mobilepro_10k-033109.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the year ended March 31, 2009
Commission
File Number 000-51010
MOBILEPRO
CORP.
(Name of
Registrant in Its Charter)
DELAWARE
|
87-0419571
|
(State
or Other Jurisdiction of
|
(IRS
Employer
|
Incorporation
or Organization)
|
Identification
No.)
|
|
|
401 Professional Drive, Suite 128, Gaithersburg,
Maryland
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20879
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
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(301)
571-3476
(Registrant’s
Telephone Number, Including Area Code)
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $0.001 par value per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
__ No X
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
__ No X
Indicate
by check mark whether the registrant (1) filed all reports required 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
__
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer __
|
|
Accelerated
filer __
|
|
Non-accelerated
filer __
(Do
not check if a smaller reporting company)
|
|
Smaller
reporting company X
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
__ No X
The
aggregate market value of the voting and nonvoting common shares of our common
stock held by non-affiliates as of September 30, 2008 (the last business day of
the registrant’s most recently completed second fiscal quarter):
$341,106
As of
March 31, 2009, the Company had 1,409,864,653 shares of its common stock, $0.001
par value per share, outstanding.
TABLE
OF CONTENTS
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ITEM NUMBER AND CAPTION
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PAGE
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PART I
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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24
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Item
1B.
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Unresolved
Staff Comments
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30
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Item
2.
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Properties
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30
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Item
3.
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Legal
Proceedings
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30
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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33
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PART II
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|
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Item
5.
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Market
for Registrant’s Common Equity and Related Stockholder
Matters
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34
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Item
6.
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Selected
Financial Data
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37
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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39
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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53
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Item
8.
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Financial
Statements
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53
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Item
9.
Item
9A.
Item
9B.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls
and Procedures
Other
Information
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53
53
55
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PART III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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55
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Item
11.
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Executive
Compensation
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59
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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65
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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66
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Item
14.
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Principal
Accountant Fees and Services
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67
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Item
15.
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Exhibits
and Financial Statement Schedules
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68
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PART
I
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. The statements contained in this document that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, or the Exchange Act, including without limitation statements regarding
our expectations, beliefs, intentions or strategies regarding our business. This
Annual Report on Form 10-K includes forward-looking statements about our
business including, but not limited to, the level of our expenditures and
savings for various expense items and our liquidity in future periods. We may
identify these statements by the use of words such as “anticipate,” “believe,”
“continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,”
“potential,” “predict,” “project,” “should,” “will,” “would” and other similar
expressions. All forward-looking statements included in this document are based
on information available to us on the date hereof, and we assume no obligation
to update any such forward-looking statements, except as may otherwise be
required by law. Our actual results could differ materially from those
anticipated in these forward-looking statements.
Item
1. Business
The
Company
We are a
holding company with subsidiaries in the integrated telecommunications, pay
telephone and mobile content industries and an affiliate in the software
industry. The integrated telecommunications business was previously
classified as discontinued operations; it has subsequently been reclassified due
to our continued ownership of the business. We previously owned broadband
wireless, telecommunications and integrated data communication services
companies which delivered a comprehensive suite of voice and data communications
services, including local exchange, long distance, enhanced data, Internet,
wireless and broadband services to end user customers. At June 30,
2007, we marketed and sold our integrated telecommunications services through
nine branch offices in seven states and we serviced over 123,000 billed accounts
representing over 211,000 equivalent subscriber lines including approximately
110,000 local and long-distance telephone lines, approximately 38,000 dial-up
lines, approximately 5,000 DSL lines, approximately 25,000 fixed and mobile
wireless lines, approximately 6,000 cellular lines and the remaining are other
Internet-related accounts. We owned and operated approximately 22,200
payphones located predominantly in 44 states and the District of Columbia
through September of 2007. Most of our subscribers are residential
customers.
Historically,
our revenues have been generated through three of our four business reporting
segments:
Wireless
Networks
|
Our
broadband wireless network deployment efforts had been conducted by our
wholly owned subsidiary, NeoReach, Inc., (“NeoReach”), and its subsidiary,
Kite Networks, Inc. (“Kite Networks,” formerly, NeoReach Wireless, Inc.).
This segment also included the operations of Kite Broadband, LLC (“Kite
Broadband”), a wireless broadband Internet service provider located in
Ridgeland, Mississippi. The business of Neoreach and Kite Broadband is
referred to as the “Wireless Networks
Business”.
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Voice Services
|
Our
voice services segment has been led by CloseCall America, Inc.
(“CloseCall”), a competitive local exchange carrier (“CLEC”, which is a
term applied under the Telecommunications Act of 1996 to local telephone
companies which compete with incumbent local telephone companies) based in
Stevensville, Maryland; American Fiber Network, Inc. (“AFN”), a CLEC based
in Overland Park, Kansas; and Davel Communications, Inc. (“Davel”), an
independent payphone provider based in Cleveland, Ohio. The business of
CloseCall and AFN is referred to as the “Integrated Telecom
Business”. CloseCall offered its customers a full array of
telecommunications products and services including local, long-distance,
1-800-CloseCall anytime/anywhere calling, digital wireless, high-speed
telephone (voice over IP), and dial-up and DSL Internet services. AFN is
licensed to provide local access, long distance and/or Internet services
throughout the United States. Davel was previously one of the largest
independent payphone operators in the United States.
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|
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Internet Services
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Our
Internet services segment included DFW Internet Services, Inc. (“DFW”,
doing business as Nationwide Internet), an Internet services provider
(“ISP”) based in Irving, Texas, its acquired Internet service provider
subsidiaries and InReach Internet, Inc. (“InReach”), a full service ISP
located in Stockton, California that we acquired on November 1, 2005. Our
Internet services segment (the “ISP Business”) provided dial-up and
broadband Internet access, web-hosting services, and related Internet
services to business and residential customers in many
states.
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|
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Corporate
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Our
corporate reporting segment serves as the holding company of the operating
subsidiaries that are divided among the other three business reporting
segments, provides senior executive and financial management, and performs
corporate-level accounting, financial reporting, and legal functions.
Occasionally, its employees may provide services to customers resulting in
the recognition of consulting service revenues. This segment also includes
our Internet gaming and mobile content subsidiary, ProGames Network, Inc.
(“ProGames”) that we founded in December
2005.
|
Prior to
January 2004, we were a development stage company. Although we were incorporated
only nine years ago, we have undergone a number of changes in our business
strategy and organization. In June 2001, we focused our business on the
integration and marketing of complete mobile information solutions to meet the
needs of mobile professionals. In April 2002, we acquired NeoReach and shifted
our focus toward solutions supporting the third generation wireless market that
provides broadband to allow faster wireless transmission of data, such as the
viewing of streaming video in real time. We shifted our business strategy in
December 2003 with a new management team, expanding significantly the scope of
our business activity to include Internet access services, local and long
distance telephone services and the ownership and operation of payphones. In
2005, we began to invest in the business of deploying broadband wireless
networks and providing wireless network access services in wireless access zones
to be primarily located in municipality-sponsored areas. As indicated above, we
entered these businesses primarily through acquisitions. We completed twenty-two
(22) acquisitions during this period. Accordingly, our experience in operating
the acquired businesses was limited.
Mobilepro
Corp. (“Mobilepro”) was incorporated under the laws of Delaware in July 2000
and, at that time, was focused on the integration and marketing of complete
mobile information solutions that satisfied the needs of mobile professionals.
In June 2001, Mobilepro merged with and into CraftClick.com, Inc.
(“CraftClick”), with CraftClick remaining as the surviving corporation. The name
of the surviving corporation was subsequently changed to Mobilepro Corp. on July
9, 2001. CraftClick had begun to cease its business operations in October 2000,
and ultimately disposed of substantially all of its assets in February
2001.
On March
21, 2002, Mobilepro entered into an Agreement and Plan of Merger with NeoReach,
a private Delaware company, pursuant to which a newly formed, wholly owned
subsidiary of Mobilepro merged into NeoReach in a tax-free transaction. The
merger was consummated on April 23, 2002. As a result of the merger, NeoReach
became a wholly owned subsidiary of Mobilepro.
DFW was
the principal operating subsidiary within our Internet services division. On
January 20, 2004, we acquired DFW. After that time we acquired nine additional
Internet service businesses that operated as subsidiaries of DFW, and on
November 1, 2005 we acquired the business of InReach.
On
October 15, 2004, we closed our acquisition of CloseCall. One month later, we
closed our acquisition of Davel. On June 30, 2005, we acquired AFN.
In June
2005, we participated in the formation of Kite Broadband, a wireless broadband
Internet service provider, resulting in the 51% ownership of this venture. On
January 31, 2006, we acquired the remaining 49% of Kite Broadband and 100% of
the outstanding common stock of Kite Networks, Inc.
On March
31, 2006, we merged Kite Networks, Inc. with and into NeoReach Wireless, Inc.
and changed the name of the combined entity to Kite Networks, Inc.
On July
8, 2007 we sold our interests in Kite Broadband, Kite Networks and
Neoreach. See discussion below concerning the sale of the Wireless
Networks Business to Gobility.
On June
30, 2007, the Company entered into an agreement to sell the Integrated Telecom
Business and ISP Business to United Systems Access, Inc. (“USA”, and the “USA
Agreement”). The closing of the ISP Business occurred on July 18,
2007. The closing of the sale of the Integrated Telecom Business to
USA did not occur. See discussion below concerning the sale of the
ISP and Integrated Telecom Business to USA.
During
June and September 2007 the Company entered into a series of transactions to
sell the majority of its pay telephones. See discussion below
concerning the sale of the payphone assets.
Our
principal executive offices are located at 401 Professional Drive, Suite 128,
Gaithersburg, MD 20879 and our telephone number at that address is (301)
571-3476. We maintain a corporate Web site at www.mobileprocorp.com. We make
available free of charge through our Web site our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments
to those reports, as soon as reasonably practicable after we electronically file
or furnish such material with or to the SEC. The contents of our Web site are
not a part of this report. The SEC also maintains a Web site at www.sec.gov that
contains reports, proxy statements, and other information regarding
Mobilepro.
Going
Concern Uncertainty
Our
business has historically lost money. Our accumulated deficit at March 31, 2009
was $106,992,868. In the years ended March 31, 2009, 2008 and 2007, we sustained
net losses of $11,360,021, $18,361,602 and $45,898,288, respectively. Over this
three-year period, most of the acquired businesses experienced declining
revenues. Although restructuring measures controlled other operating expenses,
the Company was unable to reduce the corresponding costs of
services. In addition, the Company funded the start-up and operations
of the municipal wireless networks and mobile content businesses without these
companies achieving expected revenues. As a result, the amount of cash used in
operations during fiscal years ended March 31, 2009, 2008 and 2007 were $70,223,
$3,558,996 and 6,558,708, respectively.
The
decline in cash used in operation was largely due to the reduction in corporate
expenses and the elimination of cash used for discontinued operations. The
Company also received $810,215 of receipts relating to claims involving
over-billings by certain telecommunications carriers of Davel in violation of
regulatory rulings (“Regulatory Receipts”), including $718,314 received from
Qwest in the second fiscal quarter. See “Item 3. Legal Proceedings”. Although
the Company continues to operate the Integrated Telecom Business which has been
consistently profitable and able to generate significant cash flow for the
Company, we are likely to continue to experience liquidity and cash flow
problems due to the Company’s current debt service requirements, including
amounts due under the remaining equipment obligations and leases of the former
Wireless Networks Business and the secured convertible debenture owed to YA
Global Investments, L.P. (“YA Global”, f/k/a Cornell Capital Partners, L.P.)
which is currently past due.
The
Company’s financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and settlement of liabilities and
commitments based on recorded amounts for the foreseeable future. To date, the
Company has been unable to permanently eliminate the cash requirements to fund
certain remaining liabilities of the Wireless Networks Business for which the
Company is co-obligor. In addition, Mobilepro is in default of its obligations
under the secured convertible debenture owed to YA Global and, given current
market conditions and Mobilepro’s financial condition, obtaining the required
financing to retire the secured convertible debenture is unlikely to occur in
the immediate future. YA Global has informed the Company that it
intends to exercise its rights as the company’s senior secured
creditor. Such rights include, but are not limited to, foreclosing on
the assets of the Company. In such event the Company will not have the ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Operations
and Disposition Activities
We have
historically operated in four segments: (1) Wireless Networks, (2) Voice
Services, (3) Internet Services and (4) Corporate. In April 2007, the Company
announced that its Board of Directors had decided to explore potential strategic
alternatives for the entire Company, and that it had received inquiries from
potential buyers regarding the purchase of portions of its business. This
initiative was undertaken with the goals of maximizing the value of the
Company’s assets, returning value to the Company’s stockholders and eliminating
the Company’s debt, particularly amounts payable to YA Global. During fiscal
2008 the Company disposed of its Wireless Networks and Internet Services
segments, as well as the majority of its pay telephones which had been
previously operated in the Voice Services segment. In addition, the
Company entered into an agreement to sell its Integrated Telecom Business, which
was subsequently terminated. The Company is continuing to search for a buyer for
its Integrated Telecom Business, which had been previously operated in the Voice
Services segment. The disposition activities are discussed further
below.
