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, 1999
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. [X]
State issuer's revenues for its most recent fiscal year. $6,074,076
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 6, 2000, the aggregate market value of the Company's Common
Stock held by non-affiliates was $123,150,011. 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 6, 2000, 43,277,368 shares of Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed not later than 120 days
after December 31, 1999, in connection with the Registrant's 2000 Anual Meeting
of Stockholders, referredto to herein as the "Proxy Statement," are incorporated
by reference into Part III of this Form 10-KSB. Certain exhibits filed with the
Registrant's prioor registration statements and period reports under the
Securities Exchange Act of 1934 are incorporated herein by reference by
reference into Part IV of this Report.
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 6A. Quantitative and Qualitative Disclosures about Market Risk
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
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
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. These statements contain words such as "intends", "objectives",
"planned", "future", "attainable", "opportunities", "growth" and "believes" and
include statements regarding the Company's strategy, expansion efforts, efforts
to obtain funding and equipment purchase commitments. 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.
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"). The
Company also entered into an Asset Acquisition Agreement ("American Agreement")
with American Wireless Network, Inc. ("American") where the Company will acquire
16 ten-channel 900 Mhz wide-area licenses in seven Metropolitan Trading Areas
("MTA's"). 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.
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. 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"). 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
<PAGE>
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. It consists of 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 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
communicate simultaneously with all of their workers or among worker subgroups.
The Company's primary objectives are to continue developing, operating and
aggressively loading customers, on its 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.
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 analog
platform, that previously served millions of analog users, the Company believes
that the needs of the traditional SMR customer are being underserved. 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:
o an established market base of approximately 19 million users in the U.S. that
rely on analog SMR service for dispatch applications,
o capacity constraints that have created pent-up demand,
o 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,
o favorable economic and demographic conditions have stimulated significant
business formation, with SMR positioned as a cost-effective productivity tool,
o analog SMR technology and infrastructure is proven, dependable, and widely
available,
o 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, and
o excellent system economics are attainable as analog SMR service is simple and
cost-effective to deploy o system economics that enable the Company to add
capacity incrementally as demand dictates, resulting in a relatively low cost
of infrastructure.
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:
o competitors converting to digital infrastructures create segmentation and
awareness in the marketplace,
<PAGE>
o 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,
o the capital costs per subscriber associated with such digital technology are
substantially higher than those for analog systems,
o the Company believes that it can add analog infrastructure on an as-needed,
just-in-time basis and for significantly less capital cost,
o a significantly lower pricing advantage for analog versus digital service can
be marketed to the cost-conscious end-user,
o other than digital encryption, the Company believes that essentially the same
feature set can be offered to the Company's customers, and
o 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:
o the quality of the potential dealers,
o the lack of available capacity from other SMR providers in the market,
o business and population demographics, and
o channel density, availability of tower space, topography, and similar
engineering considerations o the overall business case including anticipated
pricing, demand, infrastructure and operating costs, return on investment, and
potential for value-added services.
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 and SALES AND MARKETING), 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. 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. In addition, the Company has a direct sales force to complement the
indirect distribution network. The Company believes that these distribution
channels enable it to take advantage of existing infrastructure and human
resources, balance capital requirements and fixed operating costs, 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.
In markets where the Company plans on operating, but where a suitable dealer or
independent agent is not available, the Company is establishing its own
marketing presence or plans to offer such markets as expansion opportunities
for top dealers serving the Company in other cities.
Chadmoore supports its dealer network through field management and by providing
an array of professional sales and marketing tools to enhance end-user
recognition. These tools include a comprehensive, national marketing and
advertising program, dealer education and support and training programs.
<PAGE>
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 2000 business plan objectives.
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 Company competes against digital wireless service
providers primarily on cost and other analog SMR providers primarily on customer
service and capacity. 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.
The Company also competes with Nextel Partners, Inc., which provides digital
wireless communications services, in many of the secondary and tertiary markets
in which the Company operates, using the Nextel brand name. Nextel Partners
offers its customers the same digital wireless communications services available
from Nextel including digital cellular, text/numeric paging and Nextel Direct
Connect.
Another potential wireless competitor for Chadmoore is Southern Company, which
is implementing a digital architecture and pursuing strategies similar to Nextel
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.
Most other analog SMR providers within the Company's Operating Territory consist
of local small family owned 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.
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 6% 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.
<PAGE>
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 6,
2000, the Company had exercised Options on all except approximately 120
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.
Approximately 650 of those licenses purchased by or under option and management
agreements with the Company 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 could result in a material adverse effect on the Company's
financial condition, results of operations and liquidity. (See Item 3)
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
General. 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 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 adversely 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 customer
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. Approximately 650 of those licenses purchased by or
under option and management agreements with the Company could be permanently
canceled by the FCC for failure to comply with its construction requirements.
(See Item 3)
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 were 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.
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
<PAGE>
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. 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.
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 affect 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 state and local regulatory
authorities in the future.
Regulatory developments. In March, 1996, the Communications Act (as amended)
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 effect 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 effect 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.
However, Chadmoore has entered into an agreement with ComSpace Corporation to
install and test market their DC/MA technology in one fully commercialized
market. This technology provides a digital platform configured to serve the
traditional SMR user, while offering an increase in capacity of 8 times for each
voice channel. While the ComSpace technology is being evaluated, the Company is
constantly researching other technologies, including Motorola's new small market
iDEN product, that would offer increases in capacity and/or additional services
such as short messaging, paging or vehicle location. It is not known whether any
of the technologies, including the product developed by ComSpace, are
technically feasible or economically viable.
EMPLOYEES
As of March 6, 2000, the Company had 70 full-time and 5 part 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.
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
<PAGE>
December 31, 1999, the Company had an accumulated deficit of $52,485,052. 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 acquire 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 6 months and that the
Company will be required to raise additional funds within the next 6 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 a potential equity or debt
placement. 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, 1999 and 1998,
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 has an accumulated deficit that raise 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 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 products will ever gain wide commercial acceptance,
however, the Company is encouraged in this regard by the current subscriber
levels in excess of 40,000 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 construction
of licenses held by the Company, particularly in instances in which the Company
has made significant capital expenditures, could have a material adverse effect
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
cost-conscious 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. and Nextel Partners, Inc, to attract customers to its
service in each of the
<PAGE>
markets in which the Company operates such SMR services. 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 -- Forward-Looking Statements
Disclosure).
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 Disclosure).
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
<PAGE>
assurance that the Company will be able to keep pace with the rapid evolution of
the wireless communications industry.
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 several years and continue to
evolve as new FCC rules and regulations are adopted pursuant to the Omnibus
Budget Reconciliation Act of 1993 and the 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 regulations 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 $22,869,352 as
of December 31, 1999. Under the terms of the GATX Facility, as discussed below,
the Company has granted a security interest in all proceeds from any sale of the
Company's licenses up to the amount of debt incurred. Therefore, shareholders
would not share in the proceeds from such liquidation. Approximately 650 of
those licenses purchased by or under option and management agreements with the
Company 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
could result in a material adverse effect on the Company's financial condition,
results of operations and liquidity. (See Item 3)
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. The Company is prohibited
from paying dividends on its Common Stock in connection with its Series C
Preferred Stock and its debt facility.
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 REI's (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.
<PAGE>
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 effect 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.
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.
ITEM 2. DESCRIPTION OF PROPERTIES
<PAGE>
The Company's corporate office is located at 2875 East Patrick Lane, Suite G,
Las Vegas, Nevada. The Company leases office and warehouse space at this address
which consists of approximately 16,000 square feet at a monthly rental of
approximately $18,500 under a five-year lease, which started in December 1997,
with two five year renewal options 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 2000 and a sales facility in
Southaven, Mississippi, which consists of 800 square feet under a one-year lease
expiring in March 2000. The Company intends to renew this lease when it expires.
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 rooftops or are free standing facilities. The
terms of these leases range from month to month to 6 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
In addition to the matter described below, 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.
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, and in some
instances construction 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 not fulfilled 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 approximately 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 awarded, by the FCC, to all
commercial mobile radio services licensees. Thus, in an effort to be consistent
in its treatment of similarly situated licensees, the FCC granted the licensee
petitioners 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.
On the basis of a previous request for assistance to the FCC's Licensing
Division by the Company, the FCC examined and marked a list provided by the
Company. The FCC's markup indicated those stations held by the Company or
subject to management and option agreements, which the FCC considered to be, at
that time, Receivership Stations and/or stations considered "similarly situated"
and thus eligible for relief. From this communication, the Company believes that
approximately 800 of the licenses that it owns or manages are Receivership
Stations or otherwise entitled to relief as "similarly situated" licensees. 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
<PAGE>
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 continuing 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 Public Notice. The Company asked that the relief be reinstated for its
impacted licenses. Moreover, on February 1, 1999, the Company, in conjunction
with other aggrieved 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 instructions from the
court to reinstate the licenses for which relief had been denied. Argument
before the court was held on May 4, 1999. The petitions of the Receiver and all
"similarly situated" parties were consolidated into a single briefing and
argument before the court. In an opinion issued July 15, 1999, the court
dismissed all the petitions filed by the Goodman/Chan licensees. The court noted
in its opinion that the receiver did not have standing to seek relief on behalf
of the licensees and the similarly situated parties had filed their appeal at
the FCC in an untimely manner. Thus, rather than hearing the merits underlying
the case, the judges dismissed the petitions on procedural grounds.
The dismissal of the Petitions, while a problem for the other parties before the
court, appears not to be a bar to the Company's efforts to seek relief in this
instance, but simply requires that the Company await the FCC's final action in
this matter. In reviewing the Court's opinion, the Company's Management believes
that the court has left open the possibility of a rehearing on the merits should
the FCC fail to ultimately grant relief to the Company. Thus, as Chadmoore was
the only party before the court which had timely filed such a petition,
Management believes the potential for a rehearing on the merits would be
applicable only to Chadmoore should the FCC not act affirmatively on Chadmoore's
pending Petition for Reconsideration.
