interest income, was restated in 1997 with respect to
an SEC announcement regarding a beneficial conversion feature embedded in a
convertible security (see Item 7, Footnote 5A). Interest expense, net of
interest income, increased $443,729, or 35.8%, from $1,237,923 in 1997 to
$1,681,652 in 1998, due to higher debt balances associated with notes payable
issued to exercise license options, offset, in part, by a "beneficial conversion
feature" associated with the issuance of convertible debentures in 1997
resulting in interest expense of $767,986.
During 1997, the Company had a gain on settlement of debt of $839,952 (see Item
7, Footnotes 5A and 6D).
During 1998, the Company had expense of $182,914 associated with a standstill
agreement (see Item 7, Footnote 6A).
During 1998, the Company recognized several channel sales resulting in a gain on
sale of Intangible assets of $730,425. There was no such gain in 1997.
Based on the foregoing, the Company's net loss decreased $6,358,128 or 43.3%,
from $14,679,286 in 1997 to $8,321,158 in 1998. This decrease was the result of
a decrease of $6,834,297 in other expenses and an increase of $476,169 in the
Company's operating loss during such period.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have been and will continue to be
significant. The Company believes that during 1999 it will require additional
funding. Approximately $13.5 million was funded in March of 1999, and additional
amounts will be required for full-scale implementation of its SMR services and
ongoing operating expenses. To meet such funding requirements the Company is in
the process of obtaining additional funding including the possible funding of an
additional $13.5 million under the GATX Facility (as defined below), a vendor
financing arrangement consummated with HSI GeoTrans, Inc. ("GeoTrans") and
possible other vendor financing arrangements currently being evaluated but not
yet consummated. There can be no assurances that the Company will be able to
successfully obtain the additional financings currently contemplated, or will be
otherwise able to obtain sufficient financing to consummate the Company's
business plan.
On March 2, 1999, pursuant to a Senior Secured Loan Agreement ("GATX Facility"),
among the Company and GATX Capital Corporation ("GATX"), Chadmoore borrowed
$13.5 million from GATX. Pursuant to the agreement, within 120 days of the
funding, GATX, at its sole discretion, has the option to make available up to
$13.5 million in additional funds. Loans under the GATX facility will be made at
an interest rate fixed at the time of the funding based on five-year U.S.
Treasury notes plus 5.5%, with a five-year amortization schedule following an
interest-only period, and warrants to purchase up to 1,822,500 shares of the
Company's Common Stock at an exercise price of $0.39 per share were issued to
GATX. The loan is secured by substantially all the assets of the Company;
provided, however, that if the additional $13.5 million is not made available
within 120 days of March 2, 1999, certain assets including channels, equipment
and the customer base will be released from security and the number of warrants
will be reduced proportionately. If certain assets are released, the Company may
sell channels deemed to be non-strategic to its business plan, or use the
collateral to secure other financing.
In conjunction with the GATX Facility the Company has paid and terminated the
Motorola Loan Facility and the MarCap Facility (see Item 7, Footnote 5).
Motorola and MarCap concurrently released all security interests related to the
Motorola Loan Facility and the MarCap Facility.
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 from the Company, for $7.5 million, 8,854,662 shares of
common stock, 10,119,614 shares of 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 per share, a three-year warrant to purchase up to
4,000,000 shares of common stock at an exercise price of $1.25 per share, 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 per share (see Item 7, Footnotes 6B and
8).
In September 1997, the holder of the convertible debenture entered into an
agreement with the Company to restructure the convertible debenture financing
described above (the "Debenture Restructuring Agreement"). Under the Debenture
Restructuring Agreement the holder agreed to restrict its daily sales of the
Company's Company Stock to not more than 10% of total trading volume on the
NASDAQ bulletin board (but, notwithstanding the foregoing restriction, the
holder may sell up to 100,000 shares of the Company's common stock per month).
In addition, the Debenture Restructuring Agreement required the holder to
exchange the convertible debenture (including rights to all accrued interest and
penalties) for a new debenture (the "New Debenture") with a maturity date of
August 31, 1998, in the principal amount of $1,627,500, payable in ten monthly
payments of $162,750. These payments were payable in cash or stock at the market
price when due (at the Company's option). Interest, in the liquidated amount of
$425,000, was payable, by the Company, at the Company's option, in cash or stock
at the then current market price on the due date and was payable in September
1998. As of December 31, 1998 the Company had not made any payments on the New
Debenture, and had received a notice of default under the New Debenture. On
April 12, 1999 the Company made a payment to the New Debenture holder of
1,871,096 shares of the Company's restricted Common Stock which represented
$916,837 toward the principal and interest of the New Debenture (see Item 7
Footnotes 5A and 13).
On March 9, 1998, the Company entered into a vendor financing arrangement with
GeoTrans, a wholly owned subsidiary of Tetra Tech, Inc., whereby GeoTrans
performed turn-key implementation of full-scale SMR system operations for the
Company in up to 10 markets per month and 145 total markets. During 1997,
GeoTrans completed preliminary construction services for the Company in 78
markets and through March 31, 1999, GeoTrans completed full scale construction
of approximately 61 commercial markets. Collateral for such financing
arrangement consists of pledged stock of a subsidiary primarily consisting of
SMR assets.
<PAGE>
In October 1996, the Company signed a purchase agreement with Motorola to
purchase approximately $10 million 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.
By way of a letter agreement dated March 10, 1998 among MarCap, Motorola, and
the Company, the effective period of the Motorola purchase agreement and
Motorola Facility was extended from 30 months to 42 months from the effective
dates thereof. As of March 31, 1999 the Company has purchased approximately $5
million toward this purchase commitment.
Based on the foregoing, the Company believes that it should have adequate
resources to continue establishing its SMR business. However, the Company
anticipates, based on its current plans and assumptions relating to its growth
and operations, that the proceeds from the completed financings and planned
revenues will not be sufficient to satisfy the Company's contemplated cash
requirements for the next 12 months and that the Company will be required to
raise additional funds. In addition, in the event that the Company's plans
change or its assumptions prove to be inaccurate (due to unanticipated expenses,
delays, problems, or otherwise), the Company may be required to seek additional
funding sooner than anticipated. The Company believes it has developed adequate
contingency plans, however, the failure to consummate the aforementioned
potential financing with GATX as currently contemplated, or at all, could have a
material adverse effect on the Company, including the risk of liquidation of
assets or bankruptcy. Such contingency plans include pursuing similar financing
arrangements with other institutional investors and lenders, 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
<PAGE>
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.
During the twelve months ended December 31, 1997 and 1998, the Company used net
cash in operating activities of $3,037,044 and $475,172, respectively. The major
non-operations use of cash for the years ended December 31, 1997 and 1998 was
the acquisition of communications assets. The major non-operations source of
cash for the years ended December 31, 1997 and 1998 was proceeds from issuance
of equity securities and proceeds from issuance of long-term debt.
The Company's auditors' opinions for the years ended December 31, 1998 and 1997
include an explanatory paragraph which expresses substantial doubt about the
Company's ability to continue as a going concern. The Company's consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern. As discussed in Item 7, Footnote 2 to the consolidated
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficiency and accumulated deficit 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 Item 7, Footnote 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
YEAR 2000 ISSUES
The Year 2000 problem arose because many existing computer programs use only the
last two digits to refer to a year. Therefore, these computer programs do not
properly recognize a year that begins with "20" instead of the familiar "19". If
not corrected, many computer applications could fail or create erroneous
results.
The Company has addressed its state of readiness for Year 2000 and Management is
believes that the Company will be compliant by the end of 1999. The Company is
currently evaluating, and upgrading its internal hardware and software that
enables the Company to load subscribers, capture call records, generate customer
bills and facilitate internal communications. All internal hardware and software
is expected to be fully tested by the third quarter of 1999. The Company has
contacted the necessary hardware and software vendors about its plan, and
Management believes that all the necessary Year 2000 compliant hardware and
software is currently available and can be implemented quickly. At the current
time Management estimates the cost of internal evaluation and upgrades not to
exceed $100,000.
The Company's current accounting software is not Year 2000 compliant, however
the Company has purchased a Year 2000 compliant version and expects to be fully
compliant by the second quarter 1999. The Company primarily 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. In
addition, 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.
To a lesser extent, the Company also relies on various third party service
providers and the Company cannot independently assess the impact of Year 2000
challenges and compliance activities and programs involving operators of
utilities and other service providers (such as electric utilities and voice and
data utilities). The Company therefore must rely on utility providers' estimates
of their own Year 2000 challenges and the status of their related compliance
activities and programs in the Company's own Year 2000 assessment process.
Because the Company's systems will be dependent upon the systems of other
service providers, any disruption of operations in the computer programs of such
service providers would likely have an impact on the Company's systems.
Moreover, there can be no assurance that such impact will not have a material
adverse effect on the Company's operations
The Company has assessed its risks associated with the Year 2000 issue and has
concluded that, unless third party providers are unable to continue to provide
the Company with their services or Motorola is unable to supply the Company with
its products, the effects of the Year 2000 issue will not have a material
adverse effect on the Company. While Management believes that the Company has
timely and adequately planned for the Year 2000 issue, there can be no assurance
that the Company's plan will achieve its goals or that third parties that the
Company relies on have adequate plans to address this issue.
If the Company is unable to gather and process data electronically, it has a
contingency plan to gather and process data manually. This process will be a
temporary solution and will require substantially more resources than would
otherwise be required, however Management believes that it could resume business
for a period of time using this contingency plan.
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The accounting standards executive committee of the American Institute of
Certified Public Accountants has issued Statement of Position 98-5 "Reporting on
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires the costs of
start-up activities, as defined, to be expensed as incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The Company has
adopted this standard beginning January 1, 1999 and will expense start up
activities as incurred after that date. The adoption of SOP 98-5 is not expected
to have a material effect on the Company's financial position or results from
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("SFAS 133"). The Company expects to adopt
the new statement effective January 1, 2000. The statement establishes
accounting and reporting standards that require every derivative instrument
(including certain derivative instruments embedded in other contracts) to be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows the gains and losses on a derivative to
offset related results on the hedged item in the income statement, and requires
that a company formally document, designate and assess the effectiveness of the
hedge accounting transaction. The Company does not anticipate that the adoption
of this statement will have a significant effect on its results of operations or
financial position.
ITEM 6A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1998, all the Company's long term debt bears fixed interest
rates, however, the fair market value of this debt is sensitive to changes in
prevailing interest rates. The Company runs the risk that market rates will
decline and the required payments will exceed those based on the current market
rate. The Company does not use interest rate derivative instruments to manage
its exposure to interest rate changes.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The audited Financial Statements of the Company for the years ended December 31,
1998 and 1997, are located at page F-4.
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Independent Auditors' Report, of KPMG LLP F-2
Report of Independent Public Accountants, of Arthur Andersen LLP F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 F-5
Consolidated Statements of Redeemable Preferred Stock and
Shareholders' Equity for the years ended
December 31, 1998 and 1997 F-6, F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 F-8, F-9
Notes to Consolidated Financial Statements F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Chadmoore Wireless Group, Inc. and
Subsidiaries:
We have audited the accompanying consolidated balance sheet of Chadmoore
Wireless Group, Inc. and Subsidiaries (formerly CapVest Internationale, Ltd.),
(a development stage enterprise), as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chadmoore Wireless
Group, Inc. and Subsidiaries (formerly CapVest Internationale, Ltd.)(a
development stage enterprise), as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring losses
from operations, has a deficiency of working capital, and has a deficit
accumulated during the development stage that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 5a to the consolidated financial statements, the Company
has restated its 1997 consolidated financial statements to comply with the
Securities and Exchange Commission staff position on accounting for convertible
securities having beneficial conversion features.
/s/ KPMG LLP
March 27, 1998 except as to the
sixth paragraph of Note 5a which
is as of November 13, 1998.
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Chadmoore Wireless Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Chadmoore
Wireless Group, Inc. (a Colorado corporation) and Subsidiaries (the "Company")
as of December 31, 1998, and the related consolidated statements of operations,
redeemable preferred stock and shareholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chadmoore Wireless Group, Inc.
and Subsidiaries, as of December 31, 1998, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Footnote 2 to
the consolidated financial statements, the Company has suffered recurring losses
from operations, has a working capital deficiency and accumulated deficit 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 Footnote 2.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
Las Vegas, Nevada
March 31, 1999
F-3
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
Restated
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 578,677 $ 959,390
Accounts receivable, less allowance for
doubtful accounts of $13,000 and $45,000 at
December 31, 1998 and 1997, respectively 582,817 265,935
Other receivables, less allowance for 136,288 99,223
Doubtful accounts of $133,639 and $0 at
December 31, 1998 and 1997, respectively
Inventory 169,520 89,133
Deposits and prepaids 134,228 130,858
----------- -----------
Total current assets 1,601,530 1,544,539
Property and equipment, net 12,681,753 5,809,168
Intangible assets, net 41,118,012 34,620,880
Other assets, net 119,166 32,928
----------- -----------
Total assets $ 55,520,461 $ 42,007,515
============ ============
LIABILITIES, REDEEMBALE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Liabilities:
Current maturities of long-term debt $ 8,255,174 $ 2,638,414
Accounts payable 3,979,366 1,165,425
Accrued liabilities 2,827,792 1,629,715
License option commission payable 3,412,000 3,412,000
Unearned revenue 506,056 107,057
Other current liabilities 707,039 131,273
----------- -----------
Total current liabilities 19,687,427 9,083,884
Long-term debt 8,152,589 4,614,157
----------- -----------
Total liabilities 27,840,016 13,698,041
Minority interests 533,690 352,142
Commitments and contingencies Redeemable preferred stock:
Series C, 4% cumulative, 10,119,614 shares issued and outstanding 974,995 --
Shareholders' equity:
Preferred stock, $.001 par value, authorized 40,000,000 shares:
Series A 250,000 shares issued and canceled, 0 outstanding at December 31 -- --
1998 and 1997
Series B 219,000 shares issued and 21,218 and 219,000 shares outstanding
at December 31, 1998 and 1997, respectively 21 219
Common stock, $.001 par value, authorized 100,000,000 shares,
36,504,324 and 21,163,847 shares issued and outstanding
at December 31, 1998 and 1997, respectively 36,504 21,164
Additional paid-in capital 66,856,832 60,303,498
Stock subscribed -- 32,890
Accumulated deficit (40,721,597) (32,400,439)
----------- -----------
Total shareholders' equity 26,171,760 27,957,332
----------- -----------
Total liabilities, redeemable preferred
stock and shareholders' equity $55,520,461 $42,007,515
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1998 and 1997
1998 1997
Restated
------------ ------------
Revenues:
Service revenue $ 2,318,700 $ 747,335
Equipment sales and maintenance 829,968 1,152,832
------------ ------------
3,148,668 1,900,167
------------ ------------
Operating expenses:
Cost of service revenue 635,388 323,028
Cost of equipment sales and maintenance 461,098 630,480
General and administrative 7,909,222 6,729,585
Depreciation and amortization 1,233,359 687,679
Cost of settlement on license dispute -- 143,625
------------ ------------
10,239,067 8,514,397
------------ ------------
Loss from operations (7,090,399) (6,614,230)
------------ ------------
Other income (expense):
Minority interest (96,618) 19,366
Interest expense, net (1,681,652) (1,237,923)
Write down of management agreements
and licenses to estimated fair value -- (7,166,956)
Write down of investment in JJ&D, LLC -- (443,474)
Standstill agreement expense (182,914) --
Gain on sale of intangible assets 730,425 --
Gain on settlement of debt -- 839,952
Other, net -- (76,021)
------------ ------------
(1,230,759) (8,065,056)
------------ ------------
Net loss $ (8,321,158) $(14,679,286)
Series B preferred stock dividend (69,854) --
Redeemable preferred stock dividend and accretion (289,683) --
------------ ------------
Loss applicable to common shareholders $ (8,680,695) $(14,679,286)
============ ============
Basic and diluted loss per share of Common Stock $ (.21) $ (.73)
============ ============
Basic and diluted weighted average shares outstanding 41,454,187 20,061,602
============ ============
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Preferred Stock
Series B Common Stock
---------------------------------------- Additional Total
Outstanding Outstanding Paid-In Stock Accumulated Shareholders'
Shares Amount Shares Amount Capital Subscribed Deficit Equity
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996,
restated - $ - 17,823,445 17,824 $55,985,974 $288,835 $(17,721,153) $ 38,571,480
Issuance of Common Stock:
Stock Subscribed - - 231,744 232 255,713 (255,945) - -
Exercise of options - - 323,857 323 161,606 - - 161,929
Conversion of debentures - - 1,587,527 1,588 1,123,507 - - 1,125,095
Debt restructuring - - 1,050,000 1,050 723,450 - - 724,500
License dispute - - 101,700 102 127,023 - - 127,125
Legal fees - - 45,574 45 21,830 - - 21,875
Issuance of stock options - - - - 329,426 - - 329,426
Issuance of preferred stock
in connection with private
placement 219,000 219 - - 1,574,969 - - 1,575,188
Beneficial conversion feature
associated with convertible
debentures - - - - 767,986 - - 767,986
Restructuring of convertible
debentures - - - - (767,986) - - (767,986)
Net loss - - - - - - (14,679,286) (14,679,286)
--------- ------ ---------- ------- ----------- -------- ------------- -------------
Balance at December 31,
1997, restated 219,000 $ 219 21,163,847 $21,164 $60,303,498 $ 32,890 $(32,400,439) $ 27,957,332
========= ====== ========== ======= =========== ======== ============= =============
</TABLE>
F-6
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity
For the year ended December 31, 1998
<TABLE>
<CAPTION>
Redeemable Preferred Stock
Preferred Stock Series B Common Stock
--------------------- ------------------ -------------------- Additional Total
Outstanding Outstanding Outstanding Paid-In Stock Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Capital Subscribed Deficit Equity
------------- ------- ----------- ------ ----------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997,
restated - $ - 219,000 $219 21,163,847 $ 21,164 60,303,498 $32,890 $(32,400,439) 27,957,332
Issuance of Common Stock:
Employee compensation plan - - - - 123,500 124 63,572 - - 63,696
Stock subscribed - - - - 11,400 11 32,879 (32,890) - -
Exercise of license option - - - - 800,000 800 351,200 - - 352,000
Conversion of Series B
preferred stock - - (197,782) (198) 4,461,714 4,462 (4,264) - - -
Series B preferred stock
dividend - - - - 122,413 122 (122) - - -
Standstill agreement - - - - 310,023 310 182,604 - - 182,914
Services - - - - 290,765 291 160,634 - - 160,925
Exercise of license option - - - - 31,000 31 15,159 - - 15,190
Fixed assets - - - - 335,000 335 188,711 - - 189,046
Cash 10,119,614 685,312 - - 8,854,662 8,854 5,837,604 - - 5,846,458
Issuance of stock options - - - - - - 15,040 - - 15,040
Preferred stock dividends
and accretion - 289,683 - - - - (289,683) - - (289,683)
Net loss - - - - - - - - (8,321,158) (8,321,158)
------------- ------- ----------- ------ ----------- -------- ----------- --------- ------------- ------------
Balance at December 31, 1998
10,119,614 $974,995 21,218 $ 21 36,504,324 $36,504 $66,856,832 $ - $(40,721,597) $26,171,760
============= ======= =========== ====== =========== ======== =========== ========= ============= ============
</TABLE>
F-7
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
Restated
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(8,321,158) $(14,679,286)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest 96,618 (19,366)
Depreciation and amortization 1,233,359 687,679
Interest expense associated with beneficial
conversion feature -- 767,986
Provision for losses on accounts receivable 13,881 45,000
Write down of management agreements
and licenses to estimated fair value -- 7,166,956
Write down of investment in JJ&D, LLC -- 443,474
Write off of license options 43,690 330,882
Write down of prepaid management rights -- 81,563
Gain on settlement of debt -- (839,952)
Standstill agreement 182,914 --
Shares issued for settlement of license dispute -- 127,125
Amortization of debt discount 1,265,227 168,410
Stock compensation 7,710 --
Expense associated with:
Stock issued for services -- 21,875
Options issued for services 15,040 329,430
Change in operating assets and liabilities:
Increase in accounts receivable (321,501) (143,638)
Decrease (increase) in inventory (80,387) 108,343
Decrease (increase) in deposits and prepaids 52,116 (82,241)
Increase in unearned revenue 398,999 107,057
Increase in accounts payable and accrued
liabilities 4,267,997 1,942,328
Increase in other current liabilities 670,323 399,331
---------- ----------
Net cash used in operating activities (475,172) (3,037,044)
---------- ----------
Cash flows from investing activities:
Payments for acquisition and purchase of license options (224,448) (211,550)
Proceeds from intangible assets disposition 536,547 500,000
Purchases of property and equipment (7,364,520) (1,885,223)
Proceeds from property and equipment disposition -- 827,841
Decrease (increase) in other assets 16,597 (11,123)
---------- ----------
Net cash used in investing activities (7,035,824) (780,055)
---------- ----------
(Continued)
F-8
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the Years Ended December 31, 1998 and 1997
1998 1997
Restated
---------- ----------
Cash flows from financing activities:
Proceeds upon issuance of equity securities $ 7,500,000 $ --
Equity issuance costs (968,229) --
Proceeds upon issuance of preferred stock -- 1,575,188
Increase in debt issuance costs (143,801) --
Payments of long-term debt (2,012,012) (440,665)
Proceeds from issuance of long-term debt 2,754,325 2,178,666
---------- ----------
Net cash provided by financing activities 7,130,283 3,313,189
---------- ----------
Net decrease in cash (380,713) (503,910)
Cash at beginning of period 959,390 1,463,300
---------- ----------
Cash at end of period $ 578,677 $ 959,390
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS
Chadmoore Wireless Group, Inc., together with its subsidiaries (collectively
"Chadmoore" or the "Company"), is one of the largest holders of frequencies in
the United States in the 800 megahertz ("MHz") band for commercial specialized
mobile radio ("SMR") service. The Company's operating territory covers
approximately 55 million people in 180 markets, primarily in secondary and
tertiary cities throughout the United States ("Operating Territory"). Also known
as dispatch, one-to-many, or push-to-talk, Chadmoore's commercial SMR service
provides reliable, real-time voice communications for companies with mobile
workforces that have a need to frequently communicate with their entire fleet or
subgroups of their fleet.