Because
the cash required to fund the continuing operating losses and to complete the
build-out of planned municipal wireless networks exceeded the Company’s
available capital, in December 2006, the Company engaged an investment banking
firm to assist in evaluating strategic alternatives for the wireless networks
business conducted by its Kite Networks and Kite Broadband subsidiaries. Efforts
to secure investment capital for this business or to find a willing buyer
resulted in the Company selling these companies to Gobility, Inc. (“Gobility”)
for $2 million paid with the issuance of a convertible debenture to
Mobilepro. Despite obtaining lease financing and deferring payments
to several large vendors, the Company was required to fund the operations of
these businesses through the date of the sale.
Gobility
expected to raise capital for its operating purposes from an identified source
pursuant to a funding commitment letter that was presented to the Company at
closing. Because this funding has not been obtained, Gobility has been unable to
fund its operations including the payment of amounts due under a series of
capital equipment leases and other equipment-related obligations. On the date of
the sale to Gobility, the aggregate amount of this debt included in the balance
sheet of Kite Networks was approximately $6,111,000. Because the
equipment leases and other equipment purchases were co-signed by Mobilepro, if
Kite Networks fails to pay the leases, the Company could be required to pay this
debt.
On March
10, 2008, Gobility sold the assets of the wireless network in Longmont,
Colorado, and the Company received the related proceeds in the form of
promissory notes from the purchaser totaling $1,800,000. In addition, the
Company entered into a forbearance agreement with the principal equipment vendor
and agreed to pay the $1,591,978 equipment obligation, with interest at the
prime rate, and a related lease obligation in the principal amount of
$149,749. In March 2008, the Company also satisfied the terms of one
of the leases relating to the Tempe, Arizona wireless network with an aggregate
principal balance of $318,595, plus accrued interest, by paying $93,000 in cash
and having the $250,000 certificate of deposit that secured the lease applied
thereto. As a result of the sale to Gobility and these transactions, the Company
recorded a net loss on the sale of its Wireless Networks Business of $3,433,843
that was reported in the loss on sale of discontinued operations for the fiscal
year ended March 31, 2008.
On August
1, 2008, the Company executed a promissory note and release with Data Sales Co.,
Inc. (“Data Sales”) in the principal amount of $330,000. The note is in full
satisfaction of a $1,231,138 lease obligation for which the Company was a
co-borrower with Kite Networks and reflects the impact of a sale of certain
uninstalled wireless equipment by Data Sales to an unaffiliated third party
purchaser that was consummated in July 2008. The Company recorded a
gain of $901,138 in the second fiscal quarter of the year ended March 31, 2009
as a result of the transaction.
The
Company continues to cooperate with Gobility in its efforts to sell the
remaining assets of Kite Networks. In the event Gobility is
unsuccessful in its attempts to sell the remaining assets and satisfy the
equipment lease obligations, the Company, subject to any defenses it might have,
could be required to make the payments on the remaining equipment leases. Two
leasing companies have sued the Company for payment under a lease in which
Kite/Gobility have defaulted. See Item 3 - “Legal Proceedings”. At
March 31, 2009, the aggregate amounts recorded on the consolidated balance sheet
for the capital lease obligations, accrued interest, and the note payable and
equipment obligation were $2,385,736, $447,412 and $1,613,647, respectively. The
Company has also recorded the certificates of deposits securing the lease
obligations of $937,664.
In March
2007, the Company announced that it had signed a definitive agreement for the
merger of ProGames, its mobile content subsidiary, with and into Winning Edge
International, Inc. Consummation of the transaction was subject to a number of
closing conditions including the arrangement of financing that would have
sustained the operations of the combined entity. The anticipated
financing was not procured. As a result, the merger agreement was terminated and
the Company continues to fund the operating costs of ProGames. The Company is
currently exploring strategic alternatives with respect to its investment in
ProGames. The net loss incurred by ProGames in the twelve months ended March 31,
2009 and 2008 was $302,969 and $679,100, respectively.
The
operating losses incurred by Davel adversely affected the consolidated operating
results of the Company. However, most of the payphones have been sold
to unaffiliated payphone operators in the fiscal year ended March 31, 2008. In
June 2007, the Company sold approximately 730 operating payphones and received
in excess of $200,000 in cash proceeds. On September 7, 2007, Davel
sold approximately 21,405 payphones to Sterling Payphones, LLC (“Sterling”).
Under the terms of the sale agreement, the Company received $50,000 in cash,
$1,839,821 in cash was paid to its secured lender, YA Global, to reduce the
amount of principal and interest owed under the outstanding convertible
debentures, and, pursuant to the sale agreement, other amounts were placed in
escrow to pay certain key vendors of Davel and to satisfy potential
indemnification claims. Sterling also assumed certain liabilities of Davel.
Effective September 30, 2007, Davel sold an additional 300 payphones for
approximately $85,000. After these sales, Davel’s remaining operations have been
significantly reduced. Davel’s remaining operations are being continued and
Davel is pursuing the recovery of certain claims including the AT&T, Sprint
and Qwest claims described in Item 3 – “Legal Proceedings”.
The
Company received letters of interest regarding the acquisition of CloseCall, AFN
and the ISP Business. On June 30, 2007, the Company entered into an agreement to
sell the Integrated Telecom Business and ISP Business to USA. The total purchase
price of $27.7 million ($30.0 million face value) included cash proceeds of
approximately $21.9 million and convertible preferred stock with an $8.1 million
face value which was originally valued for accounting purposes at $5.8 million.
The sale of the ISP Business closed on July 18, 2007 resulting in the Company’s
receipt of $500,000 cash, the payment of $2,000,000 to YA Global, and the
Company’s receipt of a promissory note in the amount of $2,000,000 and 8,100
shares of convertible preferred stock of USA. The payment to YA Global retired
the $1.1 million promissory note issued in May 2007 and approximately $25,000 in
related accrued interest and convertible debenture principal and accrued
interest of approximately $393,000 and $482,000, respectively. On January 3,
2008, the Company entered into an amendment to the $2,000,000 promissory note
due from USA. USA made payments of $500,000 each on January 4 and January 11,
2008 with the remaining balance of $1,000,000, together with accrued interest at
the rate of 7.75%, due on the earlier of the date of the closing of the sale of
the Integrated Telecom Business or March 31, 2008. Of the $1,000,000 of
payments, the Company received $125,000 and the remaining $875,000 was used to
pay principal and interest on the convertible debentures due to YA Global. USA
was in default on the remaining principal balance of $1,000,000 and accrued
interest on March 31, 2008. In July 2008, the Company revised the payment terms
relating to the USA note and received payments totaling $200,000. The remaining
principal balance and accrued interest at 12% per annum was due on December 29,
2008. USA is in default with respect to the note balance of $859,128 and related
accrued interest which continues to accrue at a default rate of 18% per annum.
During the fiscal year ended March 31, 2009, the Company wrote down the carrying
value of the note and accrued interest due from USA by approximately
$345,000.The Company is currently pursuing USA and related parties to collect on
the balance owed under the terms of the promissory note. See Item 3. “Legal
Proceedings”.
On
January 14, 2008, the Company received notice from USA purporting to terminate
the USA Agreement with respect to the sale of the Integrated Telecom Business,
but provided that USA remained interested in discussing terms upon which it
would complete the sale. The Company disputes the validity of the
claims alleged for the purported termination, which include the alleged failure
to obtain certain regulatory and contractual approvals and the alleged breach of
certain representations and warranties set forth in the USA Agreement. The
Company believes the purported termination was in bad faith and is pursuing any
and all legal and equitable remedies available to it against USA. During the
fourth quarter of fiscal 2008, the Company re-assumed operating control of AFN
and CloseCall and terminated the USA Agreement. Although the Company
continues to seek an alternate buyer for the Integrated Telecom Business, it has
been unable to find a buyer to purchase the business at price that is acceptable
to the Company in the current economic environment.
YA
Global has been a significant source of capital for the Company, providing
financing in several forms. During the fiscal year ended March 31, 2007, the
Company borrowed funds under a series of convertible debentures. Using shares of
its common stock registered on Form S-3 in November 2006, the Company made
principal and interest payments on the debentures that totaled $4,880,489 and
$1,967,908 during the fiscal years ended March 31, 2007 and 2008, respectively.
However, the supply of shares registered that related to the convertible
debentures has been exhausted and the Company was unable to make the weekly
principal and interest payments in accordance with the terms of the convertible
debentures as amended through January 16, 2008. As a result, we were delinquent
with respect to the convertible debentures. The total principal and accrued
interest amounts owed to YA Global under the debentures at March 31, 2008 was
$13,168,944 and $167,370, respectively. In fiscal 2009, we continued to
negotiate with YA Global, which had verbally granted forbearance, and were able
to obtain a revised payment schedule and an extension of the maturity
date. Effective June 30, 2008, the Company issued a secured
convertible debenture with a maturity date of May 1, 2009 to YA Global with an
aggregate principal balance of $13,391,175, replacing the previous convertible
debentures and amendments. During the fiscal year ended March 31, 2009 YA Global
has made conversions which have resulted in the reduction of $324,840 of
principal. The Company did not pay the remaining principal balance of
$13,029,125 that was due May 1, 2009. On May 5, 2009, the Company executed an
agreement with YA Global, pursuant to which YA Global has agreed to forbear from
enforcing its rights and remedies against the Company under the convertible
debenture through May 31, 2009. Although YA Global initially extended the
forbearance period through June 5, 2009, YA Global has not agreed to further
extend the forbearance period.
The
Company’s financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and settlement of liabilities and
commitments based on recorded amounts for the foreseeable future. Although YA
Global initially extended the forbearance period through June 5, 2009, YA Global
has not agreed to further extend the forbearance period or restructure the
payment terms of the obligations owing under the secured convertible
debenture. As a result, Mobilepro is in default of its obligations
under the secured convertible debenture owed to YA Global and, given current
market conditions and Mobilepro’s financial condition, obtaining the required
financing to retire the secured convertible debenture is unlikely to occur in
the immediate future. YA Global has informed the Company that it
intends to exercise its rights as the Company’s senior secured
creditor. Such rights include, but are not limited to, foreclosing on
the assets of the Company. In such event the Company will not have the ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Geographic
Markets
Through
our Integrated Telecom Business, we provide service to customers located
throughout the United States with concentrations in California, Kansas,
Maryland, Missouri, New Jersey, Pennsylvania and Texas. Our pay telephone
business is concentrated in the State of Ohio. Historically, certain
portions of our consolidated business have been concentrated in certain
geographic markets. For example, the Davel payphones had previously been located
across the United States; approximately 60% of the payphones were located in
warm climate states of the southwest, southeast and west; approximately 40% of
the payphones were located in midwest, northwest, and northeast sections of the
country, with usage during the winter months thereby negatively affected by the
cold climate. The ISP Business previously provided service to customers
primarily located in the states of Texas, Arizona, Louisiana, Kansas, Missouri,
Wisconsin, Ohio, Washington and California.
Research
and Development
As we
have emphasized the growth of the Company through the acquisition of
service-oriented companies, our research and development activities have been
reduced. In fiscal 2009 and 2008, we did not pursue new research
initiatives.
Prior to
its entry into the wireless network business, NeoReach previously conducted
development efforts related to certain wireless antenna and networking
technologies, in particular, ZigBee chip development work. NeoReach also worked
toward developing a semiconductor chip for use in home networking and selected
industrial monitoring applications based on the ZigBee standard. ZigBee is an
IEEE standard (802.15.4) developed for certain low power, short-range devices.