On November 9, 1999 the FCC's Commercial Wireless Division Chief entered a
decision denying Chadmoore's Petition for Reconsideration. This staff level
opinion is not binding upon the Commission, and the Company has a legal right to
seek an internal FCC review through application to the Commission, as well as an
ultimate right to seek redress in the United States Court of Appeals for the
District of Columbia Circuit. Thus, on December 9, 1999 the Company filed, with
the full commission, an application for review of the staff decision. This
application remains pending at the Commission, and the Company is taking steps
with decision makers in Washington D.C. in an effort to obtain affirmative
relief. However, should such efforts not prove fruitful, Management believes the
way is clear for a hearing on the merits of the case in the United States Court
of Appeals for the District of Columbia Circuit. Due to the uncertainty
surrounding both the FCC's administrative process in managing review of the this
matter and the docket calendar of the court, it is not possible, at this time,
for Management to predict, with any reasonable level of reliability, a timetable
for when action on these pending matters will be concluded. Approximately 650 of
those licenses purchased by or under option and management agreements with the
Company are among those which the FCC initially has refused to afford relief
pursuant to the Commercial Wireless Division's October 9, 1998, Public Notice.
Thus, it is reasonably possible (as defined by Financial Accounting Standard
Board No. 5) 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
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 pursued the above-described
<PAGE>
litigation to clarify this matter. Based on the preceding, no provision has been
made in the accompanying consolidated financial statements.
Pursuant to the FCC's jurisdiction over telecommunications activities, the
Company is involved in pending matters before the FCC, which may ultimately
affect the Company's operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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 6, 2000, there were 388 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 prices
for the Company's Common Stock.
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
Fiscal Year 1999 High Bid Low Bid
-------- -------
First Quarter $ 0.34 $ 0.20
Second Quarter $ 0.41 $ 0.20
Third Quarter $ 0.31 $ 0.19
Fourth Quarter $ 0.41 $ 0.16
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. The Company is prohibited from
paying dividends on its Common Stock in connection with its Series C Preferred
and its debt 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, 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. 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
=============
During 1999, in connection with its debt facility, the Company issued a warrant
to GATX Capital Corporation to purchase 1,822,500 shares of its Common Stock for
$0.01 per share.
In both of the preceeding security issuances, the Company relied on Section 42
of the Securities Act and only issued securities to one accredited investor.
<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,
1999 and December 31, 1998, 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. These statements contain words such as "intends", "objectives",
"planned", "future", "attainable", "opportunities", "growth" and "believes" and
include statements regarding the Company's strategy, expansion efforts, efforts
to obtain funding and equipment purchase commitments. 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 OPERATIONS
Total revenues for the fiscal year ended December 31, 1999 increased $2,925,408,
or 92.9%, from $3,148,668 for 1998 to $6,074,076 in 1999, reflecting increases
of $2,740,206 and $185,202, or 118.2% and 22.3%, in service revenue and
equipment sales and maintenance revenue, respectively. Consistent with the
Company's plan of operation to focus on recurring revenues by selling its
commercial Specialized Mobile Radio ("SMR") service through independent dealers
and direct distribution, the proportion of total revenues generated by service
revenue increased to 83.3% for 1999 from 73.6% in 1998. In addition to the sale
of airtime the Company is currently exploring other revenue generating
opportunities, including maintenance contracts and direct distribution in
markets where the Company has determined indirect distribution is not
beneficial. During the last six months of 1999 the Company began to implement
some of these methods, however, as of December 31, 1999, the Company has yet to
recognize any material revenue from these opportunities.
The $2,740,206, or 118.2% increase in service revenue, from $2,318,700 for 1998
to $5,058,906 in 1999, was driven by an increase in subscribers utilizing the
Company's SMR systems. The increase of 14,154, 60.6%, from 23,321 to 37,475 in
subscribers generating revenue was primarily due to full-scale implementation of
service in new markets as well as continued growth in existing markets. Average
pricing per subscriber unit remained comparable during both periods. In the
future the Company expects to continue to implement new markets.
The increase in equipment sales and maintenance revenue of $185,202, or 22.3%,
from $829,968 for 1998 to $1,015,170 in 1999, was attributable to the increased
availability of capital for the purchase of inventory during the first six
months of 1999 as compared to the same period in 1998. The Company anticipates
that equipment sales and maintenance revenue will remain relatively constant and
account for a slightly declining share of total revenues in the future.
<PAGE>
Cost of service revenue increased by $752,112, or 118.4%, from $635,388 for 1998
to $1,387,500 in 1999. This increase was primarily due to SMR system site
expenses associated with additional markets being commercialized as well as the
marginal costs associated with increased capacity being used in the Company's
existing markets. Gross margin on service revenue remained constant at 72.6% for
1998 and 1999.
Cost of equipment sales and maintenance increased by $120,534, or 26.1%, from
$461,098 for 1998 to $581,632 in 1999. This increase is due to the increase in
equipment sales and maintenance activity from the related periods. Gross margin
on equipment sales and maintenance revenue decreased from 44.4% for 1998 to
42.7% in 1999. This is attributable to a higher level of sales being derived
from equipment sales as opposed to maintenance. In general, maintenance has a
lower cost of sales associated with it and therefore a higher gross margin than
equipment revenue.
General and administrative expenses increased by $2,256,108, or 28.5%, from
$7,909,222 for 1998 to $10,165,330 in 1999. Salaries, wages, and benefits
expense (a component of general and administrative expenses) increased by
$749,083, or 25.3%, from $2,961,228 for 1998 to $3,710,311 in 1999. This
increase is primarily due to personnel additions, largely in operational areas,
made in connection with the Company's transition from aggregating SMR spectrum
to constructing, marketing, and rolling out commercial SMR service. Relative to
total revenues, salaries, wages, and benefits expense was 60.7% for 1999
compared with 94.0% for 1998. Remaining general and administrative expense
increased 30.5%, or $1,507,025, from $4,947,994 for 1998 to $6,455,019 in 1999.
The increase in the remaining general and administrative expense was primarily
due to increases of approximately $315,000 in advertising and marketing, which
is in line with the revenue growth, $600,000 in professional fees associated
with potential acquisitions, securing of additional funding and consulting fees,
$50,000 in legal expenses associated with continued litigation, $220,000
increase in travel and entertainment expense, which is associated increased
travel of sales employees within the Company's operating territories, increased
travel of executives in connection with potential acquisitions, increased legal
affairs and the securing of funding, $139,000 of expense associated with a legal
settlement of which there was no such expense in the same period during 1998 and
a loss of approximately $210,000, during 1999, associated with a license
management agreement with no such expense in 1998, partially offset by an
approximately $400,000 decrease in non-commercial market expense, due to the
commercialization of new markets.
Depreciation and amortization expense increased $799,675 or 64.8%, from
$1,233,359 for 1998 to $2,033,034 in 1999, reflecting larger amounts of licenses
and infrastructure placed in service associated with construction and
implementation of approximately 20 new commercial sites and approximately 125
additional licenses.
Due to the foregoing, total operating expenses increased $3,928,429 or 38.4%,
from $10,239,067 for 1998 to $14,167,496 in 1999, and the Company's loss from
operations increased by $1,003,021 or 14.2%, from $7,090,399 to $8,093,420,
respectively.
Interest expense, net of interest income, increased $1,915,887, or 113.9%, from
$1,681,652 for 1998 to $3,597,539 in 1999, due to higher average debt balances
associated with net new loan facilities of approximately $25,000,000.
Based on the foregoing, the Company's net loss before extraordinary item
increased $3,247,330, or 39.0%, from $8,321,158 for 1998 to $11,568,488 in 1999.
During 1999 the Company had an extraordinary loss of $194,967. There was no such
charge in 1998. This charge was due to the write-off of debt issuance costs and
prepayment penalties associated with the prepayment and termination of certain
credit facilities, which were replaced with the GATX Facility (as defined
below).
<PAGE>
The Company's net loss increased $3,442,297 or 41.4%, from $8,321,158 for 1998
to $11,763,455 in 1999. This increase was primarily the result of an increase of
$2,244,309 in other expenses, due to increased interest expense for borrowings
to purchase licenses and infrastructure necessary to build and operate the
Company's systems in its Operating Territory, and an increase in loss from
operations of $1,003,021, primarily due to the build up of administration and
personnel necessary to complete the Company's plan of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net losses attributable to common stockholders of $12,313,354
and $8,680,695 for the years ended December 31, 1999 and 1998, respectively.
Operating expenses and capital expenditures associated with the development and
enhancement of its SMR network have more than offset operating revenues.
Operating expenses, debt service obligations and anticipated capital
expenditures are expected to continue to exceed operating revenues for the next
several years. The Company's auditors have included an explanatory paragraph in
their opinion which expresses substantial doubt about the Company's ability to
continue as a going concern for the years ended December 31, 1999 and 1998. The
Company has consistently used external sources of funds, primarily from equity
issuances and debt financings, to fund operations, capital expenditures and
other non-operating needs. The Company intends to continue using external
sources of funds, its existing cash and earnings before interest, taxes,
depreciation and amortization are not sufficient to cover existing and currently
anticipated future needs.
Working capital improved by $10,833,605 to a deficit of $7,252,292 at December
31, 1999, as the Company was able to reduce the prior year working capital
deficit of $18,085,897. The Company received $26,596,000 from the issuance of
debt securities, of which the proceeds were primarily used to pay down
$5,615,977 of long-term debt, purchase $3,160,819 of property and equipment and
fund operations.
Net cash used in operating activities increased to $10,567,762 for the year
ended December 31, 1999 as compared to net cash provided from operating
activities of $61,375 for the previous year. The increase in net cash used in
operating activities consisted primarily of a $3,442,297 increase in the
Company's net loss for 1999 as compared to 1998, a $6,877,399 reduction in
accounts payable and accrued liabilities and a $467,804 increase in current
assets. The increase in net cash used in operating activities primarily reflects
the increased operating expenses incurred to develop and enhance the Company's
SMR system.