In February 1995, the Company (formerly Capvest Internationale, Ltd.
("Capvest"), a publicly held entity) entered into a Plan of Reorganization
("Plan") whereby the Company exchanged 89% of its issued and outstanding stock
for 85% of the restricted common shares of Chadmoore Communications, Inc.
("CCI"). Capvest had no significant operations since its inception in 1988.
Pursuant to the Plan, Capvest changed its name to Chadmoore Wireless Group, Inc.
The transaction has been accounted for under the purchase method of accounting
as a reverse purchase acquisition whereby Chadmoore Wireless Group, Inc. is the
remaining legal entity and CCI is the acquirer and remaining operating entity.
As of December 31, 1997 the Company was a development stage company wherein the
Company's activities consisted primarily of acquiring assets (spectrum and
infrastructure), attempting to secure capital, performing engineering
activities, and assembling and installing infrastructure on antenna sites.
During the year ended December 31, 1998, the Company's planned principal
activities commenced. The Company emerged from the development stage in the
fourth quarter of 1998 and the inception to date figures have been excluded from
the accompanying consolidated financial statements.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of all
majority owned companies and joint ventures. All significant inter-company
balances and transactions have been eliminated in consolidation. Minority
interest represents the minority partners' proportionate share in the venturer's
equity or equity in income (loss) in the joint ventures.
C. USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
D. INVENTORY
Inventories, which consist of merchandise and parts, are accounted for by the
lower of cost (using the first-in, first-out method) or net realizable value.
E. INTANGIBLE ASSETS
Intangible assets consist of FCC licenses, which are recorded at cost and are
authorized by the Federal Communications Commission ("FCC") and allow the use of
certain communications frequencies. FCC licenses have a primary term of five or
ten years and are renewable for additional five-year periods for a nominal FCC
processing fee. Although there can be no assurance that the licenses will be
renewed, Management expects that the licenses will be renewed as they expire.
FCC license costs are amortized using the straight-line method over 20 years.
The Company evaluates the recoverability of FCC licenses by determining whether
the unamortized balance of this asset is expected to be recovered over its
remaining life through projected undiscounted operating cash flows.
F-10
<PAGE>
F. PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation and
amortization. Direct and indirect costs of construction are capitalized.
Depreciation is computed using the straight-line method over estimated useful
lives beginning in the month an asset is placed in service.
Estimated useful lives of property and equipment are as follows:
SMR systems and equipment 10 years
Buildings 40 years
Leasehold improvements 5 years
Furniture and office equipment 5 years
G. INCOME TAXES
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS 109"), whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. SFAS 109 requires recognition of a future tax
benefit of net operating loss carryforwards and certain other temporary
differences to the extent that realization of such benefit is more likely than
not; otherwise, a valuation allowance is applied.
H. REVENUE RECOGNITION
The Company recognizes revenue from radio dispatch and telephone interconnect
services based on monthly access charges per radio, plus in the case of
telephone interconnect service, revenue is recognized based on air time charges
as used. Revenue is also recognized from equipment maintenance upon acceptance
by the customer of the work completed as well as from the sale of equipment when
delivered.
I. LOSS PER SHARE
The Company has applied the provisions of Statement of Financial Accounting
Standards No. 128 , Earnings Per Share ("SFAS 128"), which establishes standards
for computing and presenting earnings per share. Basic earnings per share is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. The calculation of
diluted earnings per share includes the effect of dilutive common stock
equivalents.
J. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The accounting standards executive committee of the American Institute of
Certified Public Accountants has issued Statement of Position 98-5 "Reporting on
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires the costs of
start-up activities, as defined, to be expensed as incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The Company has
adopted this standard beginning January 1, 1999 and will expense start up
activities as incurred after that date. The adoption of SOP 98-5 is not expected
to have a material effect on the Company's financial position or results from
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("SFAS 133"). The Company expects to adopt
the new statement effective January 1, 2000. The statement establishes
accounting and reporting standards that require every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows the gains and losses on a derivative to
offset related results on the hedged item in the income statement, and requires
that a company formally document, designate and assess the effectiveness of the
hedge accounting transaction. The Company does not anticipate that the adoption
of this statement will have a significant effect on its results of operations or
financial position.
F-11
<PAGE>
K. CONCENTRATION OF RISK
The Company believes that the geographic and industry diversity of its customer
base minimizes the risk of incurring material losses due to concentrations of
cr edit risk.
The Company is party to an equipment purchase agreement with Motorola. For the
foreseeable future the Company expects that it will need to rely on Motorola for
the manufacturing of a substantial portion of the equipment necessary to
construct and make operational its network.
L. RECLASSIFICATIONS
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform with the 1998 presentation. None of these
reclassifications had an effect on net loss or basic or diluted loss per share.
M. STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25
("APB 25"), Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock Based
Compensation, which permits entities to recognize, as expense over the vesting
period, the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 also allows entities to continue to apply the provisions
of APB 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made as if the fair-value based
method defined in SFAS 123 had been applied. The Company has elected to continue
to apply provisions of APB 25 and provide the pro forma disclosure provisions of
SFAS 123.
N. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,
("SFAS 121") on January 1, 1996. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Impairment expense for the years ended December 31, 1998 and 1997
was $0 and $7,166,956, respectively.
O. CUSTOMER ACQUISITION COSTS
Customer acquisition costs are expensed in the period they are incurred.
P. ADVERTISING EXPENSE
The Company expenses advertising costs in the period incurred. The Company
expensed approximately $740,000 and $29,000 of advertising costs for the years
ended December 31, 1998 and 1997, respectively.
Q. DEBT ISSUANCE COSTS
Debt issuance costs are amortized using the effective interest method over the
term of the debt agreements. Debt issuance costs included in other assets were
$102,835 and $0 at December 31, 1998 and 1997, respectively. Amortization of
debt issuance costs amounted to $40,966 and $42,638 in 1998 and 1997,
respectively.
(2) MANAGEMENT PLANS
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the years ended December
31, 1998 and 1997, the Company has suffered recurring losses from operations,
F-12
<PAGE>
and has a working capital deficiency of $18,085,897 and $7,539,345,
respectively, that raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described below. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The Company believes that during 1999 it will require a significant amount of
capital for full-scale implementation of its SMR services and ongoing operating
expenses. In March 1999 the Company obtained $13.5 million of such funding
through additional borrowings (see Footnote 13). To meet such funding
requirements, the Company anticipates additional loans from GATX Capital
Corporation ("GATX") or other participants in the GATX facility (of which there
can be no certainty).
The Company believes that it should have adequate resources to continue
establishing its SMR business. However, while the Company believes that it has
developed adequate contingency plans, the failure to consummate the
aforementioned potential financing as currently contemplated, could have a
material adverse effect on the Company, including the risk of liquidation of
assets or bankruptcy. Current contingency plans may include pursuing similar
financing arrangements with other institutional investors and lenders, selling
additional equity instruments and selling selected channels, and focusing solely
on the Company's current 82 markets in which full-scale service has already been
implemented. This latter course might entail ceasing further system expansion in
existing markets and reducing corporate staff to the minimal level necessary to
administer such markets. The Company believes that this strategy would provide
sufficient time and resources to raise additional capital or sell selected
channels in order to resume its growth. However, there can be no assurances that
this or any of the Company's contingency plans would adequately address the
aforementioned risks, or that the Company will attain overall profitability once
it has achieved its additional financing.
(3) ACQUISITIONS
A. JJ&D, LLC INVESTMENT
In May 1996, the Company purchased a 20% interest in JJ&D, LLC ("JJ&D") for
$600,000. The terms of the agreement provided for consideration consisting of
$100,000 cash, $100,000 note payable due in 120 days, and $400,000 of value in
options to acquire restricted Common Stock of the Company. The value assigned to
the options was based on an arms-length negotiation as set forth in the purchase
agreement. At December 31, 1996, the investment was accounted for using the
equity method of accounting. All significant intercompany transactions were
eliminated and amortization of goodwill and equity in earnings was not material.
In 1997, the Company evaluated the recoverability of this asset in accordance
with Accounting Principles Board Opinion No. 18 ("APB 18"), The Equity Method of
Accounting for Investments in Common Stock, and determined it to be other than
temporarily impaired. The impairment, measured by the amount in which the
carrying amount exceeded the fair value of the asset, resulted in a write-down
of $443,474, principally goodwill, charged to other income (expense).
As of December 31, 1997 the investment account had been reduced to zero.
Accordingly, the Company discontinued the application of the equity method. No
material losses have accumulated since the equity method was suspended.
B. AIRTEL SMR, INC. MANAGEMENT AND OPTION TO ACQUIRE AGREEMENT
On May 11, 1996, the Company completed an option to acquire the common stock of
Airtel SMR, Inc. On February 23, 1997, the Company exercised its option to
acquire the outstanding stock of Airtel SMR, Inc. for $75,000 cash and a 180
day, non-interest bearing note payable for $75,000. In August 1997, the holder
of the $75,000 note cancelled the note in exchange for SMR equipment having a
cost basis of $50,000 to the Company. Airtel SMR, Inc.'s only holdings were FCC
licenses. Therefore, the Company recorded FCC licenses with an estimated value
of $125,000.
F-13
<PAGE>
(4) INTANGIBLE ASSETS
A. INTANGIBLE ASSETS CONSIST OF THE FOLLOWING:
December 31, December 31,
1998 1997
------------- -------------
FCC licenses $ 37,669,351 $ 6,958,871
Rights to acquire licenses 3,985,133 27,893,926
------------- -------------
41,654,484 34,852,797
Less accumulated amortization (536,472) (231,917)
============= =============
$ 41,118,012 $ 34,620,880
============= =============
B. LICENSE OPTION AND MANAGEMENT AGREEMENTS
The Company entered into various option agreements to acquire FCC licenses for
SMR channels. The option agreements allow the Company to purchase licenses,
subject to FCC approval, within a specified period of time after the agreement
is signed ("Options"). As of December 31, 1998, the Company had exercised
Options for approximately 1,370 channels for consideration of cash, notes
payable and issuance of Common Stock totaling approximately $11,940,000. In
relation to the exercise of the Options for the channels, the Company has also
incurred commission expense totaling approximately $2,823,000. Additionally, the
Company has made partial Option payments in cash and Common Stock totaling
approximately $380,000 toward the purchase of approximately 280 channels.
Commission expense associated with these Options is approximately $589,000.
All consideration given by the Company, toward the Options, is recorded at cost
as a Right to acquire licenses. When the Option is exercised, the FCC Approval
and Transfer Process (as defined below) begins. While there can be no assurance
that the license will transfer into the Company's name, management is reasonably
certain that all license applications will be approved by the FCC. As of
December 31, 1998 the Company had exercised the Options for approximately 1,370
licenses, of which approximately 1,150 had completed the FCC Approval and
Transfer Process. When the FCC Approval and Transfer Process is complete the
Company reclassifies all previous consideration given by the Company, toward the
purchase of the Option, from Rights to Acquire FCC licenses to FCC licenses.
During 1998, the Company reclassified approximately $8,400,000 to FCC licenses
related to the 1,150 licenses that had completed the FCC Approval and Transfer
Process.
Upon entering into an Option, the Company also entered into a like-term
management agreement with the licensee. The management agreements give the
Company the right to manage the SMR systems, subject to the direction of the
licensee, for a period of time prior to the transfer of the license to the
Company as stated in the agreements, usually 2 to 5 years ("Management
Agreements"). During such period, revenues received by the Company will be
shared with the licensee only after certain agreed-upon costs to construct the
channels are recovered by the Company.
In addition to the Options mentioned above, on June 14, 1996, the Company
executed a stock purchase agreement with Libero Limited ("Libero") to purchase
approximately 5,500 channels. Pursuant to the agreement, the Company acquired
from Libero all the issued and outstanding Common Stock of CMRS Systems, Inc.
("CMRS") and 800 SMR Network, Inc. ("800") (jointly the "Management Companies").
The Management Companies engaged in the business of constructing and managing
mobile radio stations. The Management Companies entered into Management
Agreements with certain companies (the "Companies"), pursuant to which CMRS or
800 agreed, in accordance with applicable FCC rules, regulations, and policies,
to construct and manage all of the SMR stations for which the Companies received
licenses from the FCC. The respective shareholders of the Companies granted to
the Management Companies, options to acquire all of the stock of the Companies,
at such time as all conditions of such transfer of control were met, as set
forth in the FCC rules, regulations and policies and as required by section 310
of the Communications Act.
F-14
<PAGE>
The Company consummated such acquisition for combined consideration valued at
$32,496,887. The Company accounted for the acquisition under the purchase method
of accounting. Based on an independent appraiser's estimate of the fair market
value of the assets exchanged, $22,725,442 of the combined consideration was
allocated to Management Agreements and the remaining $9,771,445 was allocated to
"Investment in options to acquire licenses" ("Investment in Options"). The
exercise price under such options was payable by the Management Companies with
an amount of the Management Companies own stock equal to 10% of the then issued
and outstanding stock. The Management Companies' stock was to be issued and
allocated on a pro-rata basis to the licensees ("Minority Holders") based on
their individual license percentage of the total number of licenses. No cash
consideration was payable upon exercise of such options by either the Company or
the Management Companies.