The scope of this development activity was significantly reduced over the last
few years. In the year ended March 31, 2006, we incurred research and
development costs of approximately $139,000 in connection with this effort with
the objective of making the technologies ready for sale or licensing on an OEM
basis. The development of these technologies was unrelated to the deployment,
ownership, and management of the broadband wireless networks and the Company
maintains its interest in this intellectual property
The
ZigBee chip project continues, in our view, to have potential future value as
ZigBee chips can be used for sensors and other wireless devices, including
potentially as a complement to Wi-Fi. However, shareholders should be advised
that given the limited focus and limited resources we plan to devote to these
initiatives, material revenue should not be expected from this investment. If
the U.S. patent office were to grant certain patent claims made in our patent
filings with respect to ZigBee and other wireless technologies, we may choose to
re-focus on these initiatives; however, there can be no assurance that the U.S.
patent office will act in a prompt manner or, if it does act, that it will
resolve favorably our patent claims. In sum, we do not anticipate that these
activities will represent a meaningful percentage of our revenue in the
future.
NeoReach
filed a total of eight patent applications with the U.S. Patent and Trademark
Office in the areas of “Smart Antenna” technology and RF Transceiver Chip Design
for “Low Noise Amplifier for wireless communications.” As of March 31, 2006, we
had been granted approval of seven patents in the area of “Smart Antenna”
technology and one patent applications was still pending approval. In fiscal year March 31, 2007,
we sold the Smart Antenna technology to an unaffiliated company, receiving
$300,000 in cash proceeds.
Voice
Services
Integrated
Telecom Business
Overview
Our
efforts in the Integrated Telecom Business have historically been led by
CloseCall, a company that we acquired in October 2004 and AFN, a company we
acquired in June 2005. CloseCall and AFN offer its customers a full array of
telecommunications products and services including local, long-distance, digital
wireless, digital telephone (voice over Internet protocol, or “VoIP”), and
dial-up and DSL Internet services.
Our
entrance into this business began with two acquisitions consummated in the
summer of 2004. In June 2004, we acquired US1 Telecommunications, Inc. (“US1”),
a long distance provider located in Kansas. In July 2005, we completed our
acquisition of Affinity, a Michigan-based CLEC, and long distance carrier. The
operations of US1 and Affinity have been integrated into the operations of AFN
and CloseCall, respectively.
In a
transaction that was effective January 1, 2007, CloseCall acquired mobeo®
Wireless reseller assets from TeleCommunication Systems, Inc. (“TCS”) including
over 7,000 cellular telephone service contracts and certain related net assets.
This transaction enables CloseCall to sell RIM Blackberry® products and network
access to enterprise and retail subscribers nationwide. Since the acquisition,
some of the customers acquired have discontinued services with
CloseCall.
Business Strategy
As
previously discussed, the Company entered into an agreement with USA to sell,
among other things, its Integrated Telecom Business. The sale of the Integrated
Telecom Business has not been consummated and the Company continues to pursue
potential buyers for the Integrated Telecom Business. See discussion above
concerning the sale of the ISP and Integrated Telecom Businesses to
USA. During this time period, the Company has continued to operate
the Integrated Telecom Business until such time as a sale transaction could be
consummated.
While the
Company continues to operate the Integrated Telecom Business its primary
objective is to be a leading provider of high-quality integrated communications
services in each of our major service areas, acting as a reseller of local, long
distance, wireless, Internet access and data services to residential customers,
small to medium-sized businesses, and select large business enterprises. The
Integrated Telecom Business delivers high-value bundled and individual services
tailored to the needs of its customers presented on a single
invoice. It also provides value added data management and processing
services.
When
economically advantageous for us to do so, the Integrated Telecom Business seeks
to bundle our integrated communications services. Our targeted customers often
will have multiple vendors for voice and data communications services, each of
which may be billed separately. Unlike many of these vendors, the Integrated
Telecom Business is able to provide a comprehensive package of local telephone,
long distance, Internet access, and other integrated communications services.
The success of this business will be based, in part, on the establishment of
effective cross-selling programs in order to leverage the combined customer base
of the voice service business segment, the effective delivery of such services
and the provision of excellent customer service.
CloseCall
has focused on the expansion of its telecommunications service offerings and the
securing of long-term agreements with local exchange carriers. It
has commercial agreements which expire in 2011 with Verizon and
AT&T covering eighteen and thirteen states, respectively. Completion of
these agreements 1) allows the expansion of CloseCall’s overall geographic
market, and the expansion and bundling of service offerings in these states
including Florida, and 2) provides predictability of the pricing of wholesale
services provided to us by these carriers during the terms of the agreements.
CloseCall makes extensive use of direct mail programs to market its services to
customers. CloseCall previously used print, signage, radio, and television
advertising to market services to customers of certain local professional sports
teams including the Aberdeen Ironbirds, Frederick Keys, Bowie Baysox, and the
Delmarva Shorebirds under contractual arrangements with the ball clubs. The
Company has re-evaluated the effectiveness of its advertising and no longer
participates in these programs. A new focus of CloseCall is to secure wholesale
arrangements with other telecommunications companies that wish to share
CloseCall’s cellular and Blackberry relationships. As of March 31, 2009,
CloseCall provides such services to three other companies.
Services
This
portion of our voice business segment provides service to over approximately
83,358 equivalent subscriber lines, including approximately 70,533 local and
long distance lines. This business also has approximately 7,876 cell phone and
Blackberry® subscribers. Despite the acquisition of business subscribers from
TCS, the majority of our customers of CloseCall are residential.
Bundled Services Approach.
The Integrated Telecom Business offers integrated communications services
in a high-quality bundle to residential customers and small to medium-sized
businesses at attractive prices. When economically advantageous to do so, the
Integrated Telecom Business seeks to bundle its integrated communications
services. Its targeted customers often will have multiple vendors for voice and
data communications services, each of which may be billed separately. It is able
to provide a comprehensive package of local telephone, long distance, Internet
access, and other integrated communications services.
Local Services. The
Integrated Telecom Business offers a wide range of local services, including
local access services, voicemail, universal messaging, directory assistance,
call forwarding, return call, hunting, call pick-up, repeat dialing and speed
dialing services. It provides local services primarily over local connections
utilizing Incumbent Local Exchange Carrier (ILEC) facilities.
Long Distance Services. The
Integrated Telecom Business offers both domestic and international switched and
dedicated long distance services, including “1+” outbound dialing, inbound
toll-free and calling card services. Many of its customers prefer to purchase
long distance services as part of a bundle that includes some of our other
integrated communications services offerings.
Blackberry® PDA Services.
With the acquisition of subscribers from TCS and the assignment of the
master supply agreement between TCS and Research in Motion Corporation,
CloseCall provides this popular personal data assistant (PDA) service and supply
Blackberry® equipment, accessories, software and support contracts to its
customers.
High Speed Internet Access via
Digital Subscriber Line. The Integrated Telecom Business offers xDSL
combined with our local access service in selected markets. DSL technology
provides continuous high-speed local connections to the Internet and to private
and local area networks.
Internet Access. The
Integrated Telecom Business offers dial-up and broadband Internet access
utilizing multiple wholesale vendors and also offer our five times (“5X”)
traditional dial-up speeds in select locations.
Digital Wireless Phones. The
Integrated Telecom Business offers digital wireless phone services in many of
our target markets. We believe that CloseCall is one of the few companies that
have the capability to add wireless service to an existing customer
invoice.
Digital Wireless Data. The
Integrated Telecom Business offers digital wireless data services in many of our
target markets. We believe that CloseCall is one of the few companies that have
the capability to add wireless data services to an existing customer
invoice.
Digital Broadband Phones via Voice
over IP (“VoIP”). The Integrated Telecom Business offers
digital phones for customers that have access to high-speed Internet connections
utilizing VoIP technologies provided by several third-party VoIP service
providers.
Payphone
Services
Overview
Our
subsidiary, Davel, has been one of the largest independent payphone service
providers in the United States. Davel operates in a single business segment
within the telecommunications industry, and previously utilized subcontractors
to operate, service, and maintain its system of payphones throughout the United
States. On November 15, 2004, we completed our acquisition of 100 percent of the
senior secured debt of Davel and received an assignment of the secured lenders’
shares of Davel common stock representing approximately 95.2 percent of Davel
issued and outstanding common stock. We subsequently acquired the remaining 4.8
percent of the issued and outstanding Davel common stock in May
2005.
During
fiscal 2008 Davel entered into a series of transactions to sell the majority of
its pay telephones. See discussion above concerning the sale of the
pay telephones. As of March 31, 2008 Davel owned and operated a
nominal number of pay telephones located in the State of Ohio. Davel does not
intend to expand its existing pay telephone base. Davel’s installed
payphone base generates revenue through coin calls (local and long-distance),
non-coin calls (calling card, credit card, collect, and third-party billed calls
using the Company’s pre-selected operator services providers) and dial-around
calls (utilizing a 1-800, 1010XXX or similar “toll free” dialing method to
select a carrier other than the Company’s pre-selected carrier). The revenue
generated by the pay telephones is no longer material to the operations of the
Company. See Item 3. “Legal Proceedings” for the discussion of
several matters that relate to Davel.
Payphone
Services Business – Background.
Today’s
telecommunications marketplace was principally shaped by the 1984 court-approved
divestiture by AT&T of its local telephone operations (the “AT&T
Divestiture”), and the many regulatory changes adopted by the FCC and state
regulatory authorities in response to and subsequent to the AT&T
Divestiture, including the authorization of the connection of competitive or
independently owned payphones to the public switched network. The “public
switched network” is the traditional, copper based, domestic landline public
telecommunications network used to carry, switch, and connect telephone calls.
The connection of independently owned payphones to the public switched network
has resulted in the creation of additional business segments in the
telecommunications industry. Prior to these developments, only the consolidated
Bell system or independent LECs were permitted to own and operate payphones.
Following the AT&T Divestiture and subsequent FCC and state regulatory
rulings, the independent payphone sector developed as a competitive alternative
to the consolidated Bell system and other LECs with the goal of providing more
responsive customer service, lower cost of operations and higher commissions to
the owners or operators of the premises at which a payphone is
located.
Prior to
the AT&T Divestiture, the LECs could refuse to provide payphone service to a
business operator or, if service was installed, would typically pay no or
relatively small commissions for the right to place a payphone on the business
premises. Following the AT&T Divestiture and the FCC’s authorization of
payphone competition, Independent Payphone Providers (“IPPs”) began to offer
location owners higher commissions on coin calls made from the payphones in
order to obtain the contractual right to install the equipment on the location
owners’ premises. Initially, coin revenue was the only source of revenue for the
payphone operators because they were unable to participate in revenues from
non-coin calls. However, the operator service provider, or OSP, industry emerged
and enabled the competitive payphone operators to compete more effectively with
the regulated telephone companies by paying commissions to payphone owners for
non-coin calls. For the first time, IPPs were able to receive non-coin call
revenue from their payphones. With this incremental source of revenue from
non-coin calls, IPPs were able to compete more vigorously on a financial basis
with RBOCs and other LECs for site location agreements, as a complement to the
improved customer service and more efficient operations provided by the
IPPs.
As part
of the Telecommunications Act of 1996, or 1996 Telecom Act, Congress directed
the Federal Communications Commission, or FCC, to ensure widespread access to
payphones for use by the general public. Estimates of payphone deployment
released by the FCC in February 2007 suggest that there are approximately 1.0
million payphones currently operating in the United States, of which
approximately 500,000 are operated by local exchange carriers, or LECs. The
remaining approximately 500,000 payphones are owned or managed by the more than
600 independent payphone providers, or IPPs, currently operating in the United
States.
Business
Strategy
Davel
owns and operates a nominal number of pay telephones located in the State of
Ohio. The revenues generated by the pay telephones is no longer
material to the Company; however, Davel is party to certain litigation pending
against various long distance companies, that if successful, could result in a
substantial recovery to the Company. See “Item 3. Legal Proceedings” for the
discussion of several matters that relate to Davel. Davel intends to
vigorously pursue such litigation.
Corporate
Activities
Overview
Our
Corporate business segment has historically served as the holding company for
our three operating business segments: voice services, wireless networks, and
Internet services. The corporate office primarily provides overall business
management, accounting, financial reporting, and legal support to the business.
In the past, executives have also provided contracted business consulting
services to unaffiliated companies whereby the Company received compensation for
the services.
For
example, in June 2004, we entered into a business development agreement with
Solution Technology International, Inc., a Frederick, Maryland-based software
company, or STI. The Company provided services to STI in exchange for a
non-affiliate equity ownership interest in STI which was initially valued in the
amount of $150,000. We own shares of STI
stock which were subsequently written-off in the 2008 and 2009 fiscal
years.