Net cash used in investing activities, decreased to $3,428,633 in 1999 as
compared to $7,572,371 for the previous year. Capital expenditures to fund the
Company's expansion of its SMR network declined by $4,203,701 in 1999 as
compared to 1998, as the Company's debt financing was not completed until the
last quarter of 1999. The level of capital expenditures for 1999 is not expected
to be indicative of capital spending for 2000. Subject to the completion of new
financing, the Company expects to increase its rate of capital expenditures for
2000. See, Item 6, Forward looking statements disclosure.
Net cash provided by financing activities was $19,020,631 for the year ended
December 31, 1999, as compared to $7,130,283 for the previous year. The increase
is primarily attributable to $26,596,000 in proceeds from GATX Capital
Corporation as part of a Senior Secured Loan Facility offset in part by the
repayment of $5,615,977 in long term debt and $1,885,343 in debt issuance costs.
It is anticipated that over the next several years, the Company will utilize
significant amounts of available cash flow for capital expenditures to develop
and enhance its SMR network, operating expenses relating to its SMR network,
debt service requirements, and other general corporate expenditures, including
potential acquisition of spectrum from third parties. The Company anticipates
that its cash needs for capital expenditures and operations through 2000 will
substantially exceed its service revenues. See, Item 6, Forward looking
statements disclosure
<PAGE>
Subject to the terms of its $27 million Senior Secured Loan Agreement ("GATX
Facility"), the Company has $400,000 in available borrowings at the sole and
absolute discretion of GATX. Drawdowns under the GATX Facility were made at an
interest rate fixed at the time of each funding, ranging from 10.75% to 11.5%,
with a five-year amortization following an interest-only period, a warrant to
purchase up to 1,822,500 shares of the Company's common stock at an exercise
price of $0.01 per share was also issued to GATX. The loan is secured by
substantially all the assets of the Company. In addition to the quarterly
interest payments, required quarterly principal payments of approximately $1.35
million begin on June 30, 2000.
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.
On March 10, 1998, the Company received an extension from 30 months to 42 months
from the effective dates thereof. As of March 6, 2000 the Company has purchased
approximately $6.5 million toward this purchase commitment. The Company has
received a 60 day extension on this agreement and both parties intend to
negotiate an amendment to this agreement. The Company believes that it will
reach an agreement with Motorola to amend the purchase agreement, however there
can be no assurance that the purchase agreement will be amended. If the purchase
agreement is not amended and the Company does not purchase the additional $3.5
million of radio communications equipment before June 10, 2000, the Company will
be obligated to reimburse Motorola for previous discounts of approximately
$750,000.
The Company anticipates for 2000 that its net cash from operating activities
will not be sufficient to fund its continued development and enhancement of its
SMR network, service its long-term debt or fund its ongoing operations. To meet
these anticipated cash requirements, the Company is currently pursuing a
potential equity or debt placement to raise additional funds, which may include
both the issuance of equity and additional debt. There can be no assurances that
the Company will be successful in its endeavors to complete the financing
currently being considered. At present, the Company has no legally binding
commitments or understandings with any third parties to fund any amount of
equity or debt financing. The Company's ability to incur additional indebtedness
is and will be limited by the terms of its existing GATX Facility.
The failure to complete the aforementioned potential financings would have a
material adverse effect on the Company. The Company has developed a contingency
plan, which includes selling selected channels (with the permission of GATX) and
focusing solely on the 85 markets in which full-scale service has already been
implemented. This latter course might entail ceasing further system expansion in
such markets (which in the aggregate are generating positive cash flow) and
reducing corporate staff to the minimal level necessary to administer such
markets. The Company believes that this strategy would provide sufficient time
and resources to raise additional capital in order to resume its current plan.
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 profitability. Accordingly, the Company may not be able to
continue its operations and is subject to the risk of a liquidation of its
assets or bankruptcy.
The Company did not experience, and does not expect to experience, any problems
related to the Year 2000 computer issue. The prior cost estimate of remediation
did not change the spending patterns or cost relationships of the Company. The
Company did not defer any spending as a result of the Year 2000 computer issue
and does not have any remaining contingencies related to this issue. As of the
date of this filing, none of the Company's third party relationships have been
adversely affected by the Year 2000 computer issue and the Company does not
expect any adverse effect in the future due to third party failure. However, the
Company relies on several third party relationships and it has not verified that
all of these third party's systems are currently working and there can be no
assurance that a third party failure will not adversely affect the Company.
<PAGE>
ITEM 6A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1999, 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.
ITEM 7. FINANCIAL STATEMENTS
Index to consolidated financial statements
<TABLE>
<CAPTION>
CHADMOORE WIRELESS GROUP, INC.
<S> <C>
Index to Consolidated Financial Statements F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended December 31, 1999 and 1998 F-4
Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity
for the years ended December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Chadmoore Wireless Group, Inc.:
We have audited the accompanying consolidated balance sheets of Chadmoore
Wireless Group, Inc. (a Colorado corporation) and Subsidiaries (the "Company")
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, redeemable preferred stock and shareholders' equity and cash flows
for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. 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 audits provide 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles in the United States.
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 net 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 Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Arthur Andersen LLP
Las Vegas, Nevada
March 1, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
CHADMOORE WIRELESS GROUP, INC.
Consolidated Balance Sheets
December 31, 1999 and 1998
December 31,
1999 1998
--------------- ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 5,602,913 $ 578,677
Accounts receivable, less allowance for doubtful accounts of
$36,911 and $13,000 at December 31, 1999 and 1998, respectively 1,090,392 582,817
Other receivables, less allowance for doubtful accounts of
$134,484 and $133,639 at December 31, 1999 and 1998, respectively 265,679 136,288
Inventory 531,539 169,520
Other current assets 18,323 134,228
--------------- ---------------
Total current assets 7,508,846 1,601,530
Property and equipment, net 14,188,167 12,681,753
Intangible assets, net 38,816,244 41,118,012
Other assets, net 1,706,486 119,166
--------------- ---------------
Total assets $ 62,219,743 $ 55,520,461
=============== ===============
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Liabilities:
Current maturities of long-term debt $ 11,133,762 $ 8,255,174
Accounts payable 1,432,782 3,979,366
Accrued liabilities 1,311,509 2,827,792
License option commission payable - 3,412,000
Unearned revenue 812,595 506,056
Other current liabilities 70,490 707,039
--------------- ---------------
Total current liabilities 14,761,138 19,687,427
Long-term debt 29,288,061 8,152,589
--------------- ---------------
Total liabilities 44,049,199 27,840,016
Minority interests 716,336 533,690
Commitments and contingencies
Redeemable preferred stock:
Series C, 4% cumulative, 10,119,614 shares issued and outstanding 1,507,316 974,995
Shareholders' equity:
Preferred stock, $.001 par value, authorized 40,000,000 shares:
Series B 219,000, 0 and 21,218 shares
outstanding at December 31, 1999 and 1998, respectively - 21
Common stock, $.001 par value, authorized 100,000,000 shares,
40,683,118 and 36,504,324 shares issued and outstanding
at December 31, 1999 and 1998, respectively 40,683 36,504
Additional paid-in capital 68,086,611 66,856,832
Stock subscribed 304,650 -
Deficit (52,485,052) (40,721,597)
--------------- ---------------
Total shareholders' equity 15,946,892 26,171,760
--------------- ---------------
Total liabilities, redeemable preferred stock and shareholders' equity $ 62,219,743 $ 55,520,461
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CHADMOORE WIRELESS GROUP, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 1999 and 1998
December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues:
Service revenue $ 5,058,906 $ 2,318,700
Equipment sales and maintenance 1,015,170 829,968
--------------- ---------------
Total revenues 6,074,076 3,148,668
Operating expenses:
Cost of service revenue 1,387,500 635,388
Cost of equipment sales and maintenance 581,632 461,098
General and administrative 10,165,330 7,909,222
Depreciation and amortization 2,033,034 1,233,359
--------------- ---------------
Total operating expenses 14,167,496 10,239,067
--------------- ---------------
Loss from operations (8,093,420) (7,090,399)
Other income (expense):
Minority interest (251,303) (96,618)
Interest expense, net (3,597,539) (1,681,652)
Standstill agreement expense - (182,914)
Gain on sale of intangible assets 373,774 730,425
--------------- ----------------
(3,475,068) (1,230,759)
Net loss before extraordinary item (11,568,488) (8,321,158)
Extraordinary item from early extinguishment of debt (194,967) -
---------------- ---------------
Net loss (11,763,455) (8,321,158)
Series B preferred stock dividend (17,578) (69,854)
Redeemable preferred stock dividend and accretion (532,321) (289,683)
--------------- ---------------
Loss applicable to common shareholders $ (12,313,354) $ (8,680,695)
=============== ===============
Basic and diluted loss per share of Common Stock:
Loss applicable to common shareholders before extraordinary item $ (0.22) $ (0.21)
Extraordinary item from early extinguishment of debt - -
Loss applicable to common shareholders $ (0.22) $ (0.21)
=============== ===============
Basic and diluted weighted average shares outstanding 55,300,233 41,454,187
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CHADMOORE WIRELESS GROUP, INC.
Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity
For the years ended December 31, 1999 and 1998
Page one of two pages
Redeemable Preferred Preferred Stock
Stock Series B Common Stock
----- ------------------ --------------------
Outstanding Outstanding Outstanding
Shares Amount Shares Amount Shares Amount
------ ------ ----------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997, restated - $ - 219,000 $ 219 21,163,847 $ 21,164
Issuance of Common Stock:
Employee compensation plan - - - - 123,500 124
Stock subscribed - - - - 11,400 11
Exercise of license option - - - - 800,000 800
(197,782)
Conversion of Series B - - (198) 4,461,714 4,462
preferred stock
Series B preferred stock - - - - 122,413 122
dividend
Standstill agreement - - - - 310,023 310
Services - - - - 290,765 291
Exercise of license option - - - - 31,000 31
Purchase of fixed assets - - - - 335,000 335
Cash 10,119,614 685,312 - - 8,854,662 8,854
Issuance of stock options - - - - - -
Preferred stock dividends and - 289,683 - - - -
accretion
Net loss - - - - - -
------------ ----------- ----------- ------ ----------- --------
Balance at December 31, 1998 10,119,614 974,995 21,218 21 36,504,324 36,504
------------ ----------- ----------- ------ ----------- --------
Issuance of Common Stock:
Stock subscribed - - - - - -
Series B preferred stock - - (21,218) (21) 915,932 916
conversion
Series B preferred stock - - - - 76,672 77
dividend
Settlement of license dispute - - - - 525,000 525
Settlement of debt 1,871,096 1,871
Services - - - - 90,094 90
Value of warrants issued
Conversion of subsidiary stock - - - - 700,000 700
Preferred stock dividends and accretion - 532,321 - - - -
Net loss - - - - - -
------------ ----------- ----------- ------ ----------- --------
Balance at December 31, 1999 10,119,614 $ 1,507,316 - $ - 40,683,118 $ 40,683
============ =========== =========== ====== =========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CHADMOORE WIRELESS GROUP, INC.
Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity
For the years ended December 31, 1999 and 1998
Page two of two pages
Additional Total
Paid-In Stock Shareholders'
Capital Subscribed Deficit Equity
-------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997, restated $ 60,303,498 $ 32,890 $(32,400,439) $ 27,957,332
Issuance of Common Stock:
Employee compensation plan 63,572 - - 63,696
Stock subscribed 32,879 (32,890) - -
Exercise of license option 351,200 - - 352,000
Conversion of Series B (4,264) - - -
preferred stock
Series B preferred stock (122) - - -
dividend
Standstill agreement 182,604 - - 182,914
Services 160,634 - - 160,925
Exercise of license option 15,159 - - 15,190
Purchase of fixed assets 188,711 - - 189,046
Cash 5,837,604 - - 5,846,458
Issuance of stock options 15,040 - - 15,040
Preferred stock dividends and (289,683) - - (289,683)
accretion
Net loss - - (8,321,158) (8,321,158)
-------------- ------------ ------------- -------------
Balance at December 31, 1998 66,856,832 - (40,721,597) 26,171,760
-------------- ------------ ------------- -------------
Issuance of Common Stock:
Stock subscribed - 304,650 - 304,650
Series B preferred stock (895) - - -
conversion
Series B preferred stock (77) - - -
dividend
Settlement of license dispute 138,915 - - 139,440
Settlement of debt 914,966 916,837
Services 21,028 - - 21,118
Value of warrants issued 688,863 688,863
Conversion of subsidiary stock (700) - - -
Preferred stock dividends and accretion (532,321) - - (532,321)
Net loss - - (11,763,455) (11,763,455)
-------------- ------------ ------------- -------------
Balance at December 31, 1999 $ 68,086,611 $ 304,650 $ (52,485,052) 15,946,892
============== ============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
CHADMOORE WIRELESS GROUP, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998
1999 1998
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (11,763,455) $ (8,321,158)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest 251,303 96,618
Depreciation and amortization 2,033,034 1,233,359
Extraordinary loss from extinguishment of debt 94,847 -
Settlement of license dispute 139,440 -
Write off of license options 124,862 43,690
Gain on sale of intangible assets (373,774) (730,425)
Standstill agreement - 182,914
Amortization of debt discount and debt issuance costs 1,948,026 1,265,227
Stock compensation - 7,710
Expense associated with:
Options issued for services 80,513 15,040
Change in operating assets and liabilities:
Increase in accounts and other receivables (501,581) (307,620)
Increase in inventory (362,019) (80,387)
Decrease in other current assets 59,905 52,116
Increase in unearned revenue 306,539 398,999
Increase (decrease) in accounts payable and accrued liabilities (2,609,402) 4,267,997
Increase in other current liabilities 4,000 1,937,295
--------------- ----------------
Net cash (used in) provided by operating activities (10,567,762) 61,375
Cash flows from investing activities:
Payments for acquisition and purchase of license options (267,814) (224,448)
Purchases of property and equipment (3,160,819) (7,364,520)
Decrease in other assets - 16,597
--------------- ----------------
Net cash used in investing activities (3,428,633) (7,572,371)
Cash flows from financing activities:
Proceeds upon issuance of equity securities - 7,500,000
Equity issuance costs - (968,229)
Increase in debt issuance costs (1,885,343) (143,801)
Payments of minority interest (74,049) -
Payments of long-term debt (5,615,977) (2,012,012)
Proceeds from issuance of long-term debt 26,596,000 2,754,325
--------------- ----------------
Net cash provided by financing activities 19,020,631 7,130,283
--------------- ----------------
Net increase (decrease) in cash 5,024,236 (380,713)
Cash at beginning of period 578,677 959,390
--------------- ----------------
Cash at end of period $ 5,602,913 $ 578,677
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CHADMOORE WIRELESS GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 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"). The
Company also entered into an Asset Acquisition Agreement ("American Agreement")
with American Wireless Network, Inc. ("American") where the Company will acquire
16 ten-channel 900 Mhz wide-area licenses in seven Metropolitan Trading Areas
("MTA's"). 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.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of all
majority owned companies and joint ventures. All significant intercompany
balances and transactions have been eliminated in consolidation. Minority
interest represents the minority partners' proportionate share in the joint
venture's equity or equity in income (loss).
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 and rights to acquire 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 licenses are amortized using
the straight-line method over 20 years and FCC renewal fees are amortized using
the straight-line method over 5 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. PROPERTY AND EQUIPMENT
F-8
<PAGE>
Property and equipment are carried at cost, less accumulated depreciation and
amortization. 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. 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.
H. 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.
I. 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
credit risk.
J. CUSTOMER ACQUISITION COSTS
Customer acquisition costs are expensed in the period they are incurred.
K. ADVERTISING EXPENSE
The Company expenses advertising costs in the period incurred. The Company
expensed approximately $375,000 and $740,000 of advertising costs for the years
ended December 31, 1999 and 1998, respectively.
L. DEBT ISSUANCE COSTS
Debt issuance costs are capitalized and amortized to interest expense using the
effective interest method, or a method that approximates the effective interest
method, over the term of the debt agreements. Debt issuance costs included in
other assets were $1,690,155 and $102,835 at December 31, 1999 and 1998,
respectively. Amortization of debt issuance costs amounted to $203,176 and
$40,966 in 1999 and 1998, respectively.
M. IMPAIRMENT OF LONG-LIVED ASSETS
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.
NOTE 2 - MANAGEMENT PLANS
F-9
<PAGE>
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the years ended December
31, 1999 and 1998, the Company has suffered recurring losses from operations,
and has a working capital deficiency of $7,252,292 and $18,085,897,
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.
During 2000, the Company will require additional funding in the next six months
for full-scale implementation of its SMR services, debt service, purchase
commitment and ongoing operating expenses. To meet such requirements the Company
is currently pursuing additional funding. This includes potential equity or debt
funding and potential vendor financing arrangements currently being pursued but
not yet consummated. There can be no assurances that the Company will be able to
successfully obtain the additional financings currently being pursued, or will
be otherwise able to obtain sufficient financing to consummate the Company's
business plan.
The failure to consummate the aforementioned potential financings would have a
material adverse effect on the Company. The Company has developed a contingency
plan, which includes selling selected channels (with the permission of GATX) and
focusing solely on the 85 markets in which full-scale service has already been
implemented. This latter course might entail ceasing further system expansion in
such markets (which in the aggregate are generating positive cash flow) and
reducing corporate staff to the minimal level necessary to administer such
markets. The Company believes that this strategy could provide sufficient time
and resources to raise additional capital in order to resume its current plan.
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 profitability, and accordingly, the Company may not be able
to continue its operations and is subject to risk of a liquidation of its assets
or bankruptcy.
NOTE 3 - ASSET ACQUISITION
On June 1, 1999 the Company entered into the American Agreement with American
whereby the Company will acquire 16 ten-channel 900 Mhz wide-area licenses in
seven MTA's. In consideration the Company will assume approximately $1.4 million
of American's outstanding debt with the FCC as well as American receiving 7.5%
ownership in the MTA's operations. In addition, American will receive a warrant
to purchase 50,000 shares of the Company's Common Stock at an exercise price of
$0.50 per share. In connection with the American Agreement, the Company entered
into an operating lease with American for certain SMR equipment with payments
totaling $720,000 over the next six years and assumed other operating leases
with obligations totaling approximately $25,000 per month. However, the American
Agreement is contingent upon all licenses completing the FCC approval and
transfer process.
In addition, the Company has entered into a management agreement whereby the
Company will perform as contractor and agent on behalf of American for all
managerial functions involved with operation of the stations, under the
oversight and direction of American until such time as all licenses have
completed the FCC approval and transfer process. Pursuant to this management
agreement the Company is responsible, subject to the oversight of American, for
the billing and collection of all revenues and the payment of all operating
expenses associated with the operation of these stations. The Company will also
make the required interest-only payments on the outstanding debt to the FCC
totaling approximately $8,100 per month. The Company's compensation for managing
such sites will be 100% of the gross revenues, less the costs mentioned above,
provided that the net profit of any station does not exceed $30,000 per calendar
month. If any station's profit exceeds $30,000 per calendar month the Company
shall pay any excess profit to American. During the year ended December 31,
1999, the net of the revenues and expenses associated with this agreement
totaled a loss of approximately $210,000.
NOTE 4 - INTANGIBLE ASSETS
A. INTANGIBLE ASSETS CONSIST OF THE FOLLOWING:
<TABLE>
December 31, 1999 December 31, 1998
-------------------- -----------------
<S> <C> <C>
FCC licenses $ 34,793,033 $ 37,669,351
Rights to acquire licenses 5,038,201 3,985,133
-------------------- -------------------
39,831,234 41,654,484
Less accumulated amortization (1,014,990) (536,472)
------------------- -------------------
$ 38,816,244 $ 41,118,012
==================== ===================
</TABLE>
B. LICENSE OPTION AND MANAGEMENT AGREEMENTS
F-10
<PAGE>
The Company has 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, 1999, the Company had made Option
payments of approximately $14,400,000 by giving consideration of cash, notes
payable and issuance of Common Stock for approximately 1,650 licenses. When the
FCC approval and transfer process is complete the Company reclassifies all
previous consideration given by the Company from rights to acquire FCC licenses
to FCC licenses. As of December 31, 1999, the Company reclassified approximately
$10,500,000 of the $14,400,000 consideration paid for FCC licenses. The Company
has also incurred approximately $1,200,000 worth of commission expense related
to the Options.