On January 12, 1998, the Company consummated an agreement with 32 of the
Minority Holders that were due approximately 9% of the outstanding common stock
of CMRS, to accept $150,000 in lieu of such stock in CMRS. Upon signing, the
Company had five days to fund such transaction. Due to limited time and internal
resources, the Company sought an investor that could immediately meet the
$150,000 in payments. A third party investor already familiar with the Company
from earlier investments agreed to provide the financing to acquire the
approximately 9% minority interest in CMRS, provided that the Company in turn
enter into an exchange agreement with the third party investor to issue 800,000
shares of the Company's Common Stock in return for the minority interest in
CMRS. These transactions closed on February 10, 1998, in conjunction with which
the third party investor also agreed to limit its selling of such shares of
Common Stock of the Company to not more than 50,000 shares per month for the
first six months following issuance thereof. An effect of these transactions was
to eliminate an approximately 9% minority interest in CMRS in return for the
issuance of 800,000 shares of the Company's common stock. Therefore, the
consideration given by the Company for the exercise of such Investment in
Options was valued at the closing market value of the 800,000 shares of the
Company's Common Stock. CMRS remains a wholly owned subsidiary of the Company
with no further obligations to the 32 licensee corporations. The one remaining
licensee continues to operate under the Company's Management Agreement and
related Investment in Option agreement. Negotiations are currently underway to
exercise the one remaining Investment in Option. If a satisfactory resolution
cannot be achieved, the Company intends to continue to operate under the current
Management Agreement and related Investment in Option agreement, subject to the
licensee's direction.
When the Company exercises the Investment in Options and completes the FCC
Approval and Transfer Process, the pro-rata share of the Management Agreements
and Investment in Options is reclassified from Rights to acquire licenses to FCC
licenses. As of December 31, 1998, less than 1% of the Investment in Options
remained unexercised and continued to be operated under the Management
Agreements. As of December 31, 1998, approximately 3,600 of the total 3,800 FCC
licenses related to Management Agreements and Investment in Options have
completed the FCC Transfer and Approval Process, leaving approximately 200
licenses remaining to be transferred. During 1998, the Company reclassified
approximately $22,725,000 to FCC licenses related to the 3,600 licenses that had
completed the FCC Approval and Transfer Process.
The approximately 5,500 channels managed by 800 and CMRS were included in a five
year Extended Implementation Plan granted by the FCC on March 31, 1995, under
Section 90.629 of the FCC rules, 47 C.F.R. 90.629 ("Extended Implementation
Plan"). Under the Extended Implementation Plan the stations had to be
constructed in accordance with a five-year construction plan. In December of
1995, the Company filed the required documents, as requested by the FCC,
re-justifying the Extended Implementation Plan. In May of 1997, the FCC denied
the re-justification plan and granted six months from the date of the denial to
complete construction of the stations managed by 800 and CMRS. Under the
Commission's decision, licenses for any stations not constructed before the six
month deadline of November 20, 1997 would be canceled.
As a result of the ruling, the Company restructured its build-out plan and
prioritized the channels based on detailed criteria relating to engineering
specifications, demographics, competition, market conditions and dealer
characteristics. Based on the results of prioritization and the construction
deadline stipulated by the FCC, the Company believed the value of certain
licenses under the Management Agreements and Investment in Options had been
permanently impaired. For the approximately 5,500 channels, management allocated
a portion of the original purchase price based on estimated fair market value
determined by the criteria mentioned above. Based on this process, management
estimated the Company would be able to meet FCC construction requirements on
approximately 2,800 channels, before November 20, 1997. These channels were
allocated an aggregate value of $25,329,931. The remaining channels,
approximately 2,700, were determined to be permanently impaired under SFAS 121.
As a result, the Company recorded an impairment charge of $7,166,956 in the
second quarter of 1997. Based on the independent appraiser's estimate of the
fair market value at the time of purchase, $5,016,869 was allocated to
Management Agreements and the remaining $2,150,087 was allocated to the related
options. As of November 20, 1997 the Company had met all of the FCC's
construction requirements for approximately 3,800 of the 5,500 channels. As a
result the Company exceeded its estimate by approximately 1,000 channels, and
released approximately 1,700 channels back to the FCC.
F-15
<PAGE>
According to SFAS 121 there will be no adjustment to the original permanent
impairment estimate, or the carrying value of the 1.000 channels. As a result,
the Company has approximately 1,000 FCC licenses with no carrying value.
C. INTANGIBLE ASSET DISPOSITIONS
During 1998 the Company entered into a license termination agreement where the
Company gave up its ownership right on a certain FCC license deemed by
management to be non-strategic to its business plan. The license had a carrying
value of $50,000 and the Company received consideration of $385,000 for
terminating its rights to such license, thereby creating a gain on disposition
of $335,000.
During 1998 the Company entered into a contract for the sale of certain FCC
licenses deemed by management to be non-strategic to its business plan. The
total transaction price was $915,611 for licenses with a carrying value of
$486,547. The Company received cash of $717,139 and the remaining $198,472 is
classified as other receivables with an allowance of $133,639. In 1998 the
Company recognized a gain on disposition of intangible assets related to this
transaction of $295,425.
During 1998 the Company recognized the sale of certain FCC licenses deemed by
management to be non-strategic to its business plan. The total transaction price
was $100,000 for licenses with a carrying value of $0, therefore creating a gain
on disposition of intangible assets of $100,000. To date the Company has
received cash of $75,000 and the remaining $25,000 is classified as other
receivables.
(5) LONG-TERM DEBT
Long-term debt consists of the following: December 31, December 31,
1998 1997
----------- ------------
Note payable in connection with the asset purchase
from General Communications, payable in monthly
installments of $12,500 through February 1997;
$13,750 through February 1998; thereafter, monthly
payments are subject to annual CPI increases through
February 2008, at which time the monthly payments
are fixed through February 2021. management has
assumed annual CPI increases to be 2.5%. The note
payable non-interest bearing with interest imputed
at 9%, net of unamortized discount of $3,382,925 as
of December 31, 1998. $ 1,185,335 $ 1,201,160
Notes payable to MarCap in connection with the
purchase of radio communications equipment, payable
in 36 monthly installments maturing at various dates
through 2001, including interest rates from 10.625%
to 11.15%, secured by a guarantee and stock pledge
agreement. 1,335,008 401,380
Notes payable to MarCap in connection with a $2
million line of credit collateralized by certain
assets of the Company, payable in 36 monthly
installments maturing at various dates through 2001,
including interest rate of 12%, secured by a
guarantee and stock pledge agreement. 1,635,480 470,264
Note payable to Motorola Credit in connection with
equipment purchase, paid in three monthly
installments ending January 1998. -- 34,139
Note payable which matured in August 1998, 10
monthly principal payments of $162,750, one interest
payment at maturity of $425,000. As of December 31,
1998 no payments have been made (see Footnote 5A). 1,627,500 1,627,500
Notes payable to licensees, payable in up to 36
monthly installments beginning March 1998 through
December 1999 and ending March 2001 through December
2002. Non interest bearing, interest imputed at 15%.
Aggregate face amount of $12,745,992 net of
unamortized discount of $2,402,384. 10,343,608 3,166,808
F-16
<PAGE>
Notes payable to minority partners to be paid from
positive cash flow of the related LLC. Non interest
bearing, interest imputed at 15%. 265,124 325,639
Note payable in connection with asset purchase,
matured May 1998, included interest at 12%. -- 10,158
Note payable to GMAC for van, payable in 36 monthly
installments ending June 2001, including interest at
1.9%. 15,708 --
----------- ------------
16,407,763 7,237,048
Less current maturities: (8,255,174) (2,622,891)
----------- ------------
$ 8,152,589 $ 4,614,157
=========== ============
Aggregate maturities of debt, net of unamortized discounts, for the next five
years and thereafter are as follows:
Year ended December 31
1999 $ 8,255,174
2000 3,619,036
2001 2,914,617
2002 539,279
2003 38,752
Thereafter 1,040,905
-----------
$16,407,763
A. DEBT ISSUANCES, RETIREMENTS AND CONVERSIONS
In February 1997, the Company executed a Securities Purchase Agreement to place
a minimum of $1,000,000 and a maximum of $4,000,000 of the Company's three year,
8% convertible debentures ("Convertible Debenture Agreement"). Principal and
interest are convertible into shares of the Company's Common Stock. In addition,
the Convertible Debenture 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, to the same holder, 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 is applied 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 Electronic Bulletin Board.
On June 10, 1997 the holder of the $1,750,000 three-year 8% convertible
debenture discussed above, tendered a notice of payment for penalties in the
amount of $52,500. The penalties were a result of the Company's nonperformance
to prepare and have declared effective, a registration statement with the
Securities and Exchange Commission ("SEC") to register the shares underlying the
convertible debentures within 110 days from the date of closing. In addition, on
July 31, 1997, and August 1, 1997, the holder tendered to the Company notices of
conversion, pursuant to Regulation S, for $100,000 and $50,000 of principal,
respectively. The notices as tendered did not comply with the requirements of
Regulation S. The Company therefore did not issue the requested stock. If the
Company had been compelled to issue all of the stock into which the debenture is
convertible, management believes the effect on the Company's stock price and
liquidity could have been severe.
In September 1997, the holder of the convertible debenture entered into an
agreement with the Company to restructure the convertible debenture financing
described above (the "Debenture Restructuring Agreement"). Under the Debenture
Restructuring Agreement the holder agreed to restrict its daily sales of the
Company's Company Stock to not more than 10% of total trading volume on the
NASDAQ bulletin board (but, notwithstanding the foregoing restriction, the
holder may sell up to 100,000 shares of the Company's common stock per month).
In addition, the Debenture Restructuring Agreement required the holder to
exchange the convertible debenture (including rights to all accrued interest and
penalties) for a new debenture (the
F-17
<PAGE>
"New Debenture") with a maturity date of August 31, 1998, in the principal
amount of $1,627,500, payable in ten monthly payments of $162,750. These
payments were payable in cash or stock at the market price when due (at the
Company's option). Interest, in the liquidated amount of $425,000, was payable,
by the Company, at the Company's option, in cash or stock at the then current
market price on the due date and was payable in September 1998. As of December
31, 1998 the Company had not made any payments on the New Debenture, had
received a notice of default under the New Debenture. The New Debenture is
required to be secured by specified Company assets with a value of at least 150%
of the principal outstanding. Pursuant to the Debenture Restructuring Agreement,
the holder also received 1,050,000 shares of Common Stock, which represented a
payment of the principal, interest through September 1997, and penalties. The
Common Stock was issued at the current market price on date of execution.
The Company has accounted for the transaction in accordance with the provisions
of FASB 125, "Accounting for Transfers and Servicing of Financial Asset and
Extinguishment of Liabilities" wherein the gain on extinguishment of $169,764 is
the difference between the total reacquisition cost of the debt and the net
carrying amount of the $1,750,000 Convertible Debenture on the Company's books
on the date of extinguishment.
In a 1997 announcement, the staff of the 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
debentures and ending on the date the debentures are first convertible. Based on
the market price of the Company's Common Stock on the dates of issuance, the
convertible debentures had a beneficial conversion feature valued at $767,986.
The effect of the beneficial conversion feature was not recorded in the
Company's 1997 consolidated financial statements previously filed as part of
Form 10-KSB for the year ended December 31, 1997. Because of the SEC
announcement, the Company has restated its 1997 consolidated financial
statements to reflect such announcement for the period as required by the SEC
staff. The restatement results in an increase in interest expense of $767,986
due to a beneficial conversion feature embedded in the convertible debenture and
was reflected in the Company's Form 10KSB-A. In addition, the loss on settlement
of the debenture was reduced by $767,986, from $598,222 to a gain of $169,764 as
the amount credited to additional paid-in capital was recovered. Accordingly,
there is no change in the net loss in the accompanying consolidated statement of
operations, and the restatements had no impact on shareholders' equity at
December 31, 1997. The beneficial conversion feature for the year ended December
31 1997, based on the market price of the Company's Common Stock on the dates of
issuance, totaled $767,986, and was amortized to interest expense in 1997.
In addition to the $169,764 gain on restructuring of debt discussed above, the
Company also had a $670,188 gain on settlement of debt associated with the
elimination of a restricted prepaid option prepayment liability (see Footnote
6D).
B. MOTOROLA PURCHASE AND FINANCE AGREEMENTS
In connection with a purchase agreement, CCI entered into a financing and
security agreement with Motorola (the " Motorola Loan Facility"). This agreement
allows CCI to borrow up to a total of $5 million. The guaranty and security
agreement contains various financial and other covenants which apply to the
Company. As of December 31, 1998, the Company was indebted for approximately
$1,335,008 under the Motorola Loan Facility.
In August 1997, Motorola, with the Company's concurrence, assigned all of its
interest in the Motorola Loan Facility to MarCap Corporation. In October 1997,
CCI entered into a first amendment to the financing and security agreement with
MarCap, ("Amendment"). In conjunction with the Amendment, MarCap extended a line
of credit for up to $2,000,000 ("MarCap Facility"). There were no further funds
available, to the Company, on this line as of December 31, 1998.
As of December 31, 1998 the Company was in default on the Motorola Loan Facility
and the MarCap Facility, and approximately $1,765,976 was therefore classified
as Current maturities of long-term debt that would have otherwise been
classified as Long-term debt. On March 3, 1999 the Motorola Loan Facility and
the MarCap Facility were paid-in full and the credit facilities were terminated.
(See Footnote 13)
(6) EQUITY TRANSACTIONS
A. PREFERRED STOCK PRIVATE PLACEMENT
F-18
<PAGE>
On December 23, 1997, the Company completed a private placement of 219,000
shares of Series B convertible preferred stock (the "Preferred Stock") and
warrants to purchase 223,937 shares of the Company's Common Stock. The Company
received proceeds from the placement of $1,600,000 net of placement fees of
$24,812. The Preferred Stock is convertible into shares of Common Stock
beginning 45 days from the closing date and up to two years from the closing
date. The Preferred Stock is convertible at average closing bid prices of the
Company's Common Stock as quoted by Bloomberg, LP for the five-day trading
period ending on the day prior to the date of conversion (the "Lookback
Period"). If the difference between the average price and the current market
price, where the current market price is defined as the closing bid price of the
Common Stock on the conversion date, is greater than 20% then the Lookback
Period used to calculate the average price will be increased to 20 trading days.
In the event that any securities remain outstanding on the second anniversary of
the closing date, all remaining securities must be converted on such date. The
Company shall pay a dividend on each share of Preferred Stock at the rate of 8%
per annum of the liquidation preference of $10.00 per share for each share of
Preferred Stock, accruing from the date of issuance. The dividend is payable
quarterly in cash or Common Stock at the option of the Company, is cumulative
and is calculated at the price at which the Preferred Stock may be converted
into shares of Common Stock of the Company on the date when converted or
quarterly based upon the last day of each quarter with the valuation determined
as if that was a conversion date. The warrants, which have an exercise price
equal to the fair value of the Company's Common Stock on the closing date of the
transaction, were deemed to have an estimated fair value equal to zero and
accordingly, all of the net proceeds from the transaction were allocated to
Preferred Stock. The holders of the Preferred Stock and warrants are restricted
from converting an amount which would cause them to exceed more than 4.99%
beneficial ownership of the Company's Common Stock determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. If for any
reason, while any of the Preferred Stock and warrants are outstanding,
Regulation S is rescinded or modified so as to preclude the holders of the
Preferred Stock and warrants from relying on Regulation S, the holders of the
Preferred Stock and Warrants may demand the Company to register the Preferred
Stock and warrants.
On February 10, 1998, the Company and several holders of the Preferred Stock
entered into an amendment providing that such holders would not convert any
Preferred Stock into Common Stock of the Company prior to March 11, 1998. In
consideration for such amendment, the Company issued to the Preferred Stock
holders pursuant to Regulation S an aggregate of approximately 310,000 shares of
the Company's Common Stock and authorized warrants to purchase an additional
approximately 380,000 shares of the Company's Common Stock, the terms of which
warrants are the same as terms of the warrants issued in the December 23, 1997
private placement described above. The Company recognized $182,914 of standstill
expense associated with this transaction in 1998.
During 1998, certain holders of the Preferred Stock converted 197,782 shares of
Preferred Stock into 4,461,714 shares of the Company's Common Stock. Dividends
on such shares were $52,508, which was paid with 122,413 shares of Common Stock.
In addition, dividends of $17,346 have accrued on the Preferred Stock as of
December 31, 1998.
As of March 31, 1999 all of the Preferred Stock has been converted into Common
Stock of the Company, and no warrants remain to be issued.
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 redeemable Series C preferred stock ("Series C
Preferred"), an eleven-year warrant to purchase up to 14,612,796 shares of
Common Stock at an exercise price of $.001 per share, a three-year warrant to
purchase up to 4,000,000 shares of Common Stock at an exercise price of $1.25
per share, 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 per share. The warrants
contain certain provisions which restrict conversion and/or provide adjustments
to the conversion price and number of shares. As of December 31, 1998
adjustments on the eleven-year warrant, the three-year warrant and five and
one-half year warrant were (526,599), 69,548 and 63,870 warrants to purchase
common shares, respectively. 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
==========
F-19
<PAGE>
C. DEBT CONVERSIONS
During 1997, certain holders of the 8%, three year, convertible notes payable,
tendered $1,150,000 of convertible notes and $48,907 of accrued interest for
conversion into 1,587,527 shares of the Company's Common Stock. The unamortized
debt issuance costs were netted against the $1,150,000 of convertible notes
tendered.