In August
2004, we signed a business development agreement with Texas Prototypes, Inc.,
(“Texas Prototypes”) an electronic prototype manufacturing company, to jointly
pursue a working relationship covering a number of potential technology projects
and business development initiatives. We received a non-affiliate equity
ownership interest in Texas Prototypes as consideration for services under the
agreement which we initially valued at $300,000. Texas Prototypes completed its
process of becoming a publicly traded company following its reverse merger with
Stock Market Solutions, Inc., and its shares of common stock began trading on
the Over-the-Counter Bulletin Board under the symbol “TXPO.” In fiscal year
2008, the Company sold its shares and received proceeds of
$361,503.
ProGames
Network, Inc.
ProGames
was formed by Mobilepro in order to focus on the development of tools, content
and specialized connectivity for online and mobile gamers. ProGames has launched
its website, www.progamesnetwork.com,
where visitors may obtain an understanding about the type of exclusive content
and online games that ProGames offers.
ProGames
plans that the website eventually will include, among other offerings, 1) large,
multiplayer online role-playing games, 2) a selection of exclusive games for
mobile gamers, 3) a selection of skill, action and casual games, 4) current
gaming articles and product reviews, 5) interactive ability for online gamers to
communicate with each other, evaluate games and provide feedback. The website
will also include an exclusive vertical game space search engine that will
empower visitors to search for almost any type of content or game that is
available online or via mobile devices.
ProGames
is in the business of providing online gamers with a new and unique offering of
content, news, original games, social networking and special connectivity.
Currently, it is devoting all of its resources to development of this business.
ProGames utilizes corporate personnel and office space for which Mobilepro
accrues a monthly management fee. To date, the revenues of ProGames have not
been material.
In March
2007, the Company announced that it had signed a definitive merger agreement
pursuant to which ProGames would be merged with and into Winning Edge
International, Inc. Consummation of the transaction was subject to a number of
closing conditions including the arrangement of financing that would have
sustained the operations of the combined entity. Financing was not
arranged. As a result, the merger agreement was terminated and the Company
continues to fund the operating costs of ProGames.
Competition
The
Integrated Telecom Business
The
communications industry is highly competitive. The Integrated Telecom Business
competes primarily on the basis of the quality of our offerings, quality of our
customer service, bundling (offering multiple services), price, availability,
reliability, and variety. Our ability to compete effectively depends on our
ability to maintain high-quality services at prices generally equal to or below
those charged by our competitors. In particular, price competition in our sector
has been intense and is not expected to decrease. Our competitors include, among
others, various “competitive carriers” like us, as well as larger providers such
as Verizon, AT&T, Sprint and Qwest. These larger providers have
substantially greater infrastructure, financial, personnel, technical,
marketing, and other resources, larger numbers of established customers and more
prominent name recognition than CloseCall and AFN. We increasingly face
competition in the local and long distance market from local carriers,
resellers, cable companies, wireless carriers and satellite carriers, and may
compete with electric utilities. We also face substantial competition from
businesses offering long distance data and voice services over the Internet such
as Comcast, Vonage and Skype. These businesses enjoy a significant cost
advantage because, even though Congress is considering a bill to “level the
playing field,” they currently do not pay carrier access charges.
We face
significant competition from “competitive carriers” that are similar to us,
principally in terms of size, structure and market share. Some of these carriers
already have established local operations in some of our current and target
markets. We cannot predict which of these carriers will be able to continue to
compete effectively against us over time.
We also
compete in the provision of local services against the incumbent local telephone
company in each market, which is either Verizon or AT&T in a large majority
of our market areas. Incumbent carriers enjoy substantial competitive advantages
arising from their historical monopoly position in the local telephone market,
including pre-existing customer relationships with all or virtually all
end-users. Further, we are highly dependent on incumbent carriers for local
network facilities and wholesale services required in order for us to assemble
our own local services. In addition, incumbent carriers may compete in each
other’s markets in some cases or attempt to merge and create even larger
competitors, which will increase the competitive pressures we face. Wireless
communications providers such as T-Mobile are competing with wireline local
telephone service providers, which further increases competition.
Local and
long-distance marketing is converging, as most other carriers offer integrated
communications services. For example, the mergers of AT&T and SBC and
Verizon and MCI have created companies that can offer a full array of products
and services to customers, a strategy similar to what our CloseCall subsidiary
has pursued. These companies already have extensive fiber optic cable,
switching, and other network facilities that they can use to provide local and
long distance services throughout the country. We also compete with numerous
direct marketers, telemarketers and equipment vendors and installers with
respect to portions of our business.
A recent
trend toward deregulation, particularly in connection with incumbent carriers
and service providers that use Voice over Internet Protocol applications
increases the level of competition that we face in our markets and, in turn, may
adversely affect our operating results. Incumbent carriers continue to seek
deregulation for many of their services at both the federal and state levels. If
their efforts are successful, these companies will gain additional pricing
flexibility, which could affect our ability to compete with them. The recent
emergence of service providers that use Voice over Internet Protocol
applications also presents a competitive threat. Because the regulatory status
of Voice over Internet Protocol applications is largely unsettled, providers of
such applications may be able to avoid costly regulatory requirements, including
the payment of inter-carrier compensation. This could impede our ability to
compete with these providers on the basis of price. More generally, the
emergence of new service providers will increase competition, which could
adversely affect our ability to succeed in the marketplace for communications
and other services.
Governmental
Regulation
Voice
Services
Integrated
Telecom Business
Overview. The services
provided by the Integrated Telecom Business are subject to federal, state, and
local regulation. Through our wholly owned subsidiaries, we hold numerous
federal and state regulatory authorizations. The Federal Communications
Commission, or FCC, exercises jurisdiction over telecommunications common
carriers to the extent they provide, originate or terminate interstate or
international communications. The FCC also establishes rules and has other
authority over some issues related to local telephone competition. State
regulatory commissions retain jurisdiction over telecommunications carriers to
the extent they provide, originate, or terminate intrastate communications.
Local governments may require us to obtain licenses, permits or franchises to
use the public rights-of-way necessary to install and operate our
networks.
Federal Regulation. AFN and
CloseCall are classified as a non-dominant carrier by the FCC and, as a result,
are subject to relatively limited regulation of its interstate and international
services. Some general policies and rules of the FCC apply to AFN and CloseCall,
including how we may use and how we must protect customers’ proprietary network
information, and AFN and CloseCall are subject to some FCC reporting
requirements, but the FCC does not review its billing rates, though AFN and
CloseCall must comply with FCC rules regarding the disclosure of rates, terms
and conditions and the content of our invoices. The FCC also has
jurisdiction to adjudicate complaints regarding services provided by AFN and
CloseCall. AFN and CloseCall are also required to pay various regulatory fees to
support programs authorized by the FCC. AFN and CloseCall possess the operating
authority required by the FCC to conduct its long distance business as it is
currently conducted. As a non-dominant carrier, AFN and CloseCall may install
and operate additional facilities for the transmission of domestic interstate
communications without prior FCC authorization, except to the extent that radio
licenses are required. The FCC does require prior approval for
transfer of control and assets transfers.
Local Competition. The FCC’s
role with respect to local telephone competition arises principally from the
1996 Telecom Act that preempts state and local laws to the extent that they
prevent competition in the provision of any telecommunications service. Subject
to this limitation, state and local governments retain telecommunications
regulatory authority over intrastate telecommunications. The 1996 Telecom Act
imposes a variety of duties on local carriers, including competitive carriers
such as CloseCall and AFN, to promote competition in the provision of local
telephone services. These duties include requirements for local carriers to:
interconnect with other telecommunications carriers; complete calls originated
by customers of competing carriers on a reciprocal basis; permit users to retain
their telephone numbers when changing carriers; implement dialing parity so that
all customers must dial the same number of digits to place the same type of
call, and provide competing carriers access to poles, ducts, conduits and
rights-of-way at regulated prices.
Incumbent
carriers like Verizon and AT&T also are subject to additional
duties. These duties include obligations of incumbent carriers to: offer
interconnection on a non-discriminatory basis; offer co-location of competitors’
equipment at their premises on a non-discriminatory basis; make available
certain of their network facilities, features and capabilities on
non-discriminatory, cost-based terms; and offer wholesale versions of their
retail services for resale at discounted rates. The FCC in certain
cases agreed to forbear from applying its unbundling requirements in certain
geographic markets in which it finds that sufficient competition exists in the
provision of local telecommunications services.
Collectively,
these requirements recognize that local telephone service competition is
dependent upon cost-based and non-discriminatory interconnection with, and use
of, some elements of incumbent carrier networks and facilities under specified
circumstances. Failure to achieve and maintain such arrangements could have a
material adverse impact on the ability of AFN and CloseCall to provide
competitive local telephone services. Under the 1996 Telecom Act, incumbent
carriers are required to negotiate in good faith with carriers requesting any or
all of the foregoing arrangements.
In August
2003, the FCC adopted changes to the rules defining the circumstances under
which incumbent carriers must make network elements available to competitive
carriers at cost-based rates. These rule changes were appealed by both incumbent
carriers and competitive carriers to a federal court of appeals, which in March
2004 vacated and remanded to the FCC several aspects of those changes. In
February 2005, the FCC issued a decision in response to the court’s March 2004
ruling. That decision, which is known as the Triennial Review Remand Order, or
TRRO, became effective on March 11, 2005, and revised the rules for when
incumbent carriers must unbundle and make available to competitive carriers
various types of UNEs, including high-capacity loops and interoffice transport.
The FCC also confirmed in the TRRO that the availability of special access
services for competitive carriers does not excuse incumbent carriers from the
requirement to make available prescribed UNEs at rates based on the FCC’s “Total
Element Long Run Incremental Cost,” or TELRIC, pricing methodology.
On June
16, 2006, the U.S. Court of Appeals, D.C. Circuit, rejected various CLEC
arguments in connection with the FCC’s decisions on the unbundling of local
switching and UNE-P rate increases, including the overall elimination of the
mass market local switching unbundling requirement. The court also rejected ILEC
arguments to eliminate DS1, DS3 loop and DS1 transport unbundling. The court
also rejected arguments that the FCC cannot preempt the states over such
matters.
TELRIC Pricing. The FCC has
initiated a re-examination of its TELRIC pricing methodology for network
elements. The FCC has proposed a number of changes to these pricing rules that,
if promulgated in their current form, could be unfavorable to the Integrated
Telecom Business. Legislation has been proposed in Congress in the past and may
be proposed in the future that would further restrict the access of competitive
carriers to incumbent carriers’ network elements. Future restrictions on, or
reductions in, the network elements available to AFN and CloseCall, or any
increase in the cost to them of such network elements, could have a material
adverse effect on the Integrated Telecom Business.
Broadband.
In the future, an
important element of providing competitive local service may be the ability to
offer customers high-speed broadband local connections. The FCC has reduced the
number and types of unbundled network elements, such as Fiber-to-the-Curb (FTTC)
and Fiber-to-the-Home (FTTH) that incumbent carriers must make available to
competitive carriers to enable them to provide broadband services to customers
using incumbent carrier networks. The FCC is considering requests by competitors
that would require incumbent carriers to continue to make available
to competitors certain older transport and switching technologies that the
incumbents plan to retire as they implement new digital switching and fiber
transport. The FCC also recently held that incumbent carriers such as Verizon
cannot be required by state commissions to make digital subscriber line services
available to end users when a competitive carrier provides the end user with
voice service. This is known in the industry as “naked DSL.” However,
both Verizon and AT&T, as conditions for the approval of recent mergers,
have agreed to make available naked DSL in certain markets for a prescribed
period of time.
In other
proceedings affecting broadband policy, the FCC has ruled that digital
subscriber line service, wireless broadband service and broadband over power
line should all be classified as information services, subject to minimal
federal and very limited state regulation. This regulatory treatment
is consistent with the FCC’s decision in 2002 that cable modem
service is an information service. The FCC has also ruled that
facilities-based Internet Service Providers must comply with the Communications
Assistance Law Enforcement Act (“CALEA”) which requires that companies must
construct their networks to facilitate law enforcement access for lawful
surveillance of the service provider’s customers.