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 (usually 2 to 5 years) prior to the transfer of
the license to the Company as stated in the agreements ("Management
Agreements"). During the term of the Management Agreements, 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 to purchase channels. Based on an
independent appraiser's estimate of the fair market value of the assets
exchanged, 70% of the combined consideration was allocated to Management
Agreements and the remaining 30% was allocated to "Investment in options to
acquire licenses" ("Investment in Options"). 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,
1999, 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 and approximately $22,950,000 had been reclassified to FCC
licenses.
On December 30, 1999, the Company entered into an agreement to restructure
$3,412,000 of license commissions payable. The difference between the fair value
of the consideration given and the $3,412,000 of commissions payable was
approximately $2,200,000 and was recorded as a reduction to the value of the
licenses and no gain was recorded. (See Note 6A)
C. INTANGIBLE ASSET DISPOSITIONS
During 1998 the Company entered into a license termination agreement whereby 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.
During 1999 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 $750,000 for licenses with a carrying value of $320,226 and incurred
transaction fees of $56,000, therefore creating a gain on disposition of
intangible assets of $373,774. To date the Company has received cash of $600,000
and the remaining $150,000 is classified as other receivables.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
F-11
<PAGE>
December 31, December 31,
1999 1998
------------ ------------
Land $ 102,500 $ 102,500
Buildings and improvements 439,629 395,659
SMR systems and equipment 16,026,554 12,862,613
SMR systems in process 232,265 554,200
Furniture and office equipment 447,372 292,130
Automobiles 28,260 18,760
------------ ------------
17,276,580 14,225,862
Less accumulated depreciation and amortization (3,088,413) (1,544,109)
------------ ------------
$ 14,188,167 $ 12,681,753
============ ============
F-11a
<PAGE>
NOTE 6 - LONG-TERM DEBT Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Notes Payable with GATX Capital Corporation with a face value of $26,600,000 and
a discount of $608,350, bearing interest at annual rates ranging from 10.75% to
11.35%, quarterly interest payment through March 2000 and quarterly interest
and principal payments commencing on June 30, 2000. $ 26,041,328 $ -
Note payable in connection with license commissions with a face value of
$672,348, net of discount, maturing December 2005, requiring monthly payments of
$7,500, increasing by $500 a year, and three payments of $100,000 payable in
March 2001, September 2002 and March 2004. The Company has imputed an interest
rate of 12% annually and recorded a debt discount in the amount of $267,652. 662,348 -
Note payable in connection with the purchase of SMR infrastructure, face value
of $1,673,000, with a down payment of $300,000, 8 monthly payments of $139,448,
bearing interest at 10.75% annually. 678,991 -
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 is non-interest bearing with interest imputed at 9%, net of
unamortized discount of $3,230,312 and $3,382,925 as of December 31, 1999 and
1998, respectively. 1,165,300 1,185,335
Notes payable to MarCap Corporation 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
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
Note payable, bearing no interest, which matured in August 1998, 10 monthly
principal payments of $162,750, one interest payment at maturity of $425,000. 710,663 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
$15,304,260 net of unamortized discount of $3,823,903. 11,056,503 10,343,608
Notes payable to minority partners to be paid from
positive cash flow of the related joint venture. Non
interest bearing, interest imputed at 15%. 97,170 265,124
Note payable to GMAC for van, payable in 36 monthly
installments ending June 2001, including interest at 1.9%. 9,520 15,708
----------------- -----------------
40,421,823 16,407,763
Less current maturities: (11,133,762) (8,255,174)
----------------- -----------------
Total long term debt $ 29,288,061 $ 8,152,589
================= =================
</TABLE>
F-12
<PAGE>
The Company incurred interest expense of $3,738,383 and $1,712,617 for the years
ended December 31, 1999 and 1998 respectively. No capital interest was recorded
for the years ended December 31, 1999 or 1998.
Aggregate maturities of debt, net of unamortized discounts, for the next five
years and thereafter are as follows:
Year ended December 31,
2000 11,133,762
2001 9,809,578
2002 6,393,312
2003 5,313,302
2004 5,442,287
Thereafter 2,329,582
------------------
$ 40,421,823
==================
A. DEBT ISSUANCES, RETIREMENTS AND CONVERSIONS
In September 1997, the holder of a convertible debenture entered into an
agreement with the Company to restructure a convertible debenture (the
"Debenture Restructuring Agreement"). 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 Company's option, at the then-current market price when due.
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, payable
in September 1998. 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 Note 13)
During 1999, pursuant to a loan facility with GATX Capital Corporation ("GATX
Facility'), the Company borrowed $26.6 million from GATX Capital Corporation
("GATX") leaving approximately $400,000 available for future borrowings at the
sole and absolute discretion of GATX, subject to substantially the same terms as
the previous borrowings. Loans were 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
five-years following a 16 month interest only period. Quarterly principal
payments of approximately $1.35 million are to commence June 30, 2000. 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 the Lender ("GATX Warrants"). The
loan is secured by substantially all the assets of the Company.
On June 10, 1999, the Company entered into an Amendment to the GATX Facility
("Amendment"). The Amendment, among other things, delayed certain financial
covenants, extended the option period to make available funds from 120 days to
150 days and amended the collateral value to loan ratio from 2 to 1 to 1.5 to 1.
The Company also restated the exercise price of the GATX Warrants from $0.39 to
$0.01 per share of the Company's Common Stock. In connection with the Amendment,
the Company has recognized a debt discount related to the GATX Warrants of
$608,350, which represents the intrinsic value, which is not materially
different from the fair value, of the GATX Warrants on the date of the
Amendment. This discount is being amortized to interest expense using the
effective interest method over the life of the loan.
The Company has certain financial covenants related to the GATX Facility
consisting of total indebtedness to tangible net worth ratio, current ratio,
average EBITDA for commercialized markets and adjusted tangible net worth. As of
December 31, 1999 the Company was in compliance with the respective financial
covenants.
On December 30, 1999, the Company entered into an agreement to restructure the
way it would pay its license commissions. The Company issued a non-interest
bearing note payable with a face value of $940,000, maturing December 2005. The
note payable requires monthly payments of $7,500, increasing by $500 a year, and
three payments of $100,000 payable in March 2001, September 2002 and March 2004.
The Company has imputed an interest rate of 12% annually and recorded a debt
discount in the amount of $267,652. In addition the Company issued 1,500,000
shares of its Common Stock, which was issued on March 3, 2000, resulting in
stock subscribed of $304,650 on December 31, 1999.
In conjunction with the GATX Facility the Company prepaid and terminated the
Motorola loan facility and the MarCap loan facility. All security interests
related to the Motorola loan facility and the MarCap loan facility were
concurrently released. The Company incurred expenses of $94,847 for debt
issuance costs and $100,120 of prepayment penalties related to these loans.
These amounts are reflected as an extraordinary item in the accompanying
consolidated financial statements.
F-13
<PAGE>
As of December 31, 1998, the Company was in default on its loan facilities, 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 related loan facilities were paid-in full and were
terminated.
NOTE 7 - EQUITY TRANSACTIONS
A. 1999 TRANSACTIONS
During the year ended December 31, 1999, the Company issued 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 Note 6A).
During the year ended December 31, 1999, the Company issued 525,000 shares of
the Company's Common Stock for the settlement of a license dispute.
During the year ended December 31, 1999, the Company issued 700,000 shares of
the Company's Common Stock for the conversion of a subsidiary's stock. (see
Note 7G)
B. PREFERRED STOCK PRIVATE PLACEMENT
During 1998, certain holders of the Company's Series B Preferred Stock converted
197,782 shares of Company's Series B 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
accrued on the Company's Series B Preferred Stock as of December 31, 1998.
As of March 31, 1999, all of the Company's Series B Preferred Stock had been
converted into Common Stock of the Company, and no warrants remain to be issued.
C. 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. 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-14
<PAGE>
D. STOCK OPTION PLANS
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.
During 1999 and 1998, the Company's board of directors approved and granted
stock options to purchase 685,000 and 2,588,000 shares, respectively, of the
Company's Common Stock, vesting over a four year period. 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, 1997 4,758,327 $ 1.65
Granted at $0.49 - $0.51 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
-----------
Granted at $0.49 - $0.51 685,000 0.51
Lapsed or canceled (1,912,375) 2.35
------------
Outstanding at December 31, 1999 4,645,348 $ 0.50
===========
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Number Weighted Weighted Number Weighted
Range of Outstanding at Average Average Exercisable Average
Exercise December 31, Remaining Exercise December 31 Exercisable
Price 1999 Contractual Life Price 1999 Price
----------- ------------- ---------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$0.49-$0.51 4,645,348 5.0 years $0.50 2,889,598 $0.50
</TABLE>
The Company applied APB 25 in accounting for its stock options and warrants and,
accordingly, compensation expense of $0 in 1999 and $15,040 in 1998 has been
recognized for its stock options in the financial statements.
The fair value of each option grant issued during the years ended December 31,
1999 and 1998 are estimated by management using an option pricing model
(Black-Scholes) with the following assumptions: dividend yield of 0%; expected
option life of 2 years; volatility of 88.56% and risk free interest rate of
5.73%.
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 loss would have been increased to the pro forma amounts indicated
below:
December 31, 1999 December 31, 1998
Loss applicable to
common shareholders As reported $ (12,313,354) $ (8,680,695)
SFAS 123 expense (37,483) (581,972)
----------------- -----------------
Loss applicable to
Common shareholders Pro forma (12,350,837) (9,262,667)
================= =================
F-15
<PAGE>
Loss per share As reported $ (0.22) $ (0.21)
Pro forma (0.22) (0.22)
Pro forma net loss reflects only options granted in 1999 and 1998. 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.
E. 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, 1997 2,639,605
Granted at $0.001-$1.25 per share 28,339,229
Less exercised -
Lapsed or canceled -
------------
Outstanding at December 31, 1998 30,978,834
Granted at $0.001-$1.25 per share 4,282,190
Less exercised -
Lapsed or canceled (1,931,916)
-------------
Outstanding at December 31, 1999 33,329,108
============
F. 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. On August 25,
1999, the holder of such shares elected to convert these shares of CCI to
700,000 shares of Chadmoore Wireless Group Common Stock. 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,
1999 at the following exercise prices:
Option
Number Option Exercise Expiration
of Options Type Price Date
---------- ----------- ----------- -------
700,000 A $2.50 1/13/2000
700,000 B $4.00 1/13/2004
As of the date of this filing, the 700,000 "A" options remained unexercised and
have expired.