D. STOCK RETIREMENT
In September 1996, Libero tendered funds, in the amount $2,082,116, to a former
officer and director of the Company. In consideration of the funds received, the
Company's former officer and director tendered 1,514,266 shares of the Company's
Common Stock to the Company which were canceled. In consideration for the
shares, the Company recorded an obligation to Libero in the amount of $2,082,116
which could only be used for the future amount of option exercises. In September
1997, the Company entered into a mutual termination agreement with Libero,
whereby all outstanding options were terminated and the remaining restricted
option prepayment balance was forgiven. This resulted in a gain on settlement of
debt of $670,188 (see Footnote 5A).
E. STOCK OPTION PLANS
During 1998, the Company granted stock options to purchase 2,588,000 shares of
the Company's Common Stock. The options were issued to various employees and
directors under the Company's employee stock option plans.
Weighted
Average
Number Exercise
Stock Options of Shares Price
- ----------------------------------------- --------------- -----------
Outstanding at December 31, 1996 9,642,968 $ 1.30
Granted at $.50-1.50 per share 2,062,723
0.55
Less exercised at $.50 per share
(323,857) 0.50
Lapsed or canceled (6,623,507)
0.65
--------------
Outstanding at December 31, 1997 4,758,327
1.65
Granted at $.49-.51 per share 2,588,000
0.51
Lapsed or canceled (1,473,604)
2.11
==============
Outstanding at December 31, 1998 5,872,723 $ 1.03
==============
The Company applied APB 25 in accounting for its stock options and warrants and,
accordingly, compensation expense of $15,040 in 1998 and $329,426 in 1997 has
been recognized for its stock options in the financial statements.
The weighted average fair value of each of the options issued during the year
ended December 31, 1998, substantially all of which were granted at a price
exceeding the then-current market price, was estimated by management to be
$330,145 using an option pricing model (Black-Scholes) with the following
assumptions: dividend yield of 0%; expected option life of 1 year; volatility of
88.56% and risk free interest rate of 5.73%.
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Number Weighted Weighted Number
Range of Outstanding Average Average Exercisable
Exercise at December Remaining Exercise December 31,
Price 31, 1998 Contractual Life Price 1998
------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
$ 0.49-$0.51 4,412,723 5.0 years $ 0.50 1,813,223
$ 1.00 120,000 2.1 years $ 1.00 120,000
$ 1.50 420,000 0.8 years $ 1.50 420,000
$ 2.00-$2.50 520,000 5.2 years $ 2.21 520,000
$ 4.00-$6.00 400,000 0.3 years $ 4.88 400,000
</TABLE>
F-20
<PAGE>
Had the Company determined compensation expense based on the fair value at the
grant date for its stock options under SFAS 123 instead of applying APB 25, the
Company's net income would have been reduced to the pro forma amount indicated
below:
December 31, 1998 December 31, 1997
--------------- ---------------
Net Loss As reported $ (8,680,695) $ (14,679,286)
SFAS 123 expense (581,972) (84,099)
Net Loss Pro forma (9,262,667) (14,763,385)
Earnings per share As reported $ (.21) $ (.73)
Pro forma (.22) (.74)
Pro forma net income reflects only options granted in 1998 and 1997. Therefore,
the full impact of calculating compensation expense for stock options under SFAS
123 is not reflected in the pro forma net income amounts presented above because
compensation expense is reflected over the options' vesting period of four
years.
F. WARRANTS
The following is a summary of issued and outstanding warrants for the purchase
of Common Stock:
Number
Warrants of Shares
- --------- -----------
Outstanding at December 31, 1996 1,931,918
Granted at $1.00-$2.50 per share 483,750
Granted at average trading price as defined 223,937
Less exercised --
Lapsed or canceled --
----------
Outstanding at December 31, 1997 2,639,605
Granted at $.001-$1.25 per share 28,339,229
Less exercised --
Lapsed or canceled --
Outstanding at December 31, 1998 30,978,834
==========
F-21
<PAGE>
G. MINORITY INTERESTS
Prior to the reverse acquisition, the Company sold restricted Common Stock in
its subsidiary, CCI, to a third party totaling 700,000 shares. The holder of
such shares has not yet elected to convert these shares of CCI to shares of
Chadmoore Wireless Group, Inc. As per the amended and restated stock
subscription agreement dated January 13, 1996, the third party had options to
purchase 2.1 million shares of restricted common stock of CCI. The options were
exercisable ranging from six months from the closing date of the amended and
restated stock subscription agreement through eight years from such date. As of
July 13, 1996, 700,000 options that were exercisable at $1.50 per share were
unexercised by the third party and thus expired on that date. Options to
purchase 1.4 million shares of CCI remain outstanding at December 31, 1998 at
the following exercise prices:
Option
Number Exercise Exercise
Of Options Option Type Price Date
---------- ----------- -------- ---------
700,000 A $2.50 1/13/2000
700,000 B $4.00 1/13/2004
The Company has entered into twelve (12) joint venture agreements with its
dealers ("Minority Venturers"), to finance, install, optimize and aggressively
load SMR systems in selected markets. The Company has ownership percentages
ranging from 60% to 93% in such joint ventures, and has complete operating
responsibility in all cases, subject to ultimate licensee control, if
applicable. The Minority Venturer is responsible for loading the system and must
meet mutually agreeable minimum loading standards.
The Company contributed the channels necessary to provide initial commercial
service. The Minority Venturer contributed a percentage of the system equipment
equal to its ownership interest and financed the balance of the capital
requirement necessary to bring the individual market to initial commercial
service, with a liability which was discounted on a present value basis at a 15%
imputed interest rate. This financing is repaid only from positive cash flow, if
any, from the system in that market.
(7) LOSS PER SHARE
SFAS 128 requires the Company to calculate its earnings per share based on basic
and diluted earnings per share as defined. Basic and diluted loss per share was
computed by dividing the net loss applicable to common shareholders by the
weighted average number of shares of Common Stock. The following is a
reconciliation of the basic and diluted EPS computations for income (loss)
available to common shareholders.
December 31, December 31,
1998 1997
---------- ----------
Total basic and diluted weighted shares
outstanding 31,685,633 20,061,602
Warrants deemed to be outstanding Common
Stock (weighted average) 9,768,554 --
---------- ----------
Weighted average common shares outstanding 41,454,187 20,061,602
========== ==========
The Company's warrants, preferred stock and stock options granted and issued
during 1998 and 1997, and outstanding as of December 31, 1998 and 1997, are
antidilutive and have been excluded from the diluted loss per share calculation
for the years ended December 31, 1998 and 1997. The following potentially
dilutive securities were not included in the computation of dilutive EPS because
the effect of doing so would be antidilutive.
December 31, December 31,
1998 1997
---------- ----------
Options 5,872,723 4,758,327
Warrants 16,892,637 2,639,603
Convertible preferred stock 1,044,707 4,562,500
---------- ----------
23,810,067 11,960,430
========== ==========
F-22
<PAGE>
(8) MANDITORILY REDEEMABLE PREFERRED STOCK
As discussed in Footnote 6B, on May 4, 1998, the Company issued 10,119,614
shares of 4% cumulative Series C Preferred Stock, which is mandatorily
redeemable by written notice to the Company on the earlier of (i) May 1, 2003 or
(ii) the occurrence of 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 ("Redeemable Preferred"). 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 accrue from the issue date, without interest, whether
or not dividends have been declared. Unpaid dividends, whether or not declared,
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 are
outstanding, no dividend or distribution, whether in cash, stock or other
property, may be paid, declared or set apart for payment for any junior
securities.
The difference between the relative fair value of the Redeemable Preferred at
the issue date and the mandatory redemption amount is being accreted by charges
to additional paid-in-capital, using the effective interest method through April
20, 2003. 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.
(9) NON CASH ACTIVITIES
During the year ended December 31, 1998 the Company had the following non-cash
investing and financing activities. The issuance of 123,500 shares of Common
Stock to employees for compensation that was previously accrued. The issuance of
$7,090,285 of notes payable, net of discount, to exercise Options. Conversion of
197,782 shares of Preferred Stock into 4,461,714 shares of Common Stock.
Issuance of 122,413 shares of Common Stock for Preferred Stock dividends.
Issuance of 11,400 shares of Common Stock for $32,890 of Common Stock previously
subscribed. Issuance of 800,000 shares of Common Stock with a value of $352,000,
for exercise of Investment in Options. Issuance of 31,000 shares of Common Stock
with a value of $15,190 to a license holder to exercise an Option. Issuance of
290,765 shares of Common Stock 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 in exchange for fixed assets.
During the year ended December 31, 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. Liability for prepaid options of
$670,187 was forgiven and therefore taken against additional paid-in capital,
(See Footnote 6D).
During the years ended December 31, 1998 and 1997, the Company paid no cash for
taxes. During the years ended December 31, 1998 and 1997, the Company paid cash
of $247,709 and $42,264 for interest.
F-23
<PAGE>
(10) INCOME TAXES
The major components of the deferred tax assets and liabilities at December 31,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $15,305,051 $ 10,392,915
Management agreements 2,508,435 2,508,435
Accruals not currently deductible for tax purposes 455,658 591,074
Investment in JJ&D LLC 155,216 155,216
Allowance for doubtful accounts 4,550 15,750
----------- ------------
18,428,910 13,663,390
Less valuation allowance (16,867,581) (13,146,926)
----------- ------------
Deferred tax assets $ 1,561,329 $ 516,464
----------- ------------
Deferred tax liabilities:
Property and equipment (382,177) (321,173)
FCC licenses (1,148,562) (160,212)
Other (30,590) (35,079)
----------- ------------
Deferred tax liabilities (1,561,329) (516,464)
----------- ------------
Net Deferred Tax Assets $ -- $ --
=========== ============
</TABLE>
SFAS 109 requires recognition of the future tax benefit of these assets to the
extent realization of such benefits is more likely than not; otherwise, a
valuation allowance is applied. At December 31, 1998 and 1997, the Company
determined that $16,867,581 and $13,146,926, respectively, of tax benefits did
not meet the realization criteria because of the Company's historical operating
results. Accordingly, a valuation allowance was applied to reserve against the
applicable deferred tax asset.
At December 31, 1998 and 1997, the Company had net operating loss carry-forwards
available for income tax purposes of approximately $42,299,558 and $29,953,666,
respectively, which expire principally from 2009 to 2018.
(11) RELATED PARTY TRANSACTIONS
During 1997, the Company traded, with a stockholder in JJ&D, 100 channels, with
a cost basis of $1 million, in exchange for certain specialized SMR equipment
with a similar market value and no gain or loss was recognized on the
transaction. These channels were non-strategic to the Company's business plan.
During the years ended December 31, 1998 and 1997 the Company paid $680,351 and
$102,145, respectively to Private Equity Partners ("PEP"), for professional
services associated with equity and debt financings. Mark F. Sullivan, a
Director of the Company, is an owner and managing partner of PEP.
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 Recovery 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 consultant's
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
dividends paid in the preceding twelve months. Jeffrey A. Lipkin and Joseph J.
Finn-Egan, managing partners for Recovery, are Directors of the Company.
F-24
<PAGE>
(12) COMMITMENTS AND CONTINGENCIES
A. LICENSE OPTION CONTINGENCIES
Goodman/Chan Waiver. Nationwide Digital Data Corp. and Metropolitan
Communications Corp. among others (collectively, "NDD/Metropolitan"), traded in
the selling of SMR application preparation and filing services to the general
public. Most of the purchasers in these activities had little or no experience
in the wireless communications industry. Based on evidence that NDD/Metropolitan
had been unable to fulfill their construction and operation obligations to over
4,000 applicants who had received FCC licenses through NDD/Metropolitan, the
Federal Trade Commission ("FTC") filed suit against NDD/Metropolitan in January,
1993, in the Federal District Court for the Southern District of New York
("District Court"). The District Court appointed Daniel R. Goodman (the
"Receiver") to preserve the assets of NDD/Metropolitan. In the course of the
Receiver's duties, he together with a licensee, Dr. Robert Chan, who had
received several FCC licenses through NDD/Metropolitan's services, filed a
request to extend the construction period for each of 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. Moreover, the FCC
released a list on October 9, 1998 which purported to clarify the status of
relief eligibility for licenses subject to the August 27, 1998 decision.
Subsequently the FCC also released a purported final list of the Receivership
Stations.
However, on the basis of a previous request to the Receiver and a separate
previous 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 markups 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 eligible for relief. From the communication from
the Receiver, the Company believes that approximately 800 of the licenses that
it owns or manages are Receivership Stations or otherwise entitled to relief.
For its own licenses and under the direction of each licensee for managed
stations, the Company proceeded with timely construction of those stations which
the Company reasonably believes to be Receivership Stations or otherwise
entitled to relief. The Company received relief on approximately 150 licenses
under the Goodman/Chan proceedings and from the official communication from the
FCC, the Company believes that approximately 650 licenses should be eligible for
relief as "similarly situated". Initial review of the Commission'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.
However, on October 9, 1998 a release from the Offices of the Commercial
Wireless 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 in this category from its official
licensing database. Prior to the release of the October 9, 1998, Public Notice,
the Company constructed 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 as well as continuing modification of the
FCC's license database, 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 February 1, 1999, the Company in
conjunction with other affected parties filed a Petition with the United States
Court of Appeals for the District of Columbia Circuit seeking reversal of the
FCC's decision and a remand of the decision to the FCC with specific
instructions from the court to reinstate the licenses for which relief had been
denied. Oral argument before the Court is scheduled for May 4, 1999. 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 it will
not be provided relief on 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 Option and Management
Agreements with the Company are among those which the FCC now states will not be
afforded relief pursuant to
F-25
<PAGE>
the Commercial Wireless 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 consolidated financial
statements.
The Receiver has requested that the Company replace some of the existing Options
and Management Agreements with Goodman/Chan licensees with promissory notes. The
Company engaged in discussions with the Receiver in this regard, but did not
reach a final determination and concluded that no further discussions are
warranted at this time. However, there can be no assurances that the Receiver
would not decide to take actions in the future to challenge the Company's
agreements with Goodman/Chan licensees, including the Company's rights to
licenses under such agreements, in an effort to enhance the value of the
Receivership estate.
B. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
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 denied this allegation.
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").
A non-binding mediation was conducted before a retired superior court judge on
August 21, 1998, and a confidential settlement was reached. On April 12, 1999,
the parties executed a written Settlement Agreement settling all claims and
cross claims. Pursuant to the terms of the settlement, the Company will issue
525,000 shares of its Common Stock and the parties will execute mutual general
releases.
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.
Subsequently, CCI added claims against Peacock and two related purported
entities arising out of Peacock's conduct with regard to the Consultant
Agreement and certain finder's preferences. Subsequently, Peacock added an
affirmative claim against CCI for breach of contract, alleging his entitlement
to certain bonus compensation that he alleges was not paid to him.
On January 22, 1999, CCI reached a settlement in principle of the dispute. The
settlement was reduced to a comprehensive written settlement agreement which
became effective on March 5, 1999. Under the terms of the settlement, Peacock
will receive (1) certain rights with respect to a finder's preference pending
against a five-channel SMR station in Memphis, Tennessee (WNZR202); (2) certain
rights with respect to other finder's preference proceedings which are
determined by CCI in its sole discretion to be undesirable; and (3) 10% of the
independently determined value of the wide area license, if any, issued as a
result of a certain finder's preference proceeding filed by CCI. Under the terms
of the settlement, CCI will receive a right of first refusal with respect to
certain assets belonging to Peacock. In addition, the settlement contains mutual
general releases and covenants to dismiss pending proceedings. On March 5, 1999,
CCI and Peacock executed a Voluntary Dismissal
F-26
<PAGE>
With Prejudice of all claims asserted in the District Court litigation. However,
despite CCI's demand, Peacock has refused to dismiss a finder's preference
proceeding concerning station WZC790 in Memphis, Tennessee, which is owned by a
subsidiary of the Company. The Company is presently evaluating its options with
respect to enforcement of the Agreement in this regard. For his part, Peacock is
contending that CCI is in breach of the Settlement Agreement because it does not
agree with Peacock's position with respect to the finder's preference proceeding
concerning station WZC790. Peacock has filed a motion with the District Court
seeking enforcement of the Settlement Agreement, but it is not clear what relief
Peacock is seeking. There has been no accrual reflected in the Company's
financial statements for 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.
C. PURCHASE COMMITTMENT
In October 1996, the Company signed a purchase agreement with Motorola to
purchase approximately $10 million 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.
By way of a letter agreement dated March 10, 1998 among MarCap, Motorola, and
the Company, the effective period of the Motorola purchase agreement was
extended from 30 months to 42 months. As of December 31, 1998 the Company had
purchased approximately $4.5 million toward this purchase commitment.
D. LEASE COMMITMENTS
The Company entered into a new lease for its corporate offices and warehouse
facilities in Las Vegas, Nevada, commencing in December 1997, under a
non-cancelable operating lease agreement which expires in March 2002. Terms of
the lease provide for minimum monthly lease payments of approximately $17,500.
The agreement provides for annual adjustments to the minimum monthly lease
payment based on the consumer price index as defined therein.
In addition, the Company leases sales facilities in Little Rock, Arkansas and
Southaven, Mississippi with monthly lease payments of approximately $1,500 and
$900, respectively, and the Company leases approximately 275 antenna sites for
transmission of SMR services. The terms of these leases range from
month-to-month to 5 years, with options to renew.
F-27
<PAGE>
Future minimum payments associated with the leases described herein, including
renewal options, are as follows:
Operating
Leases
--------
Years ended December 31:
1999 $1,844,672
2000 1,212,903
2001 1,040,664
2002 714,143
2003 367,062
---------
$ 5,179,444
Total rent expense for the years ended December 31, 1998 and 1997 amounted to
$1,676,494 and $646,717, respectively.