The FCC
has sought comment on a number of other regulatory proposals that could affect
the speed and manner in which high-speed broadband local services are deployed,
including whether broadband services should be subject to network neutrality
rules and open access. Network neutrality generally refers to principles
allowing access by consumers to their choice of Internet content, connection of
equipment and applications without unreasonable restrictions by broadband
providers. Open access generally requires that a broadband operator
permit unaffiliated entities to provide Internet service over the operator’s
broadband facilities. We cannot predict the outcome of these
proposals at the FCC or in the courts or the effect they will have on the
Integrated Telecom Business and the industry.
Internet Protocol-Enabled Services.
The FCC has not issued final rules on the appropriate regulatory
clarification and regulatory status of services and applications using Internet
Protocol, including VoIP offerings. VoIP is an application that manages the
delivery of voice information across data networks, including the Internet,
using Internet Protocol. Rather than send voice information across traditional
circuits, Voice over Internet Protocol sends voice information in digital form
using discrete packets that are routed in the same manner as data packets. Voice
over Internet Protocol is widely viewed as a more cost-effective alternative to
traditional circuit-switched telephone service. Because Voice over Internet
Protocol can be deployed by carriers in various capacities, and because it is
widely considered a next-generation communications service, its regulatory
classification has not yet been determined.
The FCC
thus far has issued a series of rulings in connection with the regulatory
treatment of Voice over Internet Protocol (“VoIP”), but those rulings have been
narrowly tailored. In one case, the FCC held that a computer-to-computer VoIP
application provided by Pulver.com is an unregulated information service, in
part because it does not include a transmission component, offers computing
capabilities, and is free to its users. In another case, the FCC reached a
different conclusion, holding that AT&T’s use of VoIP within its network to
transmit the long-haul portion of certain calls constitutes a telecommunications
service, thus subjecting it to regulation, because the calls use ordinary
customer premises equipment with no enhanced functionality, originate and
terminate on the public switched telephone network, and undergo no net protocol
conversion and provide no enhanced functionality to end users. In a third case,
which involved the VoIP application of Vonage, the FCC preempted the authority
of the State of Minnesota (and presumably all other states) and ruled that
Vonage’s VoIP application, and others like it, is an interstate service subject
only to federal regulation, thus preempting the authority of the Minnesota
commission to require Vonage to obtain state certification. On March 21, 2007,
this decision was upheld by the United States Court of Appeals for the Eighth
Circuit. The FCC, however, refused to rule in the Vonage case whether Vonage’s
VoIP application is a telecommunications service or an information service, thus
leaving open the question of the extent to which the service will be
regulated.
In 2004,
the FCC initiated a more generic proceeding to address the many regulatory
issues raised by the development and growth of VoIP services, including the
extent to which VoIP will be regulated at the federal level, and has expressly
reserved the right to reconsider its declaratory rulings in the generic
proceeding. As a result of this proceeding, the FCC has imposed a number of
requirements on what it calls ‘interconnected VoIP services,” which the FCC
defines as a service that enables real-time, two way voice communications;
requires a broadband connection from the user’s location; requires Internet
Protocol compatible customer premises equipment and permits users generally to
receive calls that originate and terminate on the public switched telephone
network. These include requiring interconnected VoIP service
providers to comply with the CALEA which requires that companies must construct
their networks to facilitate law enforcement access for lawful surveillance of
the service provider’s customers; requiring interconnected VoIP service
providers to contribute to the Universal Service Fund; requiring interconnected
VoIP service providers to offer E-911 to their subscribers; requiring
interconnected VoIP service providers and equipment manufacturers to comply with
rules facilitating access to VoIP services by the disabled, including the
opportunity to access Telecommunications Relay Services for the Deaf; and,
requiring interconnected VoIP service providers to comply with Commission rules
concerning the use and protection of customer proprietary network
information. The FCC continues to consider questions regarding the
applicability of access charges to VoIP. Additional federal and
state rulings in connection with VoIP will likely have a significant impact on
us, our competitors and the communications industry.
Congress
also has considered in the past, and may consider in the future, legislation
addressing Voice over Internet Protocol. We cannot at this time predict if or
when such legislation will be enacted, or its effect on our Integrated Telecom
Business and the industry.
Inter-carrier Compensation.
The FCC regulates the interstate access rates charged by local carriers
for the origination and termination of interstate long distance traffic. These
access rates make up a significant portion of the cost of providing long
distance service. The FCC has adopted policy changes that over time are reducing
incumbent carriers’ access rates, which have the impact of lowering the cost of
providing long distance service, especially to business customers. In addition,
the FCC has adopted rules that require competitive carriers to reduce the levels
of their tariffed access charges to rates no greater than those of the incumbent
carriers with which they compete. In March 2005, the FCC initiated a proceeding
designed to examine and reform comprehensively intercarrier compensation,
including access charges, in the telecommunications market. Intercarrier
compensation typically is the largest single expense incurred by companies that
provide telecommunications services, including us. Further FCC action in this
area may reduce most access charges in the future or shift all forms of
intercarrier compensation to flat rate pricing. We cannot predict at this time
the result of this proceeding, the full impact of the FCC’s decisions in this
area, or the effect these decisions will have on our business and the
industry.
The FCC
has granted incumbent carriers some flexibility in pricing their interstate
special and switched access services. Under this pricing scheme, local carriers
may establish pricing zones based on access traffic density and charge different
prices for access provided in each zone. The FCC recently has been granting
incumbent carriers additional pricing flexibility on a market-by-market basis as
local competition develops in their markets. This pricing flexibility could
place us at a competitive disadvantage, either as a purchaser of access for our
long distance operations or as a vendor of access to other carriers or end-user
customers.
In April
2001, the FCC issued a ruling changing the compensation mechanism for traffic
exchanged between telecommunications carriers that is destined for Internet
service providers. In doing so, the FCC prescribed a new rate structure for this
traffic and prescribed gradually reduced caps for its compensation. In the
course of our business, we may exchange the traffic of Internet service
providers with other carriers. The FCC’s ruling in connection with such traffic
affected a large number of carriers, including us, and further developments in
this area could have a significant impact on the industry and on us. Although a
federal court remanded that FCC decision for further consideration, the court
did not reverse the decision, so it remains in effect. In March 2005, in the
context of its generic proceeding on intercarrier compensation, the FCC sought
comment on broad policy changes that could harmonize the rate structure and
levels of all forms of intercarrier compensation, and ultimately could eliminate
most forms of carrier-to-carrier payments for interconnected traffic, including
traffic destined for Internet service providers.
Universal Service. Universal
Service programs administered by the FCC promote the availability of quality
services at affordable rates; increase access to advanced
telecommunications services throughout the Nation, including to consumers in low
income, rural, insular, and high cost areas at rates that are reasonably
comparable to those charged in urban areas, and provide that all schools,
classrooms, health care providers, and libraries should, generally, have access
to advanced telecommunications services. Universal Service programs
historically have been funded by access charges and direct contributions from
telecommunications carriers based on a percentage of their interstate
revenues. The FCC is considering changing the methodology by which
telecommunications carriers contribute to the Universal Service Fund, including
one proposal that would assess payments based on the number of telephone numbers
used by carriers. Any reform in connection with universal service, will, by
necessity, require revisions to the FCC’s intercarrier compensation
policies. Congress is currently considering changes to the USF rules;
however, it is unclear what changes, if any, will ultimately become law. Because
the effects of these revisions are uncertain, the fees we pay to subsidize
universal service may increase or decrease substantially in the
future.
Detariffing. The FCC required
non-dominant long distance companies, including us, to detariff interstate long
distance domestic and international services in 2001. In 2001, the FCC also
permitted competitive local exchange carriers, including us, to choose either to
detariff the interstate access services that competitive carriers sell to long
distance companies that originate or terminate traffic from or to their local
customers, or to maintain tariffs but comply with rate caps. Tariffs set forth
the rates, terms and conditions for service and must be updated or amended when
rates are adjusted or products are added or removed. Before detariffing, we
filed tariffs with the FCC to govern our relationship with most of our long
distance customers and with long distance companies that originated or
terminated traffic from or to our local customers. The detariffing process has
required us, among other things, to post these rates, terms and conditions on
our Web site instead of filing them as tariffs with the FCC. Because detariffing
precludes us from filing our tariffs with the FCC, some may argue that we are no
longer subject to the “filed rate doctrine,” under which the filed tariff
controls all contractual disputes between a carrier and its customers. The
detariffing process has effectively required us to enter into individual
contracts with each of our customers and to notify our customers when rates are
adjusted or products are added or removed. This process increases our costs of
doing business. Detariffing may expose us to legal liabilities and costs if we
can no longer rely on the filed rate doctrine to settle contract
disputes.
Other Federal Regulations.
The FCC imposes prior approval requirements on transfers of control and
assignments of radio licenses and operating authorizations. The FCC has the
authority generally to condition, modify, cancel, terminate, revoke, or decline
to renew licenses and operating authority for failure to comply with federal
laws and the rules, regulations and policies of the FCC. Fines or other
penalties also may be imposed for such violations. The FCC or third parties may
raise issues with regard to our compliance with applicable laws and
regulations.
Federal Excise Tax Changes.
IRS Notice 2006-50 instructs companies collecting the Federal Excise Tax to
"cease collecting and paying over tax under §4251 of the Internal Revenue Code
on nontaxable service billed after July 31, 2006". Several recent rulings
have held that "service for which there is a toll charge that varies with
elapsed transmission time and not distance (time-only service) is not taxable
toll telephone service." On August 1, 2006 the Company was no longer
responsible for collecting and remitting the Federal Excise Tax. Regarding
bundled services, the CLEC is expected to “reasonably identify” the local
services portion or else the whole bundled billing is considered FET
taxable.
State Regulation. AFN and
CloseCall are subject to various state laws and regulations. Most state public
utility commissions require providers such as AFN and CloseCall to obtain
authority from the commission before initiating service in the state and the
filing of tariffs that detail the rates, terms and conditions for our services.
The Integrated Telecom Business is subject to various reporting and
record-keeping requirements. The Integrated Telecom Business is
generally required to pay fees and assessments related to our provision of
telecommunications service in the state. In addition, some states are
ordering the detariffing of services, which may impede AFN and CloseCall’s
reliance on the filed rate doctrine and increase our costs of doing
business.
Many
issues remain open regarding how new local telephone carriers will be regulated
at the state level. For example, although the 1996 Telecom Act preempts the
ability of states to forbid local service competition, the
1996 Telecom Act preserves the ability of states to impose reasonable
terms and conditions of service and other regulatory requirements. The scope of
state regulation will be refined through rules and policy decisions made by
public utility commissions as they address local service competition
issues.
State
public utility commissions have responsibility under the 1996 Telecom Act to
oversee relationships between incumbent carriers and their new competitors with
respect to such competitors’ use of the incumbent carriers’ network elements and
wholesale local services. Public utility commissions arbitrate interconnection
agreements between the incumbent carriers and competitive carriers such as
CloseCall when necessary. Pursuant to the 1996 Telecom Act, the decisions of
state public utility commissions with regard to interconnection disputes may be
appealed to federal courts.
There
also remain unresolved important issues regarding the scope of the authority of
public utility commissions and the extent to which the commissions will adopt
policies that promote local telephone service competition. It is difficult to
predict how this and other matters will affect our ability to pursue our
business plan.
States
also regulate the intrastate carrier access services of the incumbent carriers.
AFN and CloseCall are required to pay access charges to the incumbent carriers
when they originate or terminate our intrastate long distance traffic. The
Integrated Telecom Business could be harmed by high access charges, particularly
to the extent that the incumbent carriers do not incur the same level of costs
with respect to their own intrastate long distance services or to the extent
that the incumbent carriers are able to offer their long distance affiliates
better access pricing or volume pricing to larger carriers. Some states also
regulate the intrastate access charges of competitive carriers. Some states have
also developed intrastate universal service charges parallel to the
interstate charges created by the FCC. Another issue is the use by some
incumbent carriers, with the approval of the applicable public utility
commissions, of extended local area calling that converts otherwise competitive
intrastate toll service to local service. Our business could be harmed by these
developments.
The
Integrated Telecom Business will also be affected by how states regulate the
retail prices of the incumbent carriers with which we compete. We believe that,
as the degree of intrastate competition increases, the states will offer the
incumbent carriers increasing pricing flexibility and deregulation of particular
services deemed to be competitive. This flexibility and deregulation may present
the incumbent carriers with an opportunity to subsidize services that compete
with services provided by the Integrated Telecom Business with revenues
generated from their non-competitive services, thereby allowing incumbent
carriers to offer competitive services at prices lower than most or all of their
competitors.