NOTE 8 - LOSS PER SHARE
SFAS 128 requires the Company to calculate its earnings (loss) per share based
on basic and diluted earnings (loss) 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 loss
available to common shareholders.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Total basic and diluted weighted shares outstanding 39,318,672 31,685,633
F-16
<PAGE>
Warrants deemed to be outstanding Common Stock
(weighted average) 15,981,561 9,768,554
----------------- -----------------
Weighted average common shares outstanding 55,300,233 41,454,187
================= =================
</TABLE>
The Company's warrants, preferred stock and stock options granted and issued
during 1999 and 1998, and outstanding as of December 31, 1999 and 1998, are
antidilutive and have been excluded from the diluted loss per share calculation
for the years ended December 31, 1999 and 1998. 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, 1999 December 31, 1998
-------------------- -----------------
Options 4,645,348 5,872,723
Warrants 15,802,082 16,892,637
Convertible preferred stock - 1,044,707
----------------- -----------------
20,447,430 23,810,067
================= =================
NOTE 9 - MANDATORILY REDEEMABLE PREFERRED STOCK
As discussed in Note 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
30, 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.
NOTE 10 - NON CASH ACTIVITIES
During the year ended December 31, 1999 the Company had the following non-cash
investing and financing activities. The issuance of $953,252 of notes payable,
net of discount, to exercise Options. The issuance of a note payable of
$1,673,000 for the payment of fixed assets. The issuance of 90,000 shares of
Common Stock for services. The issuance of a note payable of $672,348, net of
discount, and the agreement to issue 1,500,000 shares of Common Stock (Common
stock subscribed) to pay license commissions. The issuance of 1,871,096 shares
of Common Stock as a payment on a note payable. The issuance of 700,000 shares
of Common Stock as consideration for retiring 700,000 shares of the Company's
subsidiary's stock. Conversion of 20,955 shares of Series B Preferred into
915,932 shares of Common Stock. Issuance of 76,672 shares of Common Stock for
Series B Preferred dividends. The issuance of 525,000 shares of Common Stock as
a settlement on a license dispute.
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 for 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 years ended December 31, 1999 and 1998, the Company paid no cash for
taxes. During the years ended December 31, 1999 and 1998, the Company paid cash
of $1,702,730 and $247,709 for interest.
F-17
<PAGE>
NOTE 11 - 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.
The major components of the deferred tax assets and liabilities at December 31,
1999 and 1998 are presented below:
<TABLE>
1999 1998
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 18,111,189 $ 15,305,051
Management agreements 2,508,435 2,508,435
Accruals not currently deductible for tax purposes 411,824 455,658
Investment in JJ&D LLC 155,216 155,216
Allowance for doubtful accounts 59,724 4,550
Other 123,334 -
------------- -------------
21,369,722 18,428,910
Less valuation allowance (19,936,774) (16,867,581)
-------------- -------------
Deferred tax assets $ 1,432,948 $ 1,561,329
============= =============
Deferred tax liabilities:
Property and equipment (1,067,494) (382,177)
FCC licenses (331,281) (1,148,562)
Other (34,173) (30,590)
-------------- --------------
Deferred tax liabilities (1,432,948) (1,561,329)
-------------- --------------
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, 1999 and 1998, the Company
determined that $19,936,774 and $16,867,581, 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, 1999 and 1998, the Company had net operating loss carry-forwards
available for income tax purposes of approximately $51,746,255 and $39,427,854
respectively, which expire principally from 2009 to 2019.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 1999 and 1998 the Company paid $1,749,315
and $680,351, 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 December 6, 1999 the Company re-priced 358,793 of warrants to purchase the
Company's Common Stock from exercise prices ranging from $0.50 to $2.50 to an
exercise price of $0.01. These warrants are held by the Sullivan Family Trust,
of which Mark F. Sullivan and his wife are the only trustees.
On January 21, 2000 the Company issued a warrant to purchase 250,000 shares of
the Company's Common Stock at an exercise price of $0.21. This warrant is held
by the Sullivan Family Trust, of which Mark F. Sullivan and his wife are the
only trustees.
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 that 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. The Company shall pay an annual
consulting fee of $312,500 beginning on May 1, 1999 which shall be paid in
advance, in equal monthly
F-18
<PAGE>
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.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
A - GOODMAN CHAN PROCEEDINGS
Nationwide Digital Data Corp. and Metropolitan Communications Corp. among others
(collectively, "NDD/Metropolitan"), traded in the selling of SMR application
preparation and filing services, and in some instances construction 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 not fulfilled 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 approximately 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 awarded, by the FCC, to all commercial mobile radio services
licensees. Thus, in an effort to be consistent in its treatment of similarly
situated licensees, the FCC granted the licensee petitioners 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.
On the basis of a previous request for assistance to the FCC's Licensing
Division by the Company, the FCC examined and marked a list provided by the
Company. The FCC's markup indicated those stations held by the Company or
subject to management and option agreements, which the FCC considered to be, at
that time, Receivership Stations and/or stations considered "similarly situated"
and thus eligible for relief. From this communication, the Company believes that
approximately 800 of the licenses that it owns or manages are Receivership
Stations or otherwise entitled to relief as "similarly situated" licensees. 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 office 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 continuing 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.
F-19
<PAGE>
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 Public Notice. The Company asked that the relief be reinstated for its
impacted licenses. Moreover, on February 1, 1999, the Company, in conjunction
with other aggrieved 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 instructions from the
court to reinstate the licenses for which relief had been denied. Argument
before the court was held on May 4, 1999. The petitions of the Receiver and all
"similarly situated" parties were consolidated into a single briefing and
argument before the court. In an opinion issued July 15, 1999, the court
dismissed all the petitions filed by the Goodman/Chan licensees. The court noted
in its opinion that the receiver did not have standing to seek relief on behalf
of the licensees and the similarly situated parties had filed their appeal at
the FCC in an untimely manner. Thus, rather than hearing the merits underlying
the case, the judges dismissed the petitions on procedural grounds.
The dismissal of the Petitions, while a problem for the other parties before the
court, appears not to be a bar to the Company's efforts to seek relief in this
instance, but simply requires that the Company await the FCC's final action in
this matter. In reviewing the Court's opinion, the Company's Management believes
that the court has left open the possibility of a rehearing on the merits should
the FCC fail to ultimately grant relief to the Company. Thus, as Chadmoore was
the only party before the court which had timely filed such a petition,
Management believes the potential for a rehearing on the merits would be
applicable only to Chadmoore should the FCC not act affirmatively on Chadmoore's
pending Petition for Reconsideration.
On November 9, 1999 the FCC's Commercial Wireless Division Chief entered a
decision denying Chadmoore's Petition for Reconsideration. This staff level
opinion is not binding upon the Commission, and the Company has a legal right to
seek an internal FCC review through application to the Commission, as well as an
ultimate right to seek redress in the United States Court of Appeals for the
District of Columbia Circuit. Thus, on December 9, 1999 the Company filed, with
the full commission, an application for review of the staff decision. This
application remains pending at the Commission, and the Company is taking steps
with decision makers in Washington D.C. in an effort to obtain affirmative
relief. However, should such efforts not prove fruitful, Management believes the
way is clear for a hearing on the merits of the case in the United States Court
of Appeals for the District of Columbia Circuit. Due to the uncertainty
surrounding both the FCC's administrative process in managing review of the this
matter and the docket calendar of the court, it is not possible, at this time,
for Management to predict, with any reasonable level of reliability, a timetable
for when action on these pending matters will be concluded. Approximately 650 of
those licenses purchased by or under option and management agreements with the
Company are among those which the FCC initially has refused to afford relief
pursuant to the Commercial Wireless Division's October 9, 1998, Public Notice.
Thus, it is reasonably possible (as defined by Financial Accounting Standard
Board No. 5) 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
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 pursued the above-described litigation to
clarify this matter. Based on the preceding, no provision has been made in the
accompanying consolidated financial statements.
B. OTHER 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.
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.
F-20
<PAGE>
C. PURCHASE COMMITMENT
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.
On March 10, 1998, the effective period of the Motorola purchase agreement was
extended from 30 months to 42 months. As of December 31, 1999, the Company had
purchased approximately $6.5 million toward this purchase commitment. The
Company has received a 60 day extension on this agreement and both parties
intend to negotiate an amendment. The Company believes that it will reach an
agreement with Motorola to amend the purchase agreement, however there can be no
assurance that the purchase agreement will be amended. If the purchase agreement
is not amended and the Company does not purchase the additional $3.5 million of
radio communications equipment before June 10, 2000, the Company will be
obligated to reimburse Motorola for previous discounts of approximately
$750,000.
D. LEASE COMMITMENTS
The Company entered into a 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 $18,500.
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
$1,000, 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.
Future minimum payments associated with the leases described herein, including
renewal options, are as follows:
Year ended December 31,
2000 $ 2,462,452
2001 1,729,722
2002 1,762,678
2003 1,273,869
2004 1,271,365
thereafter 22,169
------------------
$ 8,522,255
Total rent expense for the years ended December 31, 1999 and 1998 amounted to
$2,194,642 and $1,676,494, respectively.
NOTE 14 - SUBSEQUENT EVENTS. (unaudited)
On March 2, 2000, the Company made a payment to the New Debenture holder of
1,900,000 shares of the Company's restricted Common Stock, which represented
$931,000 toward the principal and interest of the New Debenture. (See Note 6A)
F-21
<PAGE>
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections labeled "Election of Directors", "Executive officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the
Company's Proxy Statement to be delivered to stockholders in connection with the
2000 Annual Meeting of Stockholders are incorporated herein by reference (the
"Proxy Statement.")