(13) SUBSEQUENT EVENTS.
On March 2, 1999, pursuant to a senior secured loan agreement ("GATX Facility"),
the Company borrowed $13.5 million from GATX Credit Corporation (the "Lender").
Pursuant to the GATX Facility, the Lender, at its sole discretion, has the
option to make available up to $13.5 million in additional funds, within 120
days.
Loans will be made at an interest rate fixed at the time of the funding based on
five-year US Treasury notes plus 5.5% and payable over a five-year amortization
schedule following an interest only period. Warrants to purchase up to 1,822,500
shares of the Company's Common Stock at an exercise price of $0.39 per share
were also issued to GATX. The loan is secured by substantially all the assets of
the Company; provided, however, that if the full $27 million is not made
available within 120 days of funding, certain assets will be released from
security and the number of the warrants will be reduced proportionately.
In conjunction with the GATX Facility the Company has prepaid and terminated the
Motorola Loan Facility and the MarCap Facility. All security interests related
to the Motorola Loan Facility and the MarCap Facility were concurrently
released.
On April 12, 1999 the Company made a payment to the New Debenture holder of
1,871,096 shares of the Company's restricted Common Stock which representd
$916,837 toward the principal and interest of the New Debenture (see Footnote
5A).
F-28
<PAGE>
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
On February 24, 1999 the Company engaged Arthur Andersen LLP as it's independent
accountants for the year ended December 31, 1998. Arthur Andersen LLP replaces
KPMG, LLP ("KPMG") The Company did not re-appoint KPMG as its independent
accountant on February 24, 1999. KPMG's report on the Company's financial
statements for the year ended December 31, 1997, contained a fourth paragraph
indicating substantial doubt about the Company's ability to continue as a going
concern. The decision to change accountants was approved by the Company's Board
of Directors and Audit Committee. During KPMG's engagement with the Company,
there have been no disagreements with KPMG on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which were not resolved to KPMG's satisfaction. During KPMG's
engagement with the Company, there have been no reportable events (as defined in
Item 304 of Regulation S-B issued under the Securities Act of 1933, as amended).
As of February 24, 1999, Arthur Andersen LLP has been engaged by the Company as
its principal accountants to audit the Company's financial statements beginning
with the financial statements for the year ended December 31, 1998. The Company
did not consult Arthur Andersen LLP prior to its engagement regarding the
application of accounting principles to a specified transaction, either
completed or proposed, the type of audit opinion that might be rendered on the
Company's financial statements or any matter that was either the subject of a
disagreement with KPMG or a reportable event.
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS. The following table sets
forth the names and ages of all directors and executive officers of the company
and all persons nominated or chosen to become a director or an executive
officer, indicating all positions and offices with the registrant held by each
such person and the period during which he or she has served as a director or
executive officer as of April 2, 1999 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
PERIOD OF SERVICE AS
NAME AGE POSITION DIRECTOR OR EXECUTIVE OFFICER
- ----------------------- --------- ---------------------------- -----------------------------
<S> <C> <C> <C>
Robert W. Moore 41 President, CEO and Director 02/95 to Present
Richard C. Leto 41 Chief Financial Officer 08/98 to Present
Treasurer 09/98 to Present
Rick D. Rhodes 44 Chief Regulatory Officer 06/98 to Present
Secretary 06/98 to Present
Janice H. Pellar 47 Director 05/98 to Present
Mark F. Sullivan 41 Director 05/98 to Present
Joseph J. Finn-Egan 65 Director 05/98 to Present
Gary L. Stanford 60 Director 05/98 to Present
Jeffrey A. Lipkin 53 Director 05/98 to Present
</TABLE>
<PAGE>
ROBERT W. MOORE, has been President, Chief Executive Officer and Director of the
Company since inception and founded the Company in 1994. From 1989 to 1993, Mr.
Moore served as a Regional Manager and General Manager for two Cellular One
companies, managing more than 75 employees and having full profit-and-loss
responsibility for several MSAs with more than 35,000 customers generating more
than $40 million in revenues.
RICHARD C. LETO, has been Chief Financial Officer since August of 1998. From
1996 until joining Chadmoore, Mr. Leto worked for NextWave Telecom. He joined
NextWave as Director of Strategic Planning and was promoted to Director of
Finance for the West Region. In this position he was the head of finance and
administration for a region covering 39 million people throughout the western
United States. In 1992, Mr. Leto was promoted to Chief Financial Officer of
AirTouch Thailand in Bangkok. In Thailand he was tasked with turning around the
paging business. He successfully reduced costs and promoted customer focus.
AirTouch then moved him to Italy and he became Finance and Business Plan Lead
for the Cellular division. He developed and wrote application business plans
submitted to the Italian Ministry. His final position at AirTouch was as
Corporate Director of Finance, which he held until 1996. Mr. Leto earned his
Master of Business Administration from the University of California, Berkeley in
1988 and has a Bachelors Degree in Finance and Accounting from Boston College.
RICK D. RHODES, has been Sr. Vice President and Chief Regulatory Officer since
June of 1998. From 1995 until joining Chadmoore he worked for the law firm of
Irwin Campbell and Tannenwald. There he provided client counseling for
telecommunications clients and provided advocacy regarding federal law, federal
administrative agency matters and legislative activity on Capitol Hill. From
1990 to 1995, Mr. Rhodes practiced law at the Law Firm of Keller & Heckman in
Washington, DC. In 1978 he earned his Master of Arts in Mass Communications from
the University of Arkansas. He earned his Juris Doctorate from Catholic
University of America in 1990. While earning his law degree, Mr. Rhodes worked
at the Federal Communications Commission as a law clerk. Mr. Rhodes is also a
Registered Lobbyist with the United States Senate and House of Representatives.
Mr. Rhodes has published a number of papers and appeared as a guest lecturer on
the subject of telecommunications.
JANICE H. PELLAR, has been a Director since May 1998. Ms. Pellar is President of
Electronic Maintenance Co., Inc. ("EMCO"). She has held this position since
1988. Before this she held various titles including Service Manager, Vice
President and Manager at EMCO where she has been employed full time since 1973.
Ms. Pellar also served on the national Motorola Sales and Service Advisory
Council from 1990 to 1993 and was appointed to the National Motorola Problem
Resolution Council representing the Southeast region in 1996.
MARK F. SULLIVAN, has been a Director since May 1998. Mr. Sullivan serves as
Managing Partner of Private Equity Partners, an investment banking firm
specializing in institutional private equity and debt financings for growth
companies based in the western United States, which he founded in 1996. From
1993 to 1996 he served as co-head of corporate finance for D.A. Davidson & Co.,
where he helped launch and build a full-service corporate finance department
executing private and public market financings and merger and divestiture
transactions. From 1990 to 1992, he served as a founding member of the private
equity financing group at Kidder, Peabody & Co., specializing in institutional
private equity financings.
JOSEPH J. FINN-EGAN, has been a Director since May 1998. Mr. Finn-Egan is
Managing General Partner of Recovery Equity Investors I, L.P. and Recovery
Equity Investors II, L.P., which was founded in 1989. Mr. Finn-Egan is also a
Director of CMI, Inc since 1991.
GARY L. STANFORD, has been a Director since May 1998. Mr. Stanford is currently
retired from the FCC after a 37 year career. He held various positions including
Associate Bureau Chief for Operations of the Wireless Telecommunications Bureau,
in Gettysburg, upon retirement.
<PAGE>
JEFFREY A. LIPKIN, has been a Director since May 1998. Mr. Lipkin is Managing
General Partner of Recovery Equity Investors I, L.P. and Recovery Equity
Investors II, L.P., which was founded in 1989. Mr. Lipkin is also a Director of
CMI, Inc. since 1991.
TERM OF OFFICE. Directors are elected to serve until the next succeeding annual
meeting of the shareholders or until their successors are duly elected and shall
qualify. Executive officers are elected by a majority vote of the board of
directors and unless removed by a 2/3 vote of the board of directors, serve
until their respective successors are elected and qualified.
COMPENSATION OF DIRECTORS. Currently, directors of the Company receive no cash
compensation for their services. However, Robert Moore and Jan Zwaik each
received options to acquire.0 100,000 shares of the Company's Common Stock at a
price of $0.50 per share.
Janice Pellar, Mark Sullivan and Gary Stanford each received options to acquire
75,000 shares of the Company's common stock at a price of $0.51 per share.
COMMITTEES OF THE BOARD OF DIRECTORS. The Compensation Committee, which was
formed in May 1998, consists of Messrs. Lipkin and Stanford and Ms. Pellar. This
Committee reviews and recommends to the Board of Directors the compensation and
benefits of all officers of the company and reviews general policy matters
relating to compensation and benefits of employees of the Company. The
Compensation Committee also administers the Company's stock option plans. The
Compensation Committee did not meet during 1998.
The Audit Committee, which was formed during May 1998, consists of Messrs.
Sullivan, Finn-Egan, and Stanford and Ms. Pellar. The Audit committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the independent
public accountants, considers the range of audit and non-audit fees and reviews
the adequacy of the Company's internal accounting controls.
The Audit Committee did not meet during 1998.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") requires
the Company's executive officers and directors and persons who own more than ten
percent of a registered class of the Company's equity securities registered
under the Exchange Act, to file initial reports of ownership and reports
indicating changes in ownership with the Securities and Exchange Commission (the
"SEC") and each exchange in which its securities are traded. Executive officers
and directors and greater than ten percent stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file. During 1998, Mr. Rhodes failed to timely file a Form 3, which was
subsequently filed during 1998. In addition Mr. Moore and Mr. Zwaik failed to
timely file a Form 4 reporting 2 transactions and 1 transaction, respectively.
During 1998, no other person required to file reports pursuant to Section 16(a)
of the Exchange Act failed to timely file any such report.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the total executive compensation paid or accrued
by the Company for services rendered to the Company or its subsidiaries in all
capacities in the fiscal years ended December 31, 1998, 1997 and 1996 to the
Company's chief executive officer and each of the Company's other executive
officers ("Named Officers").
SUMMARY COMPENSATION TABLES
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
LONG TERM
ANNUAL COMPENSATION COMPENSATION
(a) (b) (c) (d) (1) (e)
Name Year Salary Bonus
And Ended SECURITIES
Principal December UNDERLYING EXERCISE
Position 31 ($) ($) OPTIONS PRICE
- ----------------------------- -------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Robert W. Moore 1998 133,000 60,000 750,000 $ 0.51
President, Chief Executive - - 100,000 $ 0.50
Officer and Director
1997 128,000 100,000 - -
1996 93,000 78,000 - -
Jan S. Zwaik 1998 118,000 40,000 400,000 $ 0.51
Chief Operating Officer, 1997 98,000 100,000 500,000 $ 0.50
Director(2) 1996
Rick D. Rhodes 1998 60,000 (3) 24,000 250,000 $ 0.51
Chief Regulatory Officer and 1997 - - - -
Secretary 1996 - - - -
Richard C. Leto 1998 33,000 (3) 13,350 - -
Chief Financial Officer and 1997 - - - -
Treasurer 1996 - - - -
</TABLE>
(1) In 1997, Robert Moore and Jan Zwaik were paid cash bonuses of $20,000 and
$25,000, respectively and an additional $80,000 and $75,000, respectively
was accrued at December 31, 1997 and paid in May of 1998. In 1998, the
Company accrued bonuses in the amounts of $60,000, $40,000, $24,000 and
$13,350 for Robert Moore, Jan Zwaik, Rick Rhodes and Richard Leto,
respectively. These bonuses were paid in March of 1999.
(2) During April 1999, Mr. Zwaik resigned as COO and as a director and the
Company and entered into a one year Consulting Agreement as of the same
date.
(3) Amounts shown for 1998 for Messrs. Rhodes and Leto, represent base salaries
paid after they commenced employment with the Company on June 1, 1998 and
August 31, 1998, respectively.
<PAGE>
EMPLOYMENT AGREEMENTS. Effective June 16, 1997, the Company and Robert Moore
entered into an employment agreement (the "Moore Agreement"). Under the terms of
the Moore Agreement, Mr. Moore is entitled to: (i) base compensation of $125,000
per year (subject to a minimum 5% annual increase); (ii) bonus compensation
based upon the growth and success of the Company's business as may be determined
by the Compensation Committee; and (iii) other benefits equivalent to those
provided the Company's other officers. The Moore Agreement's initial term ended
on January 1, 1999 and was automatically renewed until January 1, 2001. The
Moore Agreement is terminable by the Company or Mr. Moore for cause, as defined
therein, at any time or in the event of death or disability. In the event of
death or disability, Mr. Moore or his personal estate is entitled to additional
compensation as specified. If the Moore Agreement is terminated for cause by Mr.
Moore or without cause by the Company, Mr. Moore is entitled to health insurance
benefits for a two-year term and a lump sum payment equal to twice the then-
base compensation. In addition, in the event of a termination following a change
of control, as defined therein, Mr. Moore is entitled to 2.99 times the average
annual compensation. In addition, Mr. Moore has agreed, for a period of 12
months following termination of the Moore Agreement, not to render services for
a company that is a competitor to the Company and to keep all information
received by Mr. Moore during the course of his employment as confidential.
Finally, in the event that the Moore Agreement terminates upon expiration of a
term or Mr. Moore terminates the contract without cause, Mr. Moore is entitled
to a lump sum payment equal to the then-applicable annual base compensation.
Effective June 16, 1997, the Company and Jan Zwaik entered into an employment
agreement under substantially the same terms as the Moore Agreement, with the
exception of a base salary of $110,000. During April 1999, Mr. Zwaik resigned as
Chief Operating Officer and as a director and the Company entered into a one
year Separation and Consulting Agreement and all obligations under Mr. Zwaik's
employment agreement were terminated. Under the terms of the Separation and
Consulting Agreement, the company is obligated to pay Mr. Zwaik an aggregate of
$160,000 over the term of the agreement.
Effective December 10, 1998, the Company and Rick D. Rhodes entered into an
employment agreement under substantially the same terms as the Moore Agreement,
with the exception of a base salary of $110,000, the issuance of options to
purchase 250,000 shares of Common Stock at an exercise price of $.50 per share
(the "Options"), a lump sum payment upon termination by the Company without
cause of one year's salary and automatic vesting of the Options and no lump sum
payment upon expiration or termination of the agreement by Mr.
Rhodes.
AMENDED NONQUALIFIED STOCK OPTION PLAN. The Company has reserved an aggregate of
1,500,000 shares of restricted common stock for issuance pursuant to the Amended
Nonqualified Stock Option Plan adopted by the Board of Directors on June 15,
1995 (the "Nonqualified Plan"). The Compensation Committee of the Company's
Board of Directors has the authority to determine the persons to whom options
shall be granted, the amount of such options, and the number of shares subject
to each option, the time or times during which all or a portion of each option
may be exercised and certain other provisions of each option. Options may be
granted to directors, officers and key employees of the Company. As of March 31,
1999, the Nonqualified Plan had 1,450,000 options outstanding which had exercise
prices ranging from $.50 to $1.50.
EMPLOYEE BENEFIT AND CONSULTING SERVICES COMPENSATION PLAN. The Company has
reserved an aggregate of 2,350,000 shares of registered S-8 common stock for
issuance pursuant to the Employee Benefit and Consulting Services Plan adopted
by the Board of Directors on June 15, 1995 and amended on December 8, 1995, (the
"Employee Benefit Plan"). The Compensation Committee of the Company's Board of
Directors has the authority to determine the persons to whom options shall be
granted, the amount of such options, and the number of shares subject to each
option, the time or times during which all or a portion of each option may be
exercised and certain other provisions of each option. Options may be granted to
directors, officers and key employees of the Company. As of March 31, 1999, the
Employee Benefit Plan had 2,256,723 options outstanding which had exercise
prices ranging from $.49 to $2.50.
1998 STOCK OPTION PLAN. The Company has reserved an aggregate of 3,000,000
shares of authorized but unissued common stock for issuance pursuant to the 1998
stock option plan adopted by the Board of Directors on May 1, 1998 (the "1998
Plan"). The Compensation Committee of the Company's Board of Directors has the
authority to determine the persons to whom options shall be granted, the amount
of such options, and the number of shares subject to each option, the time or
times during which all or a portion of
<PAGE>
each option may be exercised and certain other provisions of each option.
Options may be granted to directors, officers and key employees of the Company.
As of March 31, 1999, the 1998 Plan had 2,166,000 options outstanding which had
exercise price of $.51.
The following table sets forth the options to acquire common stock issued to the
Named Officers of the Company in fiscal 1998:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF
TOTAL
OPTIONS
GRANTED TO EXERCISE OR
SHARES UNDERLYING EMPLOYEES IN FISCAL BASE PRICE EXPIRATION
NAME OPTIONS YEAR ($/SHARE) DATE
- ---------------------------- ----------------- -------------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Robert W. Moore 50,000 (1) 1.9% $ 0.50 02/10/01
President, Chief Executive 50,000 (1) 1.9% $ 0.50 02/10/02
Officer and Director
750,000 (2) 28.8% $ 0.51 05/01/06
Jan S. Zwaik 400,000 (2) 15.6% $ 0.51 05/01/06
Chief Operating Officer
Rick D. Rhodes 250,000 (2) 9.6% $ 0.51 05/01/06
Chief Regulatory Officer
and Secretary
</TABLE>
(1) Options were granted under the Employee Benefit and Consulting and Services
Plan.
(2) Options were issued under 1998 Employee Option and Compensation Plan.