Many
states also require prior approval for transfers of control of certified
carriers, corporate reorganizations, acquisitions of telecommunications
operations, assignment of carrier assets, stock offerings, and incurrence by
carriers of significant debt obligations. Certificates of authority generally
can be conditioned, modified, canceled, terminated or revoked by state
regulatory authorities for failure to comply with state law or the rules,
regulations and policies of state regulatory authorities. Fines or other
penalties also may be imposed for such violations. Public utility commissions or
third parties may raise issues with regard to our compliance with applicable
laws or regulations.
Payphone
Service Providers
Although
Davel has sold a majority of its payphones, regulations regarding payphone
service providers still apply to Davel. In addition, Davel continues to pursue a
number of claims against third parties which, if successful, could provide
significant recoveries applicable to the operations of Davel in prior years.
Regulations relating to payphone service providers provide a basis for certain
litigation and claims currently being pursued by Davel. See Item 3. – “Legal
Proceedings”.
The 1996
Telecom Act substantially restructured the telecommunications industry, included
specific provisions related to the payphone industry and required the FCC to
develop rules necessary to implement and administer the provisions of the 1996
Telecom Act on both an interstate and intrastate basis.
Federal Regulation of Local Coin and
Dial-Around Calls. The Telephone Operator Consumer Services Improvement
Act of 1990, or TOCSIA, established various requirements for companies that
provide operator services and for call aggregators, including payphone service
providers, or PSPs, who send calls to those operator service providers, or OSPs.
The requirements of TOCSIA as implemented by the FCC included call branding,
information posting, rate quotations, the filing of informational tariffs and
the right of payphone users to access any OSP in order to make non-coin calls.
TOCSIA also required the FCC to take action to limit the exposure of payphone
companies to undue risk of fraud upon providing this “open access” to
carriers.
TOCSIA
further directed the FCC to consider the need to provide compensation to IPPs
for dial-around calls made from its payphones. Accordingly, the FCC ruled in May
1992 that IPPs were entitled to dial-around compensation. Because of the
complexity of establishing an accounting system for determining per call
compensation for these calls, and for other reasons, the FCC temporarily set
this compensation at $6.00 per payphone per month based on an assumed average of
15 interstate carrier access code dial-around calls per month and a rate of
$0.40 per call. The failure by the FCC to provide compensation for 800 “toll
free” dial-around calls was challenged by the IPPs, and a federal court
subsequently ruled that the FCC should have provided compensation for these toll
free calls.
Payphone Services. In 1996,
recognizing that IPPs had been at a severe competitive disadvantage under the
existing system of regulation and had experienced substantial increases in
dial-around calls without a corresponding adjustment in compensation, Congress
enacted Section 276 to promote both competition among payphone service providers
and the widespread deployment of payphones throughout the nation. Section 276
directed the FCC to implement rules by November 1996 that would:
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create
a standard regulatory scheme for all public payphone service
providers;
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establish
a per call compensation plan to ensure that all payphone service providers
are fairly compensated for each and every completed intrastate and
interstate call, except for 911 emergency and telecommunications relay
service calls;
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terminate
subsidies for LEC payphones from LEC regulated rate-base
operations;
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prescribe,
at a minimum, nonstructural safeguards to eliminate discrimination between
LECs and IPPs and remove the LEC payphones from the LEC’s regulated asset
base;
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provide
for the RBOCs to have the same rights that IPPs have to negotiate with
location owners over the selection of interLATA carrier services, subject
to the FCC’s determination that the selection right is in the public
interest and subject to existing contracts between the location owners and
interLATA carriers;
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provide
for the right of all PSPs to choose the local, intraLATA and interLATA
carriers subject to the requirements of, and contractual rights negotiated
with, location owners and other valid state regulatory
requirements;
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evaluate
the requirement for payphones which would not normally be installed under
competitive conditions but which might be desirable as a matter of public
policy, and establish how to provide for and maintain such payphones if it
is determined they are required;
and
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preempt
any state requirements which are inconsistent with the FCC’s regulations
implementing Section 276.
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In
September and November 1996, the FCC issued its rulings implementing Section
276, or the 1996 Payphone Order. In the 1996 Payphone Order, the FCC determined
that the best way to ensure fair compensation to independent and LEC PSPs for
each and every call was to deregulate, to the maximum extent possible, the price
of all calls originating from payphones. For local coin calls, the FCC mandated
that deregulation of the local coin rate would not occur until October 1997 in
order to provide a period of orderly transition from the previous system of
state regulation.
To
achieve fair compensation for dial-around calls through deregulation and
competition, the FCC in the 1996 Payphone Order directed a two-phase transition
from a regulated market. In the first phase, November 1996 to October 1997, the
FCC prescribed flat-rate compensation payable to the PSPs by the interexchange
carriers (“IXCs”) in the amount of $45.85 per month per payphone. During the
second phase of the transition to deregulation and market-based compensation
(initially from October 1997 to October 1998, but subsequently extended in a
later order by one year to October 1999), the FCC directed the IXCs to pay the
PSPs on a per-call basis for dial-around calls at the assumed deregulated coin
rate of $0.35 per call. At the conclusion of the second phase, the FCC set the
market-based local coin rate, determined on a payphone-by-payphone basis, as the
default per-call compensation rate in the absence of a negotiated agreement
between the PSP and the IXC. To facilitate per-call compensation, the FCC
required the PSPs to transmit payphone-specific coding digits which would
identify each call as originating from a payphone and required the LECs to make
such coding available to the PSPs as a tariffed item included in the local
access line service.
In July
1997, a federal court responded to an appeal of the 1996 Payphone Order, finding
that the FCC erred in (1) setting the default per-call rate at $0.35 without
considering the differences in underlying costs between dial-around calls and
local coin calls, (2) assessing the flat-rate compensation against only the
carriers with annual toll-call revenues in excess of $100 million, and (3)
allocating the assessment of the flat-rate compensation based on gross revenues
rather than on a factor more directly related to the number of dial-around calls
processed by the carrier. The Court also assigned error to other aspects of the
1996 Payphone Order concerning inmate payphones and the accounting treatment of
payphones transferred by an RBOC to a separate affiliate.
In
response to the Court’s remand, the FCC issued its modified ruling implementing
Section 276, or the 1997 Payphone Order, in October of 1997. The FCC adjusted
the per call rate during the second phase of interim compensation to $0.284.
While the FCC tentatively concluded that the $0.284 default rate should be
utilized in determining compensation during the first phase and reiterated that
PSPs were entitled to compensation for each and every call during the first
phase, it deferred a decision on the precise method of allocating the initial
interim period (November 1996 through October 1997) flat-rate payment obligation
among the IXCs and the number of calls to be used in determining the total
amount of the payment obligation.
On March
9, 1998, the FCC issued a Memorandum Opinion and Order, FCC 98-481, which
extended and waived certain requirements concerning the provision by the LECs of
payphone-specific coding digits, which identify a call as originating from a
payphone. Without the transmission of payphone-specific coding digits, some of
the IXCs have claimed they are unable to identify a call as a payphone call
eligible for dial-around compensation. With the stated purpose of ensuring the
continued payment of dial-around compensation, the FCC’s Memorandum and Order
issued on April 3, 1998 left in place the requirement for payment of per-call
compensation for payphones on lines that do not transmit the requisite
payphone-specific coding digits but gave the IXCs a choice for computing the
amount of compensation for payphones on LEC lines not transmitting the
payphone-specific coding digits of either accurately computing per-call
compensation from their databases or paying per-phone, flat-rate compensation
computed by multiplying the $0.284 per call rate by the nationwide average
number of 800 subscriber and access code calls placed from RBOC payphones for
corresponding payment periods. Accurate payments made at the flat rate are not
subject to subsequent adjustment for actual call counts from the applicable
payphone.
On May
15, 1998, the Court again remanded the per-call compensation rate to the FCC for
further explanation without vacating the $0.284 per call rate. The Court opined
that the FCC had failed to explain adequately its derivation of the $0.284
default rate. The Court stated that any resulting overpayment may be subject to
refund and directed the FCC to conclude its proceedings within a six-month
period from the effective date of the Court’s decision.
In
response to the Court’s second remand, the FCC conducted further proceedings and
sought additional comment from interested parties to address the relevant issues
posed by the Court. On February 4, 1999, the FCC released the Third Report and
Order and Order on Reconsideration of the Second Report and Order, or 1999
Payphone Order, in which the FCC abandoned its efforts to derive a
“market-based” default dial-around compensation rate and instead adopted a
“cost-based” rate of $0.24 per dial-around call, which was to be adjusted to
$0.238 on April 21, 2002. On June 16, 2000, the Court affirmed the 1999 Payphone
Order setting a $0.24 dial-around compensation rate. On all the issues,
including those raised by the IXCs and the IPPs, the Court applied the
“arbitrary and capricious” standard of review and found that the FCC’s rulings
were lawful and sustainable under that standard. The new $0.24 rate became
effective April 21, 1999 and was applied retroactively to the period beginning
on October 7, 1997 and ending on April 20, 1999 (the “intermediate period”),
less a $0.002 amount to account for FLEX ANI payphone tracking costs, for a net
compensation rate of $0.238 per call.
In a
decision released January 31, 2002, or the 2002 Payphone Order, the FCC
partially addressed the remaining issues concerning the “true-up” required for
the earlier dial-around compensation periods. The FCC adjusted the per-call rate
to $0.229, for the interim period only, to reflect a different method of
calculating the delay in IXC payments to PSPs for the interim period, and
determined that the total interim period compensation rate should be $33.89 per
payphone per month. The 2002 Payphone Order deferred to a later order its
determination of the allocation of this total compensation rate among the
various carriers required to pay compensation for the interim period. In
addition to addressing the rate level for dial-around compensation, the FCC has
also addressed the issue of carrier responsibility with respect to dial-around
compensation payments.
On
October 23, 2002 the FCC released its Fifth Order on Reconsideration and Order
on Remand, or the Interim Order, which resolved all of the remaining issues
surrounding the interim/intermediate period true-up and specifically addressed
how the liability for flat rate monthly per-phone compensation owed to PSPs
would be allocated among the relevant dial-around carriers. The Interim Order
also resolved how certain offsets to such payments would be handled and a host
of other issues raised by parties in their remaining FCC challenges to the 1999
Payphone Order and the 2002 Payphone Order. In the Interim Order, the FCC
ordered a true-up for the interim period and increased the adjusted monthly rate
to $35.22 per payphone per month, to compensate for the three-month payment
delay inherent in the dial-around payment system. The new rate of $35.22 per
payphone per month is a composite rate, allocated among approximately five
hundred carriers based on their estimated dial-around traffic during the interim
period. The FCC also ordered a true-up requiring the PSPs, including Davel, to
refund an amount equal to $0.046 (the difference between the old $.284 rate and
the revised $.238 rate) to each carrier that compensated the PSP on a per-call
basis during the intermediate period. Interest on additional payments and
refunds is to be computed from the original payment due date at the IRS
prescribed rate applicable to late tax payments. The FCC further ruled that a
carrier claiming a refund from a PSP for the Intermediate Period must first
offset the amount claimed against any additional payment due to the PSP from
that carrier. Finally, the Interim Order provided that any net claimed refund
amount owing to carriers cannot be offset against future dial-around payments
without (1) prior notification and an opportunity to contest the claimed amount
in good faith (only uncontested amounts may be withheld); and (2) providing PSPs
an opportunity to “schedule” payments over a reasonable period of
time.
Davel and
its billing and collection clearinghouse have previously reviewed the order and
prepared the data necessary to bill or determine the amount due to the relevant
dial-around carriers pursuant to the Interim Order. Although Davel was entitled
to receive a substantial amount of additional dial-around compensation pursuant
to the Interim Order, such amounts, subject to certain limitations, were
assigned to Davel’s former secured lenders in exchange for a reduction in
Davel’s secured debt prior to the acquisition of such debt by Mobilepro (see the
discussion of the Gammino lawsuit in Item 3. “Legal Proceedings”).
On August
2, 2002 and September 2, 2002 respectively, the American Public Communications
Council, the APCC, and the Regional Bell Operating Companies, the RBOCs, filed
petitions with the FCC to revisit and increase the dial-around compensation rate
level. Using the FCC’s existing formula and adjusted only to reflect current
costs and call volumes, the APCC and RBOCs’ petitions supported an approximate
doubling of the current $0.24 rate. On August 12, 2004, the FCC released an
order to increase the dial-around compensation rate from $0.24 to $0.494 per
call, or the 2004 Order. The new rate became effective September 27, 2004, 30
days after publication of the 2004 Order in the Federal Register, and may be
subject to appeal by IXCs or other parties.