ITEM 10. EXECUTIVE COMPENSATION
The section labeled "Executive Compensation and Other Information"
appearing in the Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Sections labeled "Principal Stockholders" and "Security Ownership
of Directors and Management" appearing in the Proxy Statement are incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections labeled "Executive Compensation and Other Information" and
"Certain Relationships and Related Transactions" appearing in the Proxy
Statement are incorporated herein by reference.
F-22
<PAGE>
PART IV
ITEM 13. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
(a)(1) A list of the financial statements and schedules thereto as filed in this
report reside at Item 7.
(a)(2) The following exhibits are submitted herewith:
2.1 Agreement and Plan of Reorganization dated February 2, 1995, by and
between the Company (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 Company (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 Company (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 Company'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 Company'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 Company'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 Company's Form
10-KSB for the year ended December 31, 1995)
3.6 Bylaws (Incorporated by reference to Exhibit 3 to the Company's
Registration Statement on Form S-18 (33-14841-D))
3.7 Certificate of Designation of Rights and Preferences of Series A
Convertible Preferred Stock of the Company (Incorporated by reference
to Exhibit 3.4 to the Company's Form 10-KSB for the year ended December
31, 1995)
3.8 Certificate of Designation of Rights and Preferences of Convertible
Preferred Stock Series B of the Comp any. (Incorporated by reference to
Exhibit 4.5 to the Company's Form 8-K, under Item 9, date of earliest
event reported December 23, 1997)
4.1 Form of Warrant Certificate (Incorporated by reference to Exhibit 4.1
to the Company'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 Company's Form 10-KSB for the year ended December 31, 1995)
4.3 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 Company's Form 8-K, under Item 9, date of earliest event reported
December 23, 1997)
4.4 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 Company's Form 8-K,
under Item 5, date of earliest event reported - September 26, 1997)
4.5 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)
<PAGE>
4.6 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)
4.7 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)
4.8 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)
10.1* Amended Nonqualified Stock Option Plan dated October 12, (Incorporated
by reference to Exhibit 10.1 to the Company'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 Company'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 Company and Motorola, Inc.
(Incorporated by reference to Exhibit 10.7 to the Company'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 Company'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)
10.10 Modification to Asset Purchase Agreement dated March 8, 1996 by and
between Chadmoore Communications, Inc., the Company 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)
10.11 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 Company's Form 8-K, under dated June 1996
10.12 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 Company's Form
10-KSB for the year ended December 31, 1996)
10.13 Promissory Note executed by Chadmoore Communications, Inc. payable to
Motorola, Inc., dated December 30, 1996. (Incorporated by reference to
Exhibit 10.13 to the Company's Form 10-KSB for the year ended December
31, 1996)
10.14 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 Company's Form
10-KSB for the year ended December 31, 1996)
10.15 Restructuring Agreement Regarding 8% Convertible Debentures dated
September 19, 1997, by and between Chadmoore Wireless Group, Inc.,
Cygni S.A., and Willora Company Limited (Incorporated by reference to
Exhibit 10.12 to the Company's Form 8-K, under Item 9, date of earliest
event reported - September 19, 1997)
<PAGE>
10.16 Investment Agreement dated May 1, 1998, between the Registrant and REI
(Incorporated by reference to Exhibit 10.1 of the REI Form 8-K)
10.17 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)
10.18 Advisory Agreement, dated May 1, 1998, between the Registrant and REI
(Incorporated by reference to Exhibit 10.7 of the REI Form 8-K)
10.19 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 Company's Form 8-K, under Item 9,
date of earliest event reported - December 23, 1997)
10.20 Form of Amendment No. 1 to Offshore Subscription Agreement for Series B
8% Convertible Preferred Stock dated on or about February 17, 1998
(Incorporated by reference to Exhibit 10.16 to the Company's Form 8-K,
under Item 9, date of earliest event reported - February 17, 1998)
10.21 Employment Agreement between the Company and Robert Moore effective as
of January 1, 1997 (Incorporated by reference to Exhibit 10.21 to the
Company's Form 10-KSB for the year ended December 31, 1997)
10.22 Employment Agreement between the Company and Jan Zwaik effective as of
February 17, 1997 (Incorporated by reference to Exhibit 10.21 to the
Company's Form 10-KSB for the year ended December 31, 1997)
10.23 Employment Agreement between the Company and Rick Rhodes effective as
of December 10, 1998. (Incorporated by reference to Exhibit 10.23 to
the Company's Form 10-KSB for the year ended December 31, 1998)
10.24 Employment Agreement between the Company and Vince Hendrick effective
as of May 17, 1999 (Filed herewith)
10.25 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)
10.26 $26,600,000 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)
10.27 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)
10.28 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)
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 Mitchell Finley & Company, P.C. dated July 10, 1995, stating
its concurrence with the disclosure contained in the Company's Current
Report on Form 8-K (Incorporated by reference to Exhibit 16 to the
Company's Form 8-K, under Item 4, date of earliest event reported -
July 7, 1995)
21.1 Subsidiaries of the Company (Filed herewith)
23.12 Consent of Arthur Andersen LLP (Filed herewith)
27.1 Financial Data Schedules (Filed herewith)
- ----------
* Management contract or compensatory plan.
<PAGE>
(b) Current Reports on Form 8-K
(i) Current report on Form 8-K on March 3, 1999 reporting the change in
certifying accountant.
(ii) Current report on From 8-K/A on March 10,1999 reporting the change in
certifying accountant.
(iii) Current report on From 8-K on March 16, 1999 reporting a $13.5 million
equity investment which closed on March 2, 1999.
(iv) Current report on Form 8-K on August 2, 1999 reporting the issuance of
a press release.
(v) Current report on Form 8-K on August 2, 1999 reporting the issuance of
a press release.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized:
Chadmoore Wireless Group, Inc.
(formerly CapVest International, Ltd.)
By: /s/ Stephen K. Radusch
-----------------------------------
Stephen K. Radusch
Chief Financial Officer
Date: March 23, 2000
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: March 23, 2000
Robert W. Moore, President,
Chief Executive Officer and Director
/s/ Stephen K. Radusch Date: March 23, 2000
Stephen K. Radusch
Chief Financial and Accounting Officer
/s/ Rick D. Rhodes Date: March 23, 2000
Rick D. Rhodes
Chief Regulatory Officer
/s/ Mark F. Sullivan Date: March 23, 2000
Mark F. Sullivan
Director
/s/ Joseph J. Finn-Egan Date: March 23, 2000
Joseph J. Finn-Egan
Director
/s/ Janice H. Pellar Date: March 23, 2000
Janice H. Pellar
Director
/s/ Gary L. Stanford Date: March 23, 2000
Gary L. Stanford
Director
/s/ Jeffrey A. Lipkin Date: March 23, 2000
Jeffrey A. Lipkin
Director
<PAGE>
Exhibit 10.24
This EMPLOYMENT AGREEMENT ("Agreement") is made as of May 17,1999, by and
between CHADMOORE WIRELESS GROUP, INC., a Colorado corporation (the
"Corporation"), and Vincent F. Hedrick (the "Executive").
WHEREAS, the Corporation desires to employ Executive in the capacity of Sr. Vice
President Sales & Marketing, and Executive desires to accept such employment on
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 Corporation hereby employs the Executive as Senior
Vice President Sales & Marketing and the Executive hereby accepts such
employment, upon the terms and subject to the conditions of this Agreement.
1.2 Term. The term of employment of the Executive by the Corporation
shall be for the period commencing on May 17, 1999 (the "Commencement Date") and
ending on May 17, 2002, (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 May 18, 2002 ("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
sixty (60) day period commencing prior to the expiration of the then applicable
Term or Extended Term.
1.3 Duties. The Executive shall be the Senior Vice President Sales &
Marketing of the Corporation, with duties and responsibilities commensurate with
such position, and with the offer/acceptance letter between the parties dated
March 9,1999. The Executive shall report to the Corporation's President/CEO. The
Executive shall perform the duties regularly associated with this position at
the Corporation's corporate headquarters in Las Vegas, Nevada. Any change in
Executive duties or work location shall be mutually agreed upon by Corporation
and Executive.
2. SCOPE OF SERVICES
-----------------
2.1 Services. The Executive agrees that he or she shall perform
Executive's services to the best of his/her ability. During the term of this
Agreement the Executive 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. Executive shall
devote his/her full business time, care, attention and best efforts to the
Corporation's business and shall conduct himself/herself in a manner so as to
reflect credit upon himself /herself and the Corporation.
3. COMPENSATION
------------
3.1 Base. The Corporation shall pay to the Executive an annual base
salary of $135,000 (One Hundred Thirty Five Thousand Dollars) (the "Base
Salary"), 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
Corporation agrees to provide an annual written performance review of the
Executive by the Executive's direct supervisor, and to subsequently review the
then current Base Salary of the Executive. Said Base Salary may be increased by
the supervisor, subject to the concurrence of the President and/or the Board of
the Corporation or the Compensation Committee (if any), at the sole discretion
of the Corporation.
3.2 Bonus. In addition to the Base Salary payable to the Executive
pursuant to Section 3.1 hereof, the Corporation (i) shall make available to the
Executive a bonus in the amount of $40,000 (Forty Thousand Dollars) based on
meeting performance standards or targets set reasonably and in good faith by the
Board of Directors or the Compensation Committee, if any, 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
Executive's services. These amounts shall be referred to as "Bonus".
3.3 Employee Stock Option Plan. In addition to the Base Salary payable
to the Executive pursuant to Section 3.1 hereof, and the Bonus payable to the
Executive pursuant Section 3.2 hereof, the Corporation shall issue to the
Executive 400,000 (Four Hundred Thousand) stock options in accordance with the
offer/acceptance letter between the parties dated March 9,1999. The Corporation
may issue additional stock options, in the sole discretion
<PAGE>
of the Corporation's Board of Directors or the Compensation Committee, (if any),
it may desire as a result of the Executive's services. The vesting, exercise,
expiration and other terms and conditions pertaining to these options shall be
governed by such written stock option agreements as entered into between the
parties hereto.