None of the Named Officers exercised any options during 1998 and the intrinsic
value of all outstanding options is $0.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 31, 1999 ("The Ownership
Date"), regarding the beneficial ownership of shares of common stock held by (i)
the Named Executive Officers; (ii) each shareholder known by the Company to be
the beneficial owner of more than 5% of the common stock; (iii) each Director of
the Company, and (iv) all Directors and executive officers of the Company as a
group. The common stock, $.001 par value, is the Company's only class of
outstanding voting securities. Unless otherwise indicated in a footnote thereto,
the persons named in the table below have sole voting and investment power with
respect to the shares of common stock shown as beneficially owned by them.
Except as otherwise indicated below, the address for each person is: c/o
Chadmoore Wireless Group, Inc., 2875 E. Patrick Lane, Suite G, Las Vegas, NV
89120.
<TABLE>
<CAPTION>
SECURITY OWNERSHIP OF CERTAIN beneficial OWNERS AND MANAGEMENT
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE
BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) BENEFICIALLY OWNED
- ----------------------------------------- -------------------------- ------------------
<S> <C> <C> <C>
Robert W. Moore 2,211,766 (2) 5.8%
Jan S. Zwaik 600,000 (3) 1.6%
Rick D. Rhodes 62,500 (4) *
Richard C. Leto 30,000 (5) *
Janice H. Pellar 18,750 (6) *
Mark F. Sullivan 252,473 (7) *
Joseph J. Finn-Egan 37,193,891 (8) 56.5%
Gary L. Stanford 18,750 (9) *
Jeffrey A. Lipkin 37,193,891 (10) 56.5%
Recovery Equity Investors II, L.P.
901 Mariner's Island Blvd., Suite 465
San Mateo, CA 94404-1592 37,193,891 (11) 56.5%
All directors and executive
Officers as a group (9 persons) 40,388,130 (12) 60.0%
</TABLE>
* Less than 1%
(1) According to the rules of the Commission, a person is deemed to be the
beneficial owner of a security if such person, directly or indirectly, has
or shares the power to vote or direct the voting of such security or the
power to dispose or direct the disposition of such security. A person or
entity is also deemed to be a beneficial owner of any securities if that
person has the right to acquire beneficial ownership within 60 days of the
Ownership Date. Accordingly, more than one person may be deemed to be a
beneficial owner of the same securities. Unless otherwise indicated by
footnotes the named person has sole voting and investing power with respect
to shares beneficially owned.
(2) Includes 387,500 shares of the Company's Common Stock obtainable as of the
Ownership Date or within 60 days thereafter by Mr. Moore upon the exercise
of nonqualified stock options.
(3) Comprised of 600,000 shares of the Company's Common Stock obtainable as of
the Ownership Date or within 60 days thereafter by Mr. Zwaik upon the
exercise of nonqualified stock options.
(4) Comprised of 62,500 shares of the Company's Common Stock obtainable as of
the Ownership Date or within 60 days thereafter by Mr. Rhodes upon the
exercise of nonqualified stock options.
(5) Comprised of 30,000 shares of the Company's Common Stock obtained as of the
Ownership Date by Mr. Leto.
(6) Comprised of 18,750 shares of the Company's Common Stock obtainable as of
the Ownership Date or within 60 days thereafter by Ms. Pellar upon the
exercise of nonqualified stock options.
<PAGE>
(7) Comprised of 252,473 shares of the Company's Common Stock obtainable as of
the Ownership Date or within 60 days thereafter by Sullivan Family Trust,
of which Mr. and Mrs. Sullivan are trustees, upon the exercise of
nonqualified stock options.
(8) Comprised of (i) 8,854,662 shares of Common Stock owned by REI; and (ii)
28,339,229 shares of Common Stock obtainable as of the Ownership Date or
within 60 days there after by REI upon exercise of warrants. Mr. Finn-Egan,
who is a Managing General Partner of REI and a member of the Company's
Board of Directors, disclaims beneficial ownership of all securities of the
Company held by REI.
(9) Comprised of 18,750 shares of the Company's Common Stock obtainable as of
the Ownership Date or within 60 days thereafter by Mr. Stanford upon the
exercise of nonqualified stock options.
(10) Comprised of (i) 8,854,662 shares of Common Stock owned by REI; and (ii)
28,339,229 shares of Common Stock obtainable as of the Ownership Date or
within 60 days there after by REI upon exercise of warrants. Mr. Lipkin,
who is a Managing General Partner of REI and a member of the Company's
Board of Directors, disclaims beneficial ownership of all securities of the
Company held by REI.
(11) Comprised of 37,193,891 shares of the Company's Common Stock beneficially
owned by Recovery Equity Investors II, L.P., obtainable as of the Ownership
Date or within 60 days thereafter by exercise of certain warrants.
(12) Includes 29,679,202 shares of the Company's Common Stock obtainable as of
the Ownership Date or within 60 days thereafter by exercise of certain
options and warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a description of the employment agreements entered into between the Company
and three (3) of the Named Executive Officers, see Item 10. "EXECUTIVE
COMPENSATION". Mark F. Sullivan is the managing partner of Private Equity
Partners, ("PEP") the Company's investment banking firm. During 1998 and 1997
the Company paid PEP $680,351 and $102,145, for professional services associated
with equity and debt financings, and approximately $860,000 in March of 1999 in
connection with the GATX Transaction and other services. In addition, on
November 9, 1998, the Company entered into a consulting agreement with PEP,
whereby the Company is obligated to pay PEP $7,500 per month, plus expenses.
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 there 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.
<PAGE>
ITEM 13. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
(a)(2) The following exhibits are submitted herewith:
2.1 Agreement and Plan of Reorganization dated February 2, 1995, by and
between the Registrant (f/k/a CapVest Internationale, Ltd.) and
Chadmoore Communications, Inc. (Incorporated by reference to Exhibit 1
of the Registrants Form 8-K, date of earliest event reported- February
21, 1995 the "Form 8-K")
2.2 Addendum to the Agreement and Plan of Reorganization, dated February
21, 1995, by and between the Registrant (f/k/a CapVest Internationale,
Ltd.) and Chadmoore Communications, Inc. (Incorporated by reference to
Exhibit 1 of the Registrants Form 8-K.
2.3 Addendum No. 2 to the Agreement and Plan of Reorganization, dated March
31, 1995, by and between the Registrant (f/k/a CapVest Internationale,
Ltd.) and Chadmoore Communications, Inc. (Incorporated by reference to
Exhibit 1 of the Form 8-K.
3.1 Articles of Incorporation (Incorporated by reference to Exhibit 1 of
the Form 8.
3.2 Articles of Amendment to the Articles of Incorporation filed November
1, 1988 (Incorporated by reference to Exhibit 3.2 to the Registrant's
Form 10-KSB for the year ended December 31, 1995)
3.3 Articles of Amendment to the Articles of Incorporation filed April 28,
1995 (Incorporated by reference to Exhibit 3.3 to the Registrant's Form
10-KSB for the year ended December 31, 1995)
3.4 Articles of Amendment to the Articles of Incorporation filed April 1,
1996 (Incorporated by reference to Exhibit 3.4 to the Registrant's Form
10-KSB for the year ended December 31, 1995)
3.5 Articles of Amendment to the Articles of Incorporation filed April 11,
1996 (Incorporated by reference to Exhibit 3.5 to the Registrant's Form
10-KSB for the year ended December 31, 1995)
3.6 Bylaws (Incorporated by reference to Exhibit 3 to the Registrant's
Registration Statement on Form S-18 (33-14841-D))
4.1 Form of Warrant Certificate (Incorporated by reference to Exhibit 4.1
to the Registrant's Form 10-KSB for the year ended December 31, 1995)
4.2 Registration Rights Agreement (Incorporated by reference to Exhibit 4.2
to the Registrant's Form 10-KSB for the year ended December 31, 1995)
4.3 Certificate of Designation of Rights and Preferences of Series A
Convertible Preferred Stock of the Registrant (Incorporated by
reference to Exhibit 3.4 to the Registrant's Form 10-KSB for the year
ended December 31, 1995)
4.4 Certificate of Designation of Rights and Preferences of Series B
Convertible Preferred Stock of the Registrant (Incorporated by
reference to Exhibit 4.3 to the Registrant's Form 8-Kfiled with the
Commission on December 31, 1996)
<PAGE>
4.5 Certificate of Designation of Rights and Preferences of Series C
Convertible Preferred Stock of the Registrant (Incorporated by
reference to Exhibit 4.1 to the Registrant's Form 8-K filed with the
Commission on May 15, 1998 (the "REI Form 8-K"))
4.6 Senior Secured Loan Agreement, dated March 2, 1999, between GATX
Capital Corporation ("GATX"), the Registrant and its subsidiaries
(Incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on March 16, 1999 ("GATX Form 8-K")
9.1 Shareholders Agreement, dated May 1, 1998, by and among the Registrant,
Recovery Equity Investors, II, L.L.P ("REI") and Robert W. Moore
(Incorporated by reference to Exhibit 10.6 of the REI Form 8-K)
10.1 Amended Nonqualified Stock Option Plan dated October 12, 1995
(Incorporated by reference to Exhibit 10.1 to the Registrant's Form
10-KSB for the year ended December 31, 1995)*
10.2 Employee Benefit and Consulting Services Plan dated July 7, 1995
(Incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-8 effective July 12, 1996 (file no. 33-94508))*
10.3 First Amendment to the Employee Benefit and Consulting Services Plan
dated December 8, 1995 (Incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-8 effective December 1, 1996 (file no.
33-80405))*
10.4 Employment Agreement between the Registrant and Robert W. Moore
effective as of April 21, 1995 (Incorporated by reference to Exhibit
10.4 to the Registrant's Form 10-KSB for the year ended December 31,
1995)*
10.5 Integrated Dispatch Enhanced Network ("iDEN") Purchase Agreement dated
February 28, 1996 by and between the Registrant and Motorola, Inc.
(Incorporated by reference to Exhibit 10.7 to the Registrant's Form
10-KSB for the year ended December 31, 1995)
10.6 Amendment Number 001 to the Integrated Dispatch Enhanced Network (iDEN)
Purchase Agreement dated March 25, 1996 (Incorporated by reference to
Exhibit 10.8 to the Registrant's Form 10-KSB for the year ended
December 31, 1995)
10.7 Asset Purchase Agreement dated November 2, 1994 by and between
Chadmoore Communications, Inc., and General Communications Radio Sales
and Service, Inc., General Electronics, Inc. and Richard Day with
Exhibits (Incorporated by reference to Exhibit 2.2 of the Registrant's
Form 8-K, dated March , 1996 ("the Gencom 8-K"), date of earliest
event reported March 8, 1996)
10.8 Modification to Asset Purchase Agreement dated March 8, 1996 by and
between Chadmoore Communications, Inc., the Registrant and Chadmoore
Communications of Tennessee, Inc. and General Communications Radio
Sales and Service, Inc., General Electronics, Inc. and Richard Day with
Exhibits (Incorporated by reference to Exhibit 2.1 of the Gencom 8-K,
date of earliest event reported March 8, 1996)
<PAGE>
10. 9 Stock Purchase Agreement dated June 14, 1996, by and between Chadmoore
Wireless Group, Inc. and Libero Limited (Incorporated by reference to
Exhibit 10.11 to the Registrant's Form 8-K, under dated June 28, 1996)
10.10 Purchase Agreement between Motorola, Inc. and Chadmoore Wireless Group,
Inc. and Chadmoore Communications, Inc. dated October 25, 1996
(Incorporated by reference to Exhibit 10.12 to the Registrant's Form
10-KSB for the year ended December 31, 1996)
10.11 Promissory Note executed by Chadmoore Communications, Inc. payable to
Motorola, Inc., dated December 30, 1996. (Incorporated by reference to
Exhibit 10.13 to the Registrant's Form 10-KSB for the year ended
December 31, 1996)
10.12 Guarantee of Security Agreement executed by Chadmoore Wireless Group,
Inc., in favor of Motorola, Inc., dated December 30, 1996.
(Incorporated by reference to Exhibit 10.14 to the Registrant's Form
10-KSB for the year ended December 31, 1996)
10.13 Restructuring Agreement Regarding 8% Convertible Debentures dated
September 19, 1997, by and between Chadmoore Wireless Group, Inc.,
Cygni S.A., and Willora Registrant Limited (Incorporated by reference
to Exhibit 10.12 to the Registrant's Form 8-K, under Item 9, date of
earliest event reported - September 19, 1997)
10.14 Transfer and Release Agreement effective September 26, 1997, by and
between Chadmoore Wireless Group, Inc. and LDC Consulting, Inc.
(Incorporated by reference to Exhibit 10.13 to the Registrant's Form
8-K, under Item 5, date of earliest event reported - September 26,
1997)
10.15 Certificate of Designation of Rights and Preferences of Convertible
Preferred Stock Series B of the Registrant. (Incorporated by reference
to Exhibit 4.5 to the Registrant's Form 8-K, under Item 9, date of
earliest event reported December 23, 1997)
10.16 Form of Stock Purchase Warrant issued in connection with the Series B
8% Convertible Preferred Stock Offshore Subscription Agreement dated on
or about December 10, 1997 (Incorporated by reference to Exhibit 4.6 to
the Registrant's Form 8-K, under Item 9, date of earliest event
reported December 23, 1997)
10.17 Form of Series B 8% Convertible Preferred Stock Offshore Subscription
Agreement dated on or about December 10, 1997 (Incorporated by
reference to Exhibit 10.15 to the Registrant's Form 8-K, under Item 9,
date of earliest event reported - December 23, 1997)
10.18 Form of Amendment No. 1 to Offshore Subscription Agreement for Series B
8% Convertible Preferred Stock dated on or about February 17, 1998
(Incorporated by reference to Exhibit 10.16 to the Registrant's Form
8-K, under Item 9, date of earliest event reported - February 17, 1998)
10.19 Employment Agreement between the Registrant and Robert Moore effective
as of January 1, 1997 (Incorporated by reference to Exhibit 10.21 to
the Registrant's Form 10-KSB for the year ended December 31, 1997)*
10.20 Employment Agreement between the Registrant and Rick Rhodes effective
as of December 10, 1998*
<PAGE>
10.21 Investment Agreement dated May 1, 1998, between the Registrant and REI
(Incorporated by reference to Exhibit 10.1 of the REI Form 8-K)
10.22 Registration Rights Agreement, dated May 2, 1998, between the
Registrant and REI (Incorporated by reference to Exhibit 10.2 of the
REI Form 8-K)
10.23 Stock Purchase Warrant, dated May 1, 1998, issued to REI for the
purchase of 4,000,000 shares of Common Stock (Incorporated by reference
to Exhibit 10.3 of the REI Form 8-K)
10.24 Stock Purchase Warrant, dated May 1, 1998, issued to REI for the
purchase of 14,612,796 shares of Common Stock (Incorporated by
reference to Exhibit 10.4 of the REI Form 8-K)
10.25 Stock Purchase Warrant, dated May 1, 1998, issued to REI for the
purchase of 10,119,614 shares of Common Stock (Incorporated by
reference to Exhibit 10.5 of the REI Form 8-K)
10.26 Advisory Agreement, dated May 1, 1998, between the Registrant and REI
(Incorporated by reference to Exhibit 10.7 of the REI Form 8-K)
10.27 Indemnification Letter Agreement, dated May 1, 1998, between the
Registrant and REI (Incorporated by reference to Exhibit 10.8 of the
REI Form 8-K)
10.28 $8,775,000 Secured Promissory Note, dated March 2, 1999, issued by the
Registrant to GATX (Incorporated by reference to Exhibit 10.2 of the
GATX Form 8-K)
10.29 $4,725,000 Secured Promissory Note, dated March 2, 1999, issued by the
Chadmoore Communications, Inc. to GATX (Incorporated by reference to
Exhibit 10.3 of the GATX Form 8-K)
10.30 Security Agreement, dated March 2, 1999, between the Registrant, its
subsidiaries and GATX (Incorporated by reference to Exhibit 10.4 of the
GATX Form 8-K)
10.31 Guarantee, dated March 2, 1999, between the Registrant, its
subsidiaries and GATX (Incorporated by reference to Exhibit 10.5 of the
GATX Form 8-K)
10.32 Warrant to Purchase 1,822,500 Shares of Common Stock, dated March 2,
1999, issued to GATX (Incorporated by reference to Exhibit 10.6 of the
GATX Form 8-K)
10.33 Aggreement dated November 11, 1998, engaging Private Equity Partners
LLC as financial advisors.
10.34 Agreement dated March 7, 1999, engaging Private Equity Partners LLC as
financial advisors.
11.1 Calculation of Weighted Average Shares Outstanding (see Consolidated
Statement of Operations and Notes to Consolidated Financial Statement,
1-L)
16.1 Letter of KPMG, LLP, dated March 8, 1999, stating its concurrence with
the disclosure contained in the Registrant's Current Report on Form
8-K-A filed with the Commission on March 10, 1999 (incorporated by
reference to Exhibit 16 of the Registrant's Form 8-K-A dated March 10,
1999)
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG, LLP
27.1 Financial Data Schedules
* Indicates a management contract or compensatory plan or arrangement.
<PAGE>
(b) Current Reports on Form 8-K
(i) 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
(ii)Current report on Form 8-K on December 18, 1998 reporting (a) the sales of
equity securities pursuant to Regulation S and (b) the conversion of Series
B Convertible Preferred Stock.
<PAGE>
FORM10-KSB
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/ Richard C. Leto
---------------------------------
Richard C. Leto
Chief Financial Officer
Date: April 15, 1999
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.