In an
order that became effective on July 1, 2004, the FCC imposed certain
requirements on facilities-based telecommunications carriers to ensure that
payphone providers are fairly compensated for every payphone originated call
that is completed. The requirements included establishing detailed
procedures for tracking payphone originated calls, engaging a third party
auditor to verify that these procedures are in place, filing annually a system
audit report with the FCC and making quarterly dial-around compensation payments
to payphone providers.
Regulatory
actions and market factors, often outside Davel’s control, could significantly
affect Davel’s dial-around compensation revenues. These factors include (i) the
possibility of administrative proceedings or litigation seeking to modify the
dial-around compensation rate, and (ii) ongoing technical or other difficulties
in the responsible carriers’ ability and willingness to properly track or pay
for dial-around calls actually delivered to them.
Effect of Federal Regulation of
Local Coin and Dial-Around Calls. To ensure “fair compensation” for local
coin calls, the FCC previously determined that local coin rates from payphones
should be generally deregulated by October 7, 1997, but provided for possible
modifications or exemptions from deregulation upon a detailed showing by an
individual state that there are market failures within the state that would not
allow market-based rates to develop. On July 1, 1997, a federal court issued an
order that upheld the FCC’s authority to deregulate local coin call rates. In
accordance with the FCC’s ruling and the court order, certain LECs and IPPs,
including Davel, have increased rates for local coin calls. Initially, when
Davel increased the local coin rate to $0.35, Davel experienced a large drop in
call volume. When Davel subsequently raised its local coin rates to $0.50, it
did not experience call volume declines at the same levels. Davel has
experienced, and continues to experience, lower coin call volumes on its
payphones resulting not only from increased local coin calling rates, but from
the growth in wireless communication services, changes in call traffic and the
geographic mix of Davel’s payphones, as well.
Other Provisions of The
Telecommunications Act and FCC Rules. As a whole, the 1996 Telecom Act
and FCC Rules significantly altered the competitive framework of the payphone
industry. Davel believes that implementation of the 1996 Telecom Act has
addressed certain historical inequities in the payphone marketplace and has, in
part, led to a more equitable and competitive environment for all payphone
providers. However, there remain several key areas of implementation of the 1996
Telecom Act yet to be fully and properly implemented such that the 1996
congressional mandate for widespread deployment of payphones is not being
realized. This circumstance creates an uncertain environment in which Davel and
the industry must operate. Davel has identified the following such
uncertainties:
Various
matters pending in several federal courts and raised before the Congress which,
while not directly challenging Section 276, relate to the validity and
constitutionality of the 1996 Telecom Act, as well as other uncertainties
related to the impact, timing and implementation of the 1996 Telecom
Act.
The 1996
Payphone Order required that LEC payphone operations be removed from the
regulated rate base on April 15, 1997. The LECs were also required to make the
access lines that are provided for their own payphones equally available to IPPs
and to ensure that the cost to payphone providers for obtaining local lines and
services met the FCC’s new services test guidelines, which require that LECs
price payphone access lines at the direct cost to the LEC plus a reasonable
allocation of overhead. Proceedings are still pending in various stages and
formats before the FCC and numerous state regulatory bodies across the nation to
implement these provisions.
In the
past, RBOCs were allegedly impaired in their ability to compete with the IPPs
because they were not permitted to select the interLATA carrier to serve their
payphones. Recent changes to the FCC Rules remove this restriction. Under the
existing rules, the RBOCs are now permitted to participate with the Location
Owner in selecting the carrier of interLATA services to their payphones;
effective upon FCC approval of each RBOC’s Comparably Efficient Interconnection
plans. Existing contracts between location owners and payphone or long-distance
providers that were in effect as of February 8, 1996 were grandfathered and will
remain in effect pursuant to their terms.
The 1996
Payphone Order preempts state regulations that may require IPPs to route
intraLATA calls to the LEC by containing provisions that allow all payphone
providers to select the intraLATA carrier of their choice. Outstanding questions
still exist with respect to 0+ local and 0 - call routing, whose classification
will await the outcome of various state regulatory proceedings or initiatives
and potential FCC action.
The 1996
Payphone Order determined that the administration of programs for maintaining
public interest payphones should be left to the states within certain
guidelines. Various state proceedings have been undertaken in reviewing this
issue, but no widespread or effective actions have been taken to stem the tide
of payphone removal around the nation. The FCC has pending various “universal
service” proposals under consideration, which may impact Davel, both positively
and negatively.
Billed Party Preference and Rate
Disclosure. On
January 29, 1998, the FCC released its Second Report and Order on
Reconsideration entitled In the Matter of Billed Party Preference for InterLATA
0+ Calls, Docket No. 92-77. Effective July 1, 1998, all carriers providing
operator services were required to give consumers using payphones the option of
receiving a rate quote before a call is connected when making a 0+ interstate
call. The system appears to be functioning adequately to meet its designated
goals.
State and Local Regulation.
State regulatory authorities have been primarily responsible for
regulating the rates, terms and conditions for intrastate payphone services.
Regulatory approval to operate payphones in a state typically involves
submission of a certification application and an agreement by Davel to comply
with applicable rules, regulations, and reporting requirements. The states and
the District of Columbia have adopted a variety of state-specific regulations
that govern rates charged for coin and non-coin calls, as well as a broad range
of technical and operational requirements. The 1996 Telecom Act contains
provisions that require all states to allow payphone competition on fair terms
for both LECs and IPPs. State authorities also in most cases regulate LEC
tariffs for interconnection of independent payphones, as well as the LECs’ own
payphone operations and practices.
Davel is
also affected by state regulation of operator services. Most states have capped
the rates that consumers can be charged for coin toll calls and non-coin local
and intrastate toll calls made from payphones. In addition, Davel must comply
with regulations designed to afford consumers notice at the payphone location of
the long-distance company or companies servicing the payphone and the ability to
access alternate carriers. Davel believes that it is currently in material
compliance with all such regulatory requirements.
Employees
As of
March 31, 2009 we employed 64 full-time employees. We have no collective
bargaining agreements with our employees. The breakout of full-time employees is
as follows:
Finance,
accounting, legal and administration
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4 employees
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Integrated
Telecom Business operations
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60
employees
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Item
1A. Risk Factors
Investing
in our securities involves a high degree of risk. Our business, financial
position and future results of operations may be impacted in a materially
adverse manner by risks associated with the execution of our strategic plan and
the creation of a profitable and cash-flow positive business, our ability to
obtain capital or to obtain capital on terms acceptable to us, the successful
integration of acquired companies into our consolidated operations, our ability
to successfully manage diverse operations remotely located, our ability to
successfully compete in highly competitive communications industries, rapid
technological change and the emerging services market, the effective protection
of our intellectual property rights, the successful resolution of ongoing
litigation, our dependence upon key managers and employees and our ability to
retain them, and potential fluctuations in quarterly operating results, among
other risks. Before investing in our securities, in addition to this summary of
risks, our future results may also be impacted by other risk factors listed from
time to time in our future filings with the SEC, including, but not limited to,
our Quarterly Reports on Form 10-Q.
Failure
to Consummate a Restructuring of our Debt with YA Global Would Cause a Material
Adverse Effect
We have
attempted to negotiate an extension of the maturity date and payment terms to
our existing debt owed to YA Global. Notwithstanding those negotiations, we have
been unsuccessful in obtaining an extension of the maturity date and payment
terms. As a result, Mobilepro is in default of its obligations under
the Convertible Debenture owed to YA Global and, given current market conditions
and Mobilepro’s financial condition, obtaining the required financing to retire
the Convertible Debenture is unlikely to occur in the immediate
future. YA Global has informed the Company that it intends to
exercise its rights as the Company’s senior secured creditor. Such
rights include, but are not limited to, foreclosing on the assets of the
Company. Additionally, if YA Global declares a default on the Convertible
Debenture, interest would accrue at the default rate of 24% per
annum. The Company does not have sufficient cash available to satisfy
the YA Global obligations and YA Global could potentially foreclose on the
Company’s assets. In such event, the Company may be forced to seek protection
under the applicable bankruptcy laws or seek some form of out of court
settlement with creditors and would likely be unable to continue as a going
concern.
We
Have Limited Cash Resources
We have
limited unrestricted cash available to sustain the Company’s ongoing
operations. Although the Company continues to generate cash from the
operations of its Integrated Telecom Business, such cash has been used to fund
the Company’s interest payments due to YA Global and is not sufficient to fund
the Company’s other debt service requirements, corporate overhead and the
expenses of ProGames. We do not have access to a line of credit or other funding
source to provide cash to fund the ongoing operations of the business, including
corporate overhead. Although the Company is taking aggressive measures to reduce
its expenses to avoid depleting its existing cash resources, there can be no
assurance that expenses can be reduced by an adequate amount. In the
event the Company does not obtain additional cash through the payment of monies
due and owing on notes receivable or arriving at the successful conclusion of
one or more of the District Court Litigation matters (see Item 3. – “Legal
Proceedings”), the Company may not be able to sustain its operations which would
result in a material adverse effect to our business and our stock
price.
Our
Limited Cash Resources May Preclude Continued Quotation on the Over-the-Counter
Bulletin Board
Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
“MOBL.” In order to
maintain the quotation on the Over-the-Counter Bulletin Board the Company must
be current in the reporting required to be filed with the Securities and
Exchange Commission under Section 13 or 15(d) of the Securities Exchange Act of
1934. Given the Company’s limited cash resources, the Company may not
be able to fund the cost of compliance in order to continue to timely satisfy
the reporting requirements. In such event, the Company’s would no longer satisfy
the requirements for quotation on the Over-the Counter Bulletin Board and may be
required instead to obtain a quotation on the Pink Sheets. This may make it more
difficult for investors in our common stock to sell shares to third parties or
to otherwise dispose of them and could cause our stock price to further
decline.
The
Sale of Portions of Our Business May Not Be Concluded and We May Not Have
Sufficient Cash to Continue Operations
We have
forecasted our operating cash requirements based on several important
assumptions. We have assumed that Gobility will succeed in selling some or all
of its assets, thus enabling Kite Networks to satisfy some or all of its
liabilities including the capital equipment leases or that the wireless networks
can be sold by Gobility to a party or parties that are capable of paying these
obligations or otherwise renegotiating the terms of the equipment leases in a
satisfactory manner. A sale of the wireless networks further assumes
that in addition to finding a willing and able buyer, Gobility can also
negotiate an assignment or other transfer of the existing equipment lease
obligations with the various leasing companies, as well as obtaining approval of
the various municipalities in which the wireless networks are deployed. The
Company understands that negotiations between potential buyers, Gobility and the
various equipment leasing companies have to date been difficult and lacking in
reasonable cooperation. As a result, despite the interest of
potential buyers, it may be difficult or impossible to negotiate a reasonable
settlement with certain equipment leasing companies. The lack of
reasonable cooperation by the equipment leasing companies could cause a
potential buyer to choose not to purchase the Gobility assets and have a
material adverse effect on the Company and its ability to continue as a going
concern.
If
Gobility is unsuccessful in facilitating a sale of some or all of its assets,
the Company will be unable to permanently eliminate the cash requirements
represented by the Wireless Networks Business as planned. In such an event, the
Company will not have sufficient cash to sustain operations without the
completion of the Integrated Telecom Business sale, raising
additional capital or arriving at the successful conclusion of one or more of
the District Court Litigation matters (see Item 3. - “Legal
Proceedings”).
On June
30, 2007, we executed an agreement to sell the Wireline Businesses (including
CloseCall, AFN and the ISP Business) to USA. We had assumed that the
sale of CloseCall and AFN would occur in accordance with the terms of the USA
Agreement. However, on January 14, 2008 we received notice from USA,
which purported to terminate the USA Agreement. In the event that the
Company is unsuccessful in closing the USA Agreement, or otherwise selling the
businesses to an alternative buyer or raising new capital, the Company will not
have sufficient cash to satisfy the cash requirements represented by the
Wireless Network Business, our corporate overhead and our debt obligations and
we could therefore suffer a material adverse effect to our
business.
Included
in its audit report on our consolidated financial statements included for the
fiscal year ended March 31, 2009, our independent registered public accounting
firm included a paragraph describing that there is substantial doubt about the
Company’s ability to continue as a going concern.