4. OTHER BENEFITS
--------------
4.1 Insurance Benefits. The Executive shall be entitled to participate
in all other employee benefit programs of the Corporation in effect from time to
time, on the same availability and basis as other employees of a similar level
of employment as Executive, as determined at the sole discretion of the
Corporation 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 Corporation maintains the exclusive right, at its sole discretion, to
change, alter, modify, or eliminate any or all of said employee benefits at any
time consistent with other Senior Executives of the Corporation. Upon
termination of Employment for any reason, the Executive may, at the Executive's
discretion, elect to acquire any desired benefit plans which are convertible to
the Executive in accordance with the terms and conditions of the particular
benefit plan(s), consistent with applicable Corporation policies, and all
federal, state, and local laws, including COBRA.
4.2 Expenses. The Corporation shall reimburse the Executive for all
reasonable and customary expenses which the Executive shall incur in connection
with the Executive's services to the Corporation or any subsidiary pursuant to
this Agreement. To obtain reimbursement, Executive shall comply with the
Corporation's reimbursement policies including documentation of expenses. 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
Executive such paid vacation and paid sick leave in accordance with the
Corporation's AMTO policy as modified by the Board of Directors or Corporation
Committee (if any) for employees of a similar level of Employment as Executive.
In accordance with the policies of the Corporation, Executive may use vacation
and sick leave provided it does not materially interfere with the Executive's
performance of his/her 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 Executive's death, the Executive's
employment with the Corporation shall be deemed to be terminated as of the date
of death. Upon death, the Executive's estate or other legal representative shall
be entitled to receive any Base Salary accrued and unpaid at the time of death.
All other compensation or benefits shall cease at the date of death, except for
any prior vested benefits due the Executive under any benefit program of the
Corporation in which the Executive was enrolled, and such other benefits as may
be available to the spouse and/or dependents of the Executive in accordance with
the terms and conditions of the particular benefit plan(s), consistent with
applicable Corporation policies, and all federal, state, and local laws,
including COBRA.
5.2 Termination by the Corporation. Corporation may terminate the
Executive's employment hereunder, by delivering to the Executive a Notice of
Termination (defined hereinafter), as follows:
1) At will, without cause, with payment of twelve (12) months of
Base Salary as severance remuneration in equal bi-monthly or
semi-monthly installments to coincide with the Corporation's normal
payroll cycle. No other benefits except Base Salary will be paid or
will accrue or vest during this twelve (12) month installment severance
period. All Executive Options granted to Executive shall immediately
vest upon the date of termination at will, without cause.
2) For cause, at any time during employment, without any
additional remuneration or severance, with cause having any of the
following meanings:
(1) conviction of any felony or other crime involving moral
turpitude;
(2) the use of illegal drugs; the use of alcohol or abuse of
legal drugs which materially impairs the Executive's performance
of his or her duties;
(3) malfeasance or gross negligence by the Executive in the
performance of his or her duties;
(4) a material violation by the Executive of any provision of
this Agreement;
(5) willful or gross misconduct by the Executive injurious to
the Corporation.
5.3 Voluntary Termination. Executive may voluntarily terminate his or
her employment with the Corporation at any time, with a minimum of thirty (30)
days notice, by giving the Corporation a Notice of Termination (defined
hereinafter). If the Executive voluntarily terminates his or her Employment with
the Corporation under this Agreement, the Executive shall receive only the
compensation and benefits accrued at the date
<PAGE>
of termination. For salary, Executive will be paid salary accrued to the date of
termination, but no additional salary. For bonus, Executive will be paid bonus
amounts (if any) as determined in the sole discretion of the Board of Directors
or the Compensation Committee (if any). Stock options shall be governed by
separate Stock Option Agreements. In the event Executive voluntarily terminates
employment due to inability of Corporation to meet payroll obligations for 31
consecutive days, all employee stock options and/or stock appreciation rights
granted to Executive will vest at date of termination. Also, the Executive may
elect to acquire or assume any desired benefit plans which are convertible to
the Executive, in accordance with the terms and conditions of the benefit plan,
consistent with applicable Corporation policies, and all applicable federal,
state and local laws, including COBRA.
5.4 Termination Following Change of Control. If this Agreement is
terminated by either party, or Executive is required to relocate more than 50
miles from Las Vegas, or there is a material reduction in Executives,
compensation, duties and/or responsibilities, within one year following the
occurrence of both (a) a change of control of the Corporation as defined below,
or (b) the termination of Robert W. Moore's services as Chief Executive Officer
and President of the Corporation, the Corporation shall pay to Executive a lump
sum payment equal to 2.99 times the average annual compensation paid by the
Corporation and includable by Executive 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 of control" 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 Executive 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, or (iv) during any period of twelve (12)
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.
Notwithstanding anything contained herein to the contrary, the payment by
Corporation to Executive 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 Executive
(if termination is by the Corporation) or to the Corporation (if a voluntary
termination by the Executive), 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
Corporation (if termination is by the Corporation). 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 Executive (with the Executive
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 Executive in connection with
the Executive'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 Corporation shall advance on behalf of Executive
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 Executive shall
enjoy the greater benefits so afforded by such change.
6.2 Determination. A determination that indemnification with respect to
any claims by the Executive 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 Executive. In the event it is
determined by such counsel that Executive is not entitled to
<PAGE>
indemnification pursuant to this Section 6 (and if contested by Executive, such
determination is confirmed by the 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 Executive is not entitled to indemnification
pursuant to this Section 6, Executive shall promptly reimburse the Corporation
for all such advances of Indemnified Amounts made by the Corporation on
Executive's behalf.
6.3 Notice of Claims. The Executive 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 Executive'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 Executive 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 Executive 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. During the Term, any Extended Term and thereafter,
Executive shall keep secret and retain in strictest confidence and shall not,
without the prior written consent of the Corporation, furnish, make available or
disclose to any third party or use for the benefit of himself or herself or any
third party any Confidential Information. Confidential Information is
information related to or concerning the Corporation and its businesses which is
confidential, proprietary or not generally known to and cannot be readily
ascertained through proper means by persons or entities (including any of the
Corporation's present competitors), who can gain any type of competitive
advantage from its disclosure or use. Confidential Information includes without
limitation, all secret, confidential or proprietary information, knowledge or
data relating to the Corporation, such as operational methods; financial data,
marketing or development proposals, plans or strategies; pricing strategies;
business or property acquisition or development proposals or plans; new
personnel acquisition proposals or plans; customer lists and any descriptions or
data concerning current or prospective customers; provided, however, while
employed by the Corporation and in furtherance of the business and for the
benefit of the Corporation, Executive may provide Confidential Information as
appropriate to attorneys, accountants, financial institutions and other persons
or entities engaged in business with the Corporation and authorized to receive
such information in the ordinary course of business.
7.2 Return of Documents. Promptly upon termination of this Agreement
for any reason, or whenever requested by the Board of Directors of the
Corporation, the Executive shall return or cause to be returned to the
Corporation all Confidential Information in any form or format, or any other
property of the Corporation in the Executive'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 Executive 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 as defined in NRS 600A.030(4)(a) conceived or reduced to practice
(actually or constructively) during the Term or Extended Term of this Agreement
by the Executive, 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 Executive'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 Executive pursuant to this Agreement.
9. REMEDIES
--------
<PAGE>
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 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. Such
arbitration and any award made therein shall be binding upon the Corporation and
the Executive.
9.2 Injunctive Relief. The Executive 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
and Executive hereby consents to the issuance of an injunction preventing or
prohibiting such breach or threatened breach of Section 7 or 8 hereof.
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 or she may be entitled.
9.4 Reasonableness and Severability of Executive Covenants. The
Executive acknowledges and agrees that the Executive's covenants under Sections
7 and 8 hereof are necessary for the protection of the Corporation's legitimate
interests, are reasonable and valid in duration and geographical scope, and in
all other respects. If any court determines that any of the Executive covenants
under Sections 7 and 8 hereof, or any part thereof, is invalid or unenforceable,
the remainder of them shall not thereby be affected and shall be given full
effect without regard to the invalid portions.
9.5 Blue-Penciling. If any court determines that any of the Executive's
covenants under Sections 7 and 8 hereof, or any part thereof, is unenforceable
because of the duration or geographical scope of such provision, such court
shall have the power to reduce the duration or scope of such provision, as the
case may be, and, in its reduced form, such provision shall then be enforceable.
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 Executive:
-----------------
Vincent F Hedrick
95 Teton Pines Dr.
Henderson, Nevada 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 Executive 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.
<PAGE>
13. ASSIGNABILITY
-------------
a) By Corporation. This Agreement is binding upon, and shall inure to
the benefit of the Corporation, and any successors or assigns, and may be
assigned in whole or in part by the Corporation, its successors and assigns.
b) By Executive. This Agreement is a personal services contract, and
the Executive may not assign this Agreement, or any part hereof, without the
prior, written consent of the Corporation, 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 Executive.
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.
EXECUTIVE
----------------------------------------
Vincent F. Hedrick
CHADMOORE COMMUNICATIONS, INC.
By:
----------------------------------------
Robert W. Moore
President/CEO
Exhibit 21.1
SUBSIDIARIES
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 PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-KSB of our report dated March 1, 2000 included in
Chadmoore Wireless Group, Inc.'s Registration Statements, Files: No. 33-94508,
No. 33-80405, No. 333-30338, and No. 333-30334. It should be noted that we have
not audited any financial statements of the company subsequent to December 31,
1999 or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 20, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,602,913
<SECURITIES> 0
<RECEIVABLES> 1,356,071
<ALLOWANCES> 171,395
<INVENTORY> 531,539
<CURRENT-ASSETS> 7,508,846
<PP&E> 17,276,580
<DEPRECIATION> 3,088,413
<TOTAL-ASSETS> 62,219,743
<CURRENT-LIABILITIES> 14,761,138
<BONDS> 0
1,507,316
0
<COMMON> 40,683
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 62,219,743
<SALES> 6,074,076
<TOTAL-REVENUES> 6,074,076
<CGS> 1,969,132
<TOTAL-COSTS> 14,167,496
<OTHER-EXPENSES> 3,475,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,597,539
<INCOME-PRETAX> (12,313,354)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,118,387)
<DISCONTINUED> 0
<EXTRAORDINARY> (194,967)
<CHANGES> 0
<NET-INCOME> (12,313,354)
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