/s/ Robert W. Moore Date: April 15, 1999
Robert W. Moore, President,
Chief Executive Officer and Director
/s/ Richard C. Leto Date: April 15, 1999
Richard C. Leto
Chief Financial and Accounting Officer
/s/ Rick D. Rhodes Date: April 15, 1999
Rick D. Rhodes
Chief Regulatory Officer
/s/ Mark F. Sullivan Date: April 15, 1999
Mark F. Sullivan
Director
/s/ Joseph J. Finn-Egan Date: April 15, 1999
Joseph J. Finn-Egan
Director
/s/ Janice H. Pellar Date: April 15, 1999
Janice H. Pellar
Director
/s/ Gary L. Stanford Date: April 15, 1999
Gary L. Stanford
Director
/s/ Jeffrey A. Lipkin Date: April 15, 1999
Jeffrey A. Lipkin
Director
Exhibit 10.20
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made as of December 10, 1998, by and
between CHADMOORE WIRELESS GROUP, INC., a Colorado corporation (the
"Corporation"), and Rick D. Rhodes (the "Employee").
W I T N E S S E T H
WHEREAS, the Employee has been serving the Corporation in the capacity of Senior
Vice President and Chief Regulatory Officer, and both the Corporation and the
Employee desire to continue their relationship, subject to the terms and
conditions contained herein.
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements hereinafter set forth, the parties hereto, intending to be legally
bound, agree to the following terms and conditions, which shall be effective
from and after the date hereof:
1. RETENTION, TERM AND DUTIES
1.1 Retention. The Company hereby employs the Employee as Senior Vice
President and Chief Regulatory Officer and the Employee hereby accepts such
employment, upon the terms and subject to the conditions of this Agreement.
1.2 Term. The term of employment of the Employee by the Company shall
be for the period commencing on September 15, 1998 (the "Commencement Date") and
ending on September 15, 2000, (the "Term"), unless this Agreement is sooner
terminated pursuant to Section 5 herein. Notwithstanding anything contained
herein to the contrary, the term of employment will be automatically extended
for successive one (1) year periods commencing September 15, 2000 (referred to
below as an "Extended Term"), unless either party to this Agreement elects to
terminate this agreement by providing notice pursuant to Section 12 hereof of
such election to the other party during the thirty (30) day period commencing
prior to the expiration of the then applicable Term or Extended Term.
1.3 Duties. The Employee shall be Senior Vice President and Chief
Regulatory Officer of the Corporation, with duties and responsibilities
commensurate with such positions. The Employee shall report to the Corporation's
President and Chief Executive Officer. The Employee shall perform the duties
regularly associated with this position at the Corporation's corporate
headquarters in Las Vegas, Nevada. Any change in Employee duties or work
location shall be mutually agreed upon by Corporation and Employee.
2. SCOPE OF SERVICES
Services. The Employee agrees that he or she shall perform
their services to the best of their ability. During the term of this Agreement
the Employee shall not render any services for others in any line of business in
which the Corporation or its subsidiaries are significantly engaged without
first obtaining the Corporation's written consent; and they shall devote their
full business time, care, attention and best efforts to the Corporation's
business.
3. COMPENSATION
3.1 Base. The Corporation shall pay to the Employee an annual base
salary of $110,000.00 (the "Base Compensation"), payable in equal installments
(in accordance with the Corporation's standard practices, but no less often than
semi-monthly) subject to all withholding for income, FICA and other similar
taxes, to the extent required by applicable law. Salary for a portion of any
period will be prorated. The Company agrees to provide an annual written
performance review of the Employee by the Employee's direct supervisor, and to
subsequently review the then current Base Salary of the Employee. Said Base
Salary may be adjusted by the supervisor, subject to the concurrence of the
President and/or the Board of the Company or the Compensation Committee (if
any), at the sole discretion of the Company.
3.2 Bonus. In addition to the Base Compensation payable to the Employee
pursuant to Section 3.1 hereof, the Corporation (i) shall pay to the Employee as
a result of the Employee's services the amount set forth in Exhibit A hereto in
accordance with the performance standards set forth in such Exhibit A, and (ii)
may pay any additional amounts as, in the discretion of the Corporation's Board
of Directors or the Compensation Committee (if any), it may desire as a result
of the Employee's services.
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<PAGE>
3.3 Employee Stock Option Plan. In addition to the Base Compensation
payable to the Employee pursuant to Section 3.1 hereof, and the Bonus payable to
the Employee pursuant Section 3.2 hereof, the Corporation shall issue to the
Employee 250,000 stock options as per their original employment offer. The
Corporation may issue additional stock options as, in the discretion of the
Corporation's Board of Directors or the Compensation Committee, (if any), it may
desire as a result of the Employee's services.
4. OTHER BENEFITS
4.1 Insurance Benefits. The Employee shall be entitled to participate
in all other employee benefit programs of the Company in effect from time to
time, on the same availability and basis as other employees of a similar level
of employment, as determined at the sole discretion of the Company or as
required by applicable laws, subject to a determination of eligibility under the
terms of said plan in accordance with its respective terms. The Company
maintains the exclusive right, at its sole discretion, to change, alter, modify,
or eliminate any or all of said employee benefits at any time. Upon termination
of Employment for any reason, the Employee may, at the Employee's discretion,
elect to acquire any desired benefit plans which are convertible to the Employee
as per the terms and conditions of the particular benefit plan(s), consistent
with applicable Company policies, and all federal, state, and local laws,
including COBRA.
4.2 Expenses. To the extent not otherwise reimbursed under this
Agreement, the Corporation shall reimburse the Employee for all reasonable and
customary expenses which the Employee shall incur in connection with the
Employee's services to the Corporation or any subsidiary pursuant to this
Agreement. All additional benefits are to be authorized by and subject to
approval by the Corporation's Board of Directors.
4.3 Vacation; Sick Leave. The Corporation shall provide to the Employee
such paid vacation and paid sick leave as outlined in the Corporation's
Associate Managed Time Off (AMTO) Policy which do not materially interfere with
the Employee's performance of his obligations hereunder.
5. TERMINATION
This Agreement may be terminated prior to the Expiration Date only in accordance
with the following provisions:
5.1 Death. In the event of the Employee's death, the Employee's
employment with the Company shall be deemed to be terminated as of the date of
death. Upon death, the Employee's estate or other legal representative shall be
entitled to receive any Base Salary installments which are accrued and unpaid at
that time. All other compensation or benefits shall cease at the date of death,
except for any prior vested amount due the Employee under any benefit program of
the Company in which the Employee was enrolled, and such other benefits as may
be maintained by the spouse and/or dependents of the Employee as per the terms
and conditions of the particular benefit plan(s), consistent with applicable
Company policies, and all federal, state, and local laws, including COBRA.
5.2 Termination by the Company. Company may terminate the Employee's
employment hereunder, by delivering to the Employee a Notice of Termination
(defined hereinafter), as follows:
i) At will, without cause, during the first ninety (90) days of
continuous employment with the corporation, without additional
employment or severance remuneration. ii) At will, without cause, at
any time after the first ninety (90) days of continuous employment,
with payment of twelve (12) months of Base Salary as severance
remuneration. All Employee Options granted to employee shall
immediately vest upon the date of termination at will, without cause.
iii) For cause, at any time during employment, without additional
remuneration or severance, with cause having any of the following
meanings:
(a) the Employee having been convicted of any felony or other
crime involving moral turpitude;
(b) the use of narcotics or alcohol to the extent which
materially impairs the Employee's performance of his or her
duties;
(c) malfeasance or gross negligence by the Employee in the
performance of his or her duties;
(d) a material violation by the Employee of any provision of
this Agreement;
(e) willful or gross misconduct by the Employee materially
injurious to the Company.
5.3 Voluntary Termination. Employee may voluntarily terminate his or
her employment with the Company at any time, with a minimum of thirty (30) days
of notice, by giving the Company a Notice of Termination (defined hereinafter).
If the Employee voluntarily terminates his or her Employment with the Company
under this Agreement, the Employee shall not receive additional remuneration,
but shall receive pay only for days worked, but not yet paid through the last
day worked. In the event Employee voluntarily terminates
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<PAGE>
employment due to inability of Company to meet payroll obligations for 31
consecutive days, all employee stock options and/or stock appreciation rights
granted to employee will vest at date of termination. Also, the Employee may, in
his or her discretion, elect to acquire or assume any desired benefit plans
which are convertible to the Employee, as per the terms and conditions of the
benefit plan, consistent with applicable Company policies, and as per all
applicable federal, state and local laws, statutes, or ordinances, including
COBRA.
5.4 Termination Following Change of Ownership. If this Agreement is
terminated by either party within one year following a "change in the ownership"
(as defined below) of the Corporation, and in lieu of the benefits provided for
in Section 5.2(ii), Corporation shall pay to Employee a lump sum payment equal
to 2.99 times the average annual compensation paid by the Corporation and
includable by Employee in his gross income during the lesser of (i) the period
of time employed by the Corporation or (ii) the five tax years ended prior to
the tax year in which such change of ownership or control occurs, and all
Employee Stock Options shall immediately and irrevocably vest . For purposes of
this Section 5.4, a "change in the ownership" of the Corporation will be deemed
to have occurred upon: (i) completion of a transaction resulting in a
consolidation, merger, combination or other transaction in which the common
stock of the Corporation is exchanged for or changed into other stock or
securities, cash and/or any other property and the holders of the Corporation's
common stock immediately prior to completion of such transaction are not,
immediately following completion of such transaction, the owners of at least a
majority of the voting power of the surviving entity, (ii) a tender or exchange
offer by any person or entity other than Employee and/or his affiliates for
fifty percent (50%) of the outstanding shares of common stock of the Corporation
is successfully completed, (iii) the Corporation has sold all or substantially
all of the Corporation's assets, (iv) during any period of twenty-four (24)
consecutive months, individuals who at the beginning of such period constituted
the board of directors of the Corporation (together with any new or replacement
directors whose election by the board of directors, or whose nomination for
election, was approved by a vote of at least a majority of the directors then
still in office who were either directors at the beginning of such period or
whose election or nomination for reelection was previously so approved) cease
for any reason to constitute a majority of the directors then in office, and (v)
any other event resulting in a change in the ownership of the Corporation.
Notwithstanding anything contained herein to the contrary, the payment by
Corporation to Employee pursuant to this Section 5.4 shall be reduced to the
extent necessary to prevent any portion of such payment to be characterized as
an excess parachute payment under Section 280G of the Internal Revenue Code of
1986, as amended, or any successor provision thereof, which may be applicable to
a payment pursuant to this Section 5.4.
5.5 Notice of Termination. For purposes of this Agreement, the term
"Notice of Termination" shall mean a written document delivered to the Employee
(if termination is by the Company) or to the Company (if a voluntary termination
by the Employee), which shall specify the section of this Agreement under which
the termination occurs. Termination shall be effective on the date that the
Notice of Termination is effective, or any date specified by the Company (if
termination is by the Company). Notwithstanding the foregoing, the Notice of
Termination shall be effective immediately upon termination for "cause."
6. INDEMNIFICATION AND INSURANCE
6.1 Obligation. The Corporation shall indemnify and hold harmless, and
in any action, suit or proceeding, defend the Employee (with the Employee having
the right to use counsel of his choice) against all expenses, costs, liabilities
and losses (including attorneys' fees, judgments and fines, and amounts paid or
to be paid in any settlement) (collectively "Indemnified Amounts") reasonably
incurred or suffered by the Employee in connection with the Employee's service
as an employee of the Corporation or any affiliate to the full extent permitted
by the By-laws of the Corporation as in effect on the date of this Agreement,
or, if greater, as permitted by the general corporation law of the jurisdiction
of the Corporation's incorporation (the "GCL"), provided that the indemnity
afforded by the Corporation's By-laws shall never be greater than permitted by
the GCL. The Company shall advance on behalf of Employee all Indemnified Amounts
as they are incurred. To the extent a change in the GCL (whether by statute or
judicial decision) permits greater indemnification than is now afforded by the
By-laws and a corresponding amendment shall not be made in said By-laws, it is
the intent of the parties hereto that the Employee shall enjoy the greater
benefits so afforded by such change.
6.2 Determination. A determination that indemnification with respect to
any claims by the Employee pursuant to this Section 6 is proper shall be made by
independent legal counsel selected by the Board of Directors of the Corporation
and set forth in a written opinion furnished by such counsel to the Board of
Directors, the Corporation and the Employee. In the event it is determined by
such counsel that Employee is not entitled to indemnification pursuant to this
Section 7 (and if contested by Employee, such determination is confirmed by the
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<PAGE>
final non-appealable order of a court of competent jurisdiction), or if a court
of competent jurisdiction determines in a final non-appealable order that
Employee is not entitled to indemnification pursuant to this Section 6, Employee
hereby undertakes that he or she shall promptly reimburse the Company for all
such advances of Indemnified Amounts made by the Company on Employee's behalf.
6.3 Notice of Claims. The Employee shall advise promptly the
Corporation in writing of the institution of any action, suit or proceeding
which is or may be subject to this Section 6, provided that Employee's failure
to so advise the Corporation shall not affect the indemnification provided for
herein, except to the extent such failure has a material and adverse effect on
the Corporation's ability to defend such action, suit or proceeding.
6.4 Indemnification Insurance. The Employee shall be covered by
insurance, to the same extent as other employees of the Corporation are covered
by insurance, with respect to (a) directors and officers liability, (b) errors
and omissions, and (c) general liability insurance. The Corporation shall
maintain reasonable and customary insurance of the type specified in parts (b)
and (c) in the preceding sentence. The Employee shall be a named insured or
additional insured, without right of subrogation against him or her, under any
policies of insurance carried by the Corporation. The Corporation will, in good
faith, make efforts to maintain insurance coverage of the type specified in part
(a) above at commercially reasonable rates, but the failure to obtain such
coverage shall not constitute a breach of the Corporation's obligations
hereunder.
7. CONFIDENTIAL INFORMATION: NONDISCLOSURE, ETC.
7.1 Confidentiality. Except as may be in furtherance of the Employee's
performance of his functions as the Corporation's Chief Regulatory Officer
(including, without limitation, in connection with acquisitions, dispositions,
financings and other significant corporate transactions, developments or
planning which involve the participation of third parties) or otherwise with the
consent of the Board of Directors, the Employee shall not, throughout the Term
of this Agreement and thereafter, disclose to any third party, or use or
authorize any third party to use, any material information relating to the
material business or interests of the Corporation (or any of its subsidiaries)
which Employee knows to be confidential and valuable to the Corporation or any
of its subsidiaries (the "Confidential Information"). The Confidential
Information is and will remain the sole and exclusive property of the
Corporation, and, during the Term of this Agreement, the Confidential
Information, when entrusted to the Employee's custody, shall be deemed to remain
at all times in the Corporation's sole possession and control.
7.2 Return of Documents. Upon termination of this Agreement for any
reason whatsoever, or whenever requested by the Board of Directors of the
Corporation, the Employee shall return or cause to be returned to the
Corporation all of the Confidential Information or any other property of the
Corporation in the Employee's possession or custody or at his or her disposal,
which he or she has obtained or been furnished, without retaining any copies
thereof.
8. NON-COMPETITION
8.1 Restriction. Subject to Section 2 hereof, the Employee shall not,
(i) throughout the Term or Extended Term of this Agreement, as the case may be,
and (ii) for a period of 12 months thereafter, in each case without the
Corporation's prior written consent, render services to a business, or plan for
or organize a business, which is materially competitive with the Corporation or
of any of its subsidiaries by becoming an owner, officer, director, shareholder
(owning more than 4.9% of such business' equity interests), partner, associate,
employee, agent or representative or consultant or serve in any other capacity
in any such business.
8.2 Trade Secrets. Subject to Section 2 hereof, all ideas and
improvements which are protectable by patent or copyright or as trade secrets,
conceived or reduced to practice (actually or constructively) during the Term of
this Agreement by the Employee, shall be the property of the Corporation;
provided, however, that the provisions of this Section 8.2 shall not apply to an
invention for which no equipment, supplies, facility or trade secret information
of the Corporation was used and which was developed entirely on the Employee's
own time, and (a) which does not relate to (i) the business of the Corporation
or any of its subsidiaries or (ii) the actual or demonstrably anticipated
research or development by the Corporation of any of its subsidiaries or (b)
which does not result from any work performed by the Employee pursuant to this
Agreement.
9. REMEDIES
9.1 Arbitration. In the event of any dispute or controversy
arising under, out of or relating to this Agreement or the breach hereof other
than under Section 7 or 8 hereunder for which the Corporation may seek
injunctive relief, it shall be determined by arbitration in Las Vegas, Nevada to
be heard by a single arbitrator
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<PAGE>
chosen by the Corporation and the Employee, provided that if the Corporation and
the Employee cannot agree on a single arbitrator, each shall select one
arbitrator and the arbitrators so selected shall select a third arbitrator, and
the panel of three arbitrators shall determine the dispute. The arbitration is
to commence within four (4) weeks after service of demand for arbitration by
either party, and each party shall have the right to make one document request
on the other party prior to commencement of the arbitration proceeding, but no
other discovery shall be conducted other than that which is agreed upon in
writing by both parties. Such arbitration and any award made therein shall be
binding upon the Corporation and the Employee.
9.2 Injunctive Relief. The Employee acknowledges and agrees that any
material breach which occurs or which is threatened of Section 7 or 8 hereof
shall cause substantial and irreparable damage to the Corporation in an amount
and of a character difficult to ascertain. Accordingly, in addition to any other
relief to which the Corporation may otherwise be entitled at law, in equity or
by statute, or under this Agreement, the Corporation shall also be entitled to
seek such immediate temporary, preliminary and permanent injunctive relief on
such breach or threatened breach of Section 7 or 8 hereof as may be granted
through appropriate proceedings.
9.3 Fees. If any action at law or in equity or arbitration is necessary
to enforce or interpret the terms and conditions of this Agreement, the
prevailing party shall be entitled to reasonable attorney's, accountant's and
expert's fees, costs and necessary disbursements in addition to any other relief
to which it or he may be entitled. As used in this Section 9.3, the term
prevailing party shall include, but not be limited to, any party against whom a
cause of action, demand for arbitration, complaint, cross-complaint,
counterclaim, cross-claim or third party complaint is voluntarily dismissed,
with or without prejudice.
10. NOTICES
All notices required or permitted hereunder shall be in writing and
shall be delivered in person, by facsimile, telex or equivalent form of written
communication, or sent by certified or registered mail, return receipt
requested, postage prepaid, as follows:
To Corporation:
Chadmoore Wireless Group, Inc.
2875 E. Patrick Lane, Suite G
Las Vegas, Nevada 89120
Attention: President
Fax: 702-740-5646
To the Employee:
Rick D. Rhodes
16 Stone Cress
Henderson, NV. 89014
or such other party and/or address as either party may designate in a written
notice delivered to the other party in the manner provided herein. All notices
required or permitted hereunder shall be deemed duly given and received on the
date of delivery, if delivered in person or by facsimile, telex or other
equivalent written telecommunication, or on the seventh day next succeeding the
date of mailing if sent by certified or registered mail.
11. FURTHER ACTION
The Corporation and the Employee each agrees to execute and deliver
such further documents as may be reasonably necessary by the other in order to
give effect to the intentions expressed in this Agreement.
12. HEADING; INTERPRETATIONS
The headings and captions used in this Agreement are for convenience
only and shall not be construed in interpreting this Agreement.
13. ASSIGNABILITY
a) By Company. This Agreement is binding upon, and shall inure to the
benefit of the Company, and any successors or assigns, and may be assigned in
whole or in part by the Company, its successors and assigns.
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<PAGE>
b) By Employee. This Agreement is a personal services contract, and the
Employee may not assign this Agreement, or any part hereof, without the prior,
written consent of the Company, which consent may be withheld for any reason.
14. ENTIRE AGREEMENT
This Agreement contains the entire agreement and understanding of the
parties with respect to the matters herein, and supersedes all existing
negotiations, representations or agreements and all other oral, written and
other communications between them concerning the subject matter of this
Agreement, except in the event of change in control.
15. AMENDMENTS
This Agreement may be amended or modified in whole or in part only by
an agreement in writing signed by the Corporation and the Employee.
16. WAIVER AND SEVERABILITY
The waiver by either party of a breach of any terms or conditions of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach by such party. In the event that one or more provisions of this Agreement
shall be declared to be invalid, illegal or unenforceable under any law, rule or
regulation, such invalidity, illegality or unenforceability shall not affect the
validity, legality or enforceability of the other provisions of this Agreement.
17. GOVERNING LAW
This Agreement and the rights of the parties under it shall be governed
by and construed in accordance with laws of the State of Nevada, including all
matters of construction, validity, performance and enforcement and without
giving effect to the principles of conflict of laws, except that matters of
corporate law and governance shall be governed by and construed in accordance
with the laws of the State of Nevada.
18. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be an original, and all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed Agreement as of the day and year
first above written.
EMPLOYEE
/s/Rick D. Rhodes
-------------------
Rick D. Rhodes
CHADMOORE COMMUNICATIONS, INC.
By: /s/Robert W. Moore
----------------------
Robert W. Moore
Title: President
-------------------
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<PAGE>
EXHIBIT "A"
Other Provisions to Employment Agreement
As per the original offer letter, annual bonus shall equate to $40,000.00 at
100% achievement
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Exhibit 10.33
November 11, 1998
Mr. Robert W. Moore
President & CEO
Chadmoore Wireless Group, Inc.
2875 East Patrick Lane, Suite G
Las Vegas, NV 89120
Dear Robert:
The purpose of this letter is to confirm the engagement of Private Equity
Partners LLC ("PEP") by Chadmoore Wireless Group, Inc. (the "Company") on a
non-exclusive basis to render financial advisory services to the Company in
connection with the Company's efforts to effect a transaction by which the
Company or its securityholders would directly or indirectly derive an economic
interest in 900 megahertz spectrum or related assets of Geotek Communications,
Inc. (the "Transaction"). The nature of the engagement and the rights and
obligations of PEP and the Company to each other are agreed to be as follows:
Section 1. Services to be Rendered
PEP will perform such of the following financial advisory services as the
Company may reasonably request:
(a) PEP will familiarize itself to the extent it deems appropriate with the
business and financial condition and prospects of the Company, it being
understood that PEP shall, in the course of such familiarization, rely
entirely on publicly available information and such other information as
may be supplied by the Company, without independent investigation.
(b) PEP will familiarize itself to the extent it deems appropriate with the
assets and financial condition of Geotek Communications, Inc. ("Geotek"),
it being understood that PEP shall, in the course of such familiarization,
rely entirely on publicly available information and such other information
as may be supplied by the Company, without independent investigation.
(c) PEP will advise and assist the Company in developing and implementing a
general strategy for accomplishing a Transaction.
(d) PEP will advise and assist the Company in preparing appropriate
documentation for pursuing the Transaction, which documentation shall be
designed to describe the Company and its business, operation, properties,
financial condition and prospects, and qualifications for effecting the
Transaction, it being specifically understood and agreed that (i) such
documentation shall be based entirely upon publicly available information
and such other information as may be supplied by the Company, which
information the Company hereby warrants shall be complete and accurate in
all material respects, and not misleading, (ii) the Company shall be solely
responsible for the accuracy and completeness of such documentation, (iii)
PEP shall receive written approval of such documentation from the Company
prior to its distribution, and (iv) other than as contemplated in this
paragraph such documentation shall not be used, reproduced, disseminated,
quoted, or referred to at any time, in any manner, or for any purpose, by
PEP or the Company, except with the prior consent of the other.
<PAGE>
(e) PEP will advise and assist the Company in working with Geotek and third
parties having a potential interest in the Transaction.
(f) PEP will advise and assist the Company in preparing for and conducting due
diligence meetings related to the Transaction and in negotiating and
closing the Transaction.
(g) PEP will render such other financial advisory services as may from time to
time be agreed upon by PEP and the Company; provided, however, that any
services rendered by PEP (and compensation therefor) relating to or in
connection with financing to facilitate a Transaction shall be governed by
a separate engagement letter specific to the scope of such engagement. Not
withstanding the foregoing, PEP agrees that the Company may utilize its
work-product hereunder with existing or potential creditors of or investors
in Geotek and its successors with the objective of effecting a Transaction,
and that in such case PEP shall not be entitled to additional compensation
(beyond that provided for in this letter agreement) for such work-product
or such use, and that such activity shall not constitute services rendered
by PEP relating to or in connection with financing under the preceding
sentence of this paragraph (g).
Section 2. Compensation.
For PEP's services hereunder, the Company shall pay PEP the following:
(a) A cash retainer of $7,500.00 (seven thousand five hundred dollars) per
month. The first such payment shall be due upon execution of this letter
agreement, and each successive monthly payment shall be due on the monthly
anniversary of October 23, 1998.
(b) Upon consummation of the Transaction, (i) a cash success fee of $500,000
(five-hundred thousand dollars) and (ii) a five-year warrant to purchase
242,000 shares of common stock of the Company exercisable at $0.50 per
share.
It is hereby agreed that compensation to PEP for any services rendered by PEP
relating to or in connection with financing to facilitate a Transaction will be
in addition to the compensation provided for herein and shall be governed by a
separate engagement letter specific to the scope of such services. Not
withstanding the foregoing, PEP agrees that the Company may utilize PEP's
work-product hereunder with existing or potential creditors of or investors in
Geotek and its successors with the objective of effecting a Transaction, and
that in such case PEP shall not be entitled to additional compensation (beyond
that provided for in this letter agreement) for such work-product or such use,
and that such activity shall not constitute services rendered by PEP relating to
or in connection with financing under the first sentence of paragraph 1(g)
hereof.
The Company expressly agrees that by executing this letter agreement, the
compensation and other terms of this agreement shall be and remain its full
responsibility. The Company further recognizes that certain parties may attempt
to renegotiate (and may enlist the Company's assistance in so doing) the terms
hereof as a condition to closing a Transaction. Consequently, the Company hereby
represents and warrants that it will (i) immediately inform any such party in
writing that the Company intends to honor its contractual commitments hereunder
and that the freedom to do so is a condition of the Company doing business with
such party, and (ii) immediately provide PEP with a copy of such written
notification.
<PAGE>
Section 3. Expenses.
In addition to any fees or other compensation that may have been paid or be
payable hereunder and regardless of whether any Transaction is proposed or
consummated, the Company shall, from time to time upon request, reimburse PEP
for all of PEP's reasonable out-of-pocket expenses incurred in connection with
PEP's engagement hereunder.
Section 4. Indemnification.
PEP and the Company have entered into a separate agreement, dated the date
hereof, providing for the indemnification of PEP by the Company in connection
with PEP's engagement hereunder.
Section 5. Termination.
PEP's engagement hereunder shall continue for a period of 12 months from the
date hereof unless extended by mutual agreement of PEP and the Company or
terminated in compliance with the terms hereof. Prior to the expiration of such
period, the Company may terminate PEP's engagement hereunder only if the Company
abandons pursuit of the Transaction or if PEP fails in a material way to perform
its duties hereunder; provided, however, that (i) if terminated because the
Company abandons pursuit of the Transaction, PEP's engagement hereunder shall be
deemed immediately reinstated concurrent with any resumption of pursuit of the
Transaction by the Company, and (ii) following termination hereof for any reason
(including expiration of the 12 month engagement term provided for above) other
than PEP's failure in a material way to perform its duties hereunder, PEP will
be entitled to its full fees under Section 2 hereof in the event that at any
time prior to the expiration of 24 months after such termination a Transaction
is consummated directly or indirectly involving the Company or its
securityholders. Likewise, following termination hereof for any reason, PEP
shall be entitled to any reasonable expenses due under Section 3 hereof incurred
during the term of PEP's engagement hereunder, and the provisions of Section 4
hereof shall survive such termination. Consummation of the Transaction and full
remuneration to PEP of all compensation and reasonable expenses provided for in
this letter agreement shall also be deemed termination hereof.
Section 6. Miscellaneous.
Confidentiality. PEP acknowledges that all information relating to its
engagement hereunder supplied to PEP by the Company shall be deemed confidential
by PEP. PEP will not disclose or divulge any such information other than to
parties approved by the Company.
Entire Agreement. This letter agreement supersedes all prior discussions and
agreements between the parties with respect to the subject matter hereof and,
together with the indemnification letter of even date herewith, contains the
sole and entire agreement between the parties hereto with respect to the subject
matter hereof. This letter agreement may be modified or amended only by written
instrument signed by the parties hereto.
<PAGE>
Severability. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision.
Counterparts. This letter agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
Headings. The headings of the sections, subsections, and paragraphs of this
letter agreement have been added for convenience only and shall not be deemed to
be a part of this letter agreement.
Governing Law. This letter agreement shall be governed by and construed in
accordance with the laws of the State of Nevada, and the federal and state
courts within the State of Nevada shall have sole and exclusive jurisdiction
over any disputes that may arise relating hereto.
Please confirm that the foregoing is in accordance with your understandings and
agreements with PEP by signing and returning one copy of this letter to PEP.
Very truly yours,
Private Equity Partners
/s/Mark F. Sullivan
Mark F. Sullivan
Managing Partner
Accepted and agreed to as of the date first above written:
Chadmoore Wireless Group, Inc.
By:/s/Robert W. Moore
--------------------------
Title: President
-----------------------
<PAGE>
Private Equity Partners November 11, 1998
539 Spencer Way
Incline Village, NV 89451
Gentlemen:
In connection with your engagement to advise and assist us with the matters
referred to in the engagement letter dated the date hereof, we indemnify and
hold harmless you and your affiliates, and the directors, officers, agents, and
employees of you and your affiliates, to the full extent lawful, from and
against any losses, claims, damages, or liabilities (or actions, including
shareholder actions, in respect thereof) related to or arising out of such
engagement or your role in connection therewith, and will reimburse you and any
other party entitled to be indemnified hereunder for all expenses (including
counsel fees and court costs) as they are incurred by you or any such other
indemnified party in connection with investigating, preparing, or defending any
such action or claim, whether or not in connection with pending or threatened
litigation in which you are a party. We will not, however, be responsible for
any claims, liabilities, losses, damages or expenses which are finally
judicially determined to have resulted primarily from your bad faith or gross
negligence. We also agree that neither you, nor any of your affiliates, nor any
officer, director, employee or agent of you or any of your affiliates shall have
any liability to us for or in connection with such engagement except for any
such liability for losses, claims, damages, liabilities, or expenses incurred by
us that result primarily from your bad faith or gross negligence. The foregoing
agreement shall be in addition to any rights that you or any indemnified party
may have at common law or otherwise, including, but not limited to, any right to
contribution. We hereby consent to personal jurisdiction and service and venue
in any court in which any claim which is subject to this agreement is brought
against you or any other indemnified party.
It is understood that, in connection with your engagement, you may also be
engaged to act for us in one or more additional capacities, and the terms of
this engagement or any such additional engagement may be embodied in one or more
separate written agreements. This indemnification shall apply to said
engagement, any such additional engagement, and any modification of said
engagement or such additional engagement, and shall remain in full force and
effect following the completion or termination of your engagement(s).
Very truly yours, Agreed:
Chadmoore Wireless Group, Inc. Private Equity Partners
By: By:
-------------------------- --------------------------
Title: Title:
----------------------- -----------------------
Exhibit 10.34
March 7, 1999
Mr. Jan S. Zwaik
Chief Operating Officer
Chadmoore Wireless Group, Inc.
2875 East Patrick Lane, Suite G
Las Vegas, NV 89120
Dear Jan:
The purpose of this letter is to confirm the engagement of Private Equity
Partners LLC ("PEP") by Chadmoore Wireless Group, Inc. (the "Company") effective
as of February 24, 1998 (the "Effective Date") to coordinate production of the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1997, draft the MD&A section of such 10-K, and draft potential press releases
for the Company as requested. For such services, the Company agrees to issue to
PEP or its designee 5,000 (five thousand) freely trading (pursuant to Form S-8)
shares of its common stock per month in advance, to be accrued for the benefit
of and issued to PEP or its designee by the Company from time to time as
requested in writing by PEP within ten business days of such request. This
agreement shall remain in effect for six months from the Effective Date and
continue thereafter on a month to month basis as mutually agreed upon by PEP and
the Company. In addition to any fees or other compensation that may have been
paid or be payable hereunder, the Company shall, from time to time upon request,
reimburse PEP for all of PEP's out-of-pocket expenses incurred in connection
with PEP's engagement hereunder. The Company agrees that the separate agreement
dated June 5, 1997 entered into by PEP and the Company providing for the
indemnification of PEP by the Company shall be deemed automatically extended to
cover and apply to this engagement as well, and the provisions of such
indemnification agreement shall survive the termination or effective termination
hereof. PEP shall receive written approval from the Company for all press
releases, filings, or other work product related to PEP's engagement hereunder
prior to its distribution, and the Company agrees that it holds sole
responsibility for the final content, accuracy, and completeness of any such
documentation. Please confirm that the foregoing is in accordance with your
understandings and agreements with PEP by signing and returning one copy of this
letter to PEP.
Private Equity Partners LLC
/s/Mark F. Sullivan
Mark F. Sullivan
Managing Partner
Accepted and agreed to as of the date first above written:
Chadmoore Wireless Group, Inc.
By:/s/Robert W. Moore
--------------------------
Title: President
-----------------------
Exhibit 21.1
SUBSIDIARIES 4/15/99
CHADMOORE WIRELESS GROUP, INC.
Chadmoore Communications, Inc.
CMRS Systems, Inc.
Chadmoore Construction Services, Inc.
PTT Beacon Hill, Inc.
PTT of Nevada, Inc.
PTT Tanner, Inc.
CHADMOORE COMMUNICATIONS, INC.
Chadmoore Communications of Tennessee, Inc.
PTT Burton, Inc.
PTT Maple, Inc.
PTT Tristin, Inc.
PTT Communications of Austin, LLC
PTT Communications of Ft. Wayne, LLC
PTT Communications of Huntsville, LLC
PTT Communications of Jacksonville, LLC
PTT Communications of Richmond, LLC
PTT Communications of Roanoke, LLC
PTT Communications of Virginia Beach, LLC
PTT Communications of Baton Rouge, LLC
CMRS SYSTEMS, INC.
800 SMR Network, Inc.
PTT Artina, Inc.
PTT Chaco, Inc.
PTT Franklin, Inc.
PTT Roseland, Inc.
PTT Communications of Baton Rouge, LLC
PTT Communications of Bay City, LLC
PTT Communications of Lake Charles, LLC
PTT Communications of Rockford, LLC
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS'
The Board of Directors
Chadmoore Wireless Group, Inc.
We consent to incorporation by reference in the registration statements
(No.33-95408 and No. 33-80405) on Form S-8 of Chadmoore Wireless Group, Inc. of
our report dated March 27, 1998, except as to the sixth paragraph of Note 5a
which is as of November 13, 1998, relating to the consolidated balance sheet of
Chadmoore Wireless Group, Inc. and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended, which report appears in the December 31, 1998,
annual report on Form 10-KSB of Chadmoore Wireless Group, Inc. Our report
contains an explanatory paragraph that states that the Company has suffered
recurring losses from operations, has a deficiency in working capital, and has a
deficit accumulated during the development stage that raise substantial doubt
about its ability to continue as a going concern. The Consolidated Financial
Statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
Las Vegas, Nevada
April 15, 1998
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