The
Failure of Gobility to Sell Assets May Result in Our Payment of Transferred
Liabilities and May Cause a Material Adverse Effect to our Business
In
December 2006, we engaged an investment banking firm to assist in evaluating
strategic alternatives for the Wireless Networks Business conducted by its Kite
Networks and Kite Broadband subsidiaries. Efforts to secure investment capital
for this business or to find a willing buyer resulted in the sale of the
Wireless Networks Business to Gobility on July 8, 2007. The purchase price was
$2.0 million, paid with a debenture convertible into shares of common stock of
Gobility. However, under the terms of the debenture, Gobility was required to
raise at least $3.0 million in cash no later than August 15, 2007. Gobility has
defaulted on the financing obligation under the debenture, providing us the
right to repurchase the wireless networks business with the surrender of the
debenture and the payment of a nominal additional amount.
Mobilepro
remains a co-obligor on certain capital leases transferred to Gobility. The
total principal balance of these leases was approximately $3,569,518 at March
31, 2008. Monthly payments on these capital leases totaled approximately
$175,000 at that time and they are currently more than twenty months in arrears.
In addition, Mobilepro was a co-purchaser of certain wireless network equipment
obtained by Kite Networks. The amount originally owed to the supplier of this
equipment for the purchase of this equipment was $1,591,978. The
Company entered into a forbearance agreement with the equipment vendor and
agreed to pay the equipment obligation over time, with interest at the prime
rate. In the event certain assets are sold by Gobility, the proceeds
of such asset sale will be used to satisfy all or a portion of the equipment
obligation.
On March
10, 2008 Gobility sold the assets of the wireless network in Longmont, Colorado
and the Company received the related proceeds in the form of promissory notes
from the purchaser totaling $1,800,000. Thereafter, in July 2008 Data Sales sold
certain of the leased assets to a third party, further reducing the total
principal balance of the leases by approximately $1,231,000. In connection with
the foregoing asset sale, the Company executed a promissory note and release
with Data Sales in the principal amount of $330,000. Although
Gobility has previously represented to us that it is pursuing the sale of its
remaining wireless network assets, we understand that Gobility has not yet
closed on the sale of those wireless networks and that it has defaulted in
making scheduled lease payments. If Gobility fails to consummate the sale of its
remaining wireless network assets and make the required payments on the
liabilities described above, it is likely that the creditors described above
will demand payment of the past due amounts from Mobilepro. As a
result of Gobility’s failure to satisfy the monthly lease obligations, two
leasing companies have commenced legal action against Mobilepro, which is
currently proceeding in its initial phases of discovery (see the Harborside
Litigation and Commonwealth Litigation in Paragraphs 4 and 8 of Item 3. “Legal
Proceedings”). Other leasing companies may also elect to commence legal action
and may elect to accelerate the payment date for the balance of the remaining
monthly payments. In such event, Mobilepro would not have sufficient
cash to satisfy the obligations to the leasing companies. Further, if
we were unsuccessful in defending lawsuits from the leasing companies and were
required to satisfy the obligations to the leasing companies, the Company may
not be able to meet its principal and interest payment obligations on the
convertible debenture and YA Global could potentially foreclose on the assets of
the Company.
We
Have Lost Money Historically Which Means That We May Not Be Able to Continue
Operations
The
Company has historically lost money. The Company’s accumulated deficit at March
31, 2009 was $106,992,868. In the years ended March 31, 2009, 2008 and 2007, the
Company sustained net losses of $11,360,021, $18,361,602, and $45,898,288,
respectively. Over this three-year period, most of the acquired businesses of
Mobilepro have experienced declining revenues. Although restructuring measures
have reduced other operating expenses, the Company had been unable to reduce the
corresponding costs of services. In addition, the Company has funded
the start-up and operations of the municipal wireless networks and online gaming
businesses without these companies achieving expected revenues and continues to
fund the Company’s corporate overhead. As a result, the amount of cash used in
operations during the fiscal year ended March 31, 2009 and 2008 was $70,223 and
$3,558,996, respectively. The decline in cash used in operation was largely due
to the reduction of corporate expenses, the elimination of cash used for
discontinued operations and $810,215 of regulatory receipts relating to claims
against certain telecommunications carriers of Davel, including $718,314
received from Qwest in the second quarter of fiscal 2009 (see Paragraph 6 of
Item 3. – “Legal Proceedings”). Future losses are likely to occur. Accordingly,
the Company will continue to experience liquidity and cash flow problems if it
is unable to improve its operating performance, to sell assets for cash
including the Integrated Telecom Business, or to raise additional capital as
needed and on acceptable terms.
If
YA Global or Other Large Stockholders Sell Part or All of Their Shares of Common
Stock in the Market, Such Sales May Cause Our Stock Price to
Decline
From time
to time, YA Global and other selling stockholders may sell in the public market
up to all of the shares of common stock owned at that time. Under the
Convertible Debenture, YA Global has the right to convert its debt into common
stock of the Company. We believe such shares can be sold by YA Global under Rule
144 of the Securities Act. YA Global has converted and sold 629,042,857 shares
of common stock during fiscal 2009 and has converted and sold at least
290,700,000 shares since March 31, 2009.
Any
significant downward pressure on our stock price caused by the sale of stock by
large selling stockholders could encourage short sales by third parties. Such
short sales could place further downward pressure on our stock
price.
Legal
Actions May Be Required by Us in order to Enforce Certain Legal
Rights
The
telecommunications industry includes hundreds of companies, many with
substantially greater infrastructure, financial, personnel, technical,
marketing, and other resources, and larger numbers of established customers and
more prominent name recognition than us. We transact business with certain of
these companies. In addition, certain of our businesses operate in areas of the
industry that are subject to federal and/or state regulations. As a result, in
order to enforce rights under negotiated contracts with transaction partners or
to obtain the benefits of certain government regulations, we may be forced to
initiate or to participate in legal action. For example, as discussed in Item 3,
Paragraph 2 - “Legal Proceedings”, Davel is engaged in a lengthy and expensive
legal process relating to the nonpayment of dial-around compensation by large,
long distance carriers. Using their greater resources, defendants have taken and
may in the future continue to take actions that stretch the duration of
litigation and substantially delay our receipt of the benefits of favorable
legal decisions. Furthermore, there can be no guarantee that the legal actions
taken by the Company will ultimately result in a favorable legal decision to the
Company.
Adverse
Decisions in Litigation Could Cause a Material Adverse Effect and/or Cause the
Company to Cease Operations
The
Company is a defendant in the Harborside Litigation and the Commonwealth
Litigation, which is described in Item 3 – “Legal
Proceedings”. Although the Company believes that it has meritorious
defenses to the claims raised in this and the other matters identified in Item 3
– “Legal Proceedings” and intends to vigorously defend itself in each matter,
there can be no guarantee that the Company will ultimately succeed in doing
so. If an adverse ruling is ultimately issued against the Company in
the Harborside Litigation and or the Commonwealth Litigation, we may not have
sufficient funds available to satisfy a judgment. In such event, the Company
could cease operations and/or be required to seek the protection of the
bankruptcy court to protect the interests of its secured creditor.
Similarly,
Davel and its subsidiaries are plaintiffs in the District Court Litigation in
which it seeks recovery of significant amounts of nonpaid dial around
compensation from large, long distance carriers. Although the Company believes
Davel’s litigation efforts will ultimately result in a favorable legal decision
in the District Court Litigation, there can be no guarantee that Davel will
ultimately succeed, or that it will ultimately recover, or timely recover,
significant amounts of money owed to it. In the event Davel is unable
to recover the monies owed to it for the non-payment of dial around
compensation, and the Company is otherwise unable to raise additional capital,
the Company could be forced to cease operations.
Further
Declines in the Economy May Adversely Affect our Operations and Impair Our
Ability to Generate Cash from and/or Sell the Integrated Telecom
Business
The U.S.
Economy has entered a recession, unemployment claims have increased and
consumers’ incomes have been reduced. Given our Integrated Telecom
Business ’s exposure to business travel (through its temporary housing and
hospitality business) and consumer welfare (through our residential business),
our business has been negatively affected and further declines in the economy
could materially adversely affect our Integrated Telecom Business, impairing our
ability to sell it at a price sufficient to retire our debt. Such
failure may cause us to further reduce the goodwill attributable to the
Integrated Telecom Business.
Poor
Operating Performance by the Companies With Which We have Notes Receivable May
Cause Us to Further “Write Down” the Carrying Value of our Notes Receivable,
Reducing the Book Value Per Share of Our Company
DHB
Networks, USA and Microlog all owe us money in the form of notes
receivable. If any or all of these three businesses has poor
operating performance and is unable to service the payments, we may be required
to take additional write downs of the carrying value of the notes
receivable. We have already taken write downs against the DHB and USA
notes. Such write downs would reduce the book value per share
of our Company.
Federal
Regulators Have Taken and May Take Positions in the Future with Which We
Disagree or Which We Believe are Contrary to Existing Law and Regulation, Which
May Impose Substantial Litigation Costs on Our Business, Impede Our Access to
Capital and/or Force Us to Seek a Merger Partner or Cease
Operations
As a
publicly traded telecommunications company, we are subject to the regulatory
scrutiny of both the FCC and the SEC. Both agencies are so-called
“administrative agencies” with statutory authority to implement and enforce laws
passed by the U.S. Congress. Despite this limited scope, both the FCC and SEC
have the ability to use discretion in certain cases both in interpreting what
the laws passed by Congress mean and when to enforce such laws. The FCC and/or
SEC may even take positions with which we disagree or which we believe are
unfounded in statute, regulation, or prior agency guidance and which are adverse
to Mobilepro. For instance, the FCC has been repeatedly overruled by federal
courts in recent years for misinterpretations of the 1996 Telecom Act. In order
to contest such behavior, Mobilepro may be forced to resort to litigation. In
the context of the SEC, Mobilepro’s ability to have any registration statement
“go effective” may be impeded if in its comments to a future registration
statement the SEC were to take a position with which we disagree based on prior
law, regulation or prior SEC interpretative guidance. The registration process
that resulted in our Form S-3 becoming effective in November 2006 commenced in
September 2005 with the filing of Form SB-2. The protracted registration process
included the filing of several registration statement amendments in order to
incorporate changes from the SEC received in a series of comment letters. If we
were to encounter similar difficulties and a prolonged registration process in
connection with a future registration statement, it could materially impair
Mobilepro’s access to the capital markets, potentially force Mobilepro to incur
substantial litigation related costs and may force Mobilepro to seek a merger
with another company or cease operations.
The
Federal and State Regulations under Which We Operate Could Change,
Resulting in Harm to Our Business
The
enactment of the 1996 Telecom Act significantly altered the regulatory landscape
in which our businesses operate. In addition, state regulators maintain
jurisdiction over certain of our services. We cannot predict whether future FCC
or state regulatory decisions may adversely affect our ability to operate
certain of our businesses or impact our profitability.
Although
the 1996 Telecom Act, as implemented by the FCC, addressed certain historical
inequities in the payphone marketplace, uncertainties relating to the impact and
timing of the implementation of this framework still exist. The uncertainty with
the greatest potential financial impact relates to revenue from and
collectability of access code calls and toll-free dialed calls, or dial around
compensation. Dial around compensation has previously accounted for a material
percentage of our revenues. Historically, many parties legally obligated by the
FCC to pay dial around compensation have nevertheless failed to do so. We
believe that such failures exist today. While we believe that we would have the
right to sue in order to collect amounts owed, such efforts may consume
management time and attention and our cash, and there can be no assurance that
such efforts would result in the collection of any additional amounts.
Consequently, such illegal nonpayment activities may adversely affect our cash
flows, receivable collectability, and future business
profitability.
In
addition, the FCC has issued recent orders concerning, among other things,
universal service contribution methodology and inter-carrier compensation. It is
unclear whether these orders will ultimately be implemented by the FCC, and if
implemented, what impact, if any, they will have for our Integrated Telecom
Business.
Our
Common Stock Is Deemed to Be “Penny Stock,” Which May Make It More Difficult for
Investors to Resell Their Shares Due to Suitability Requirements
Our
common stock is deemed to be “penny stock” as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. A penny stock has
the following characteristics:
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It
is traded at a price of less than $5.00 per share;
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•
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It
is not traded on a “recognized” national exchange;
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•
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Its
price is not quoted on the NASDAQ automated quotation system
(NASDAQ-listed stock must still have a price of not less than $5.00 per
share); or
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Its
issuer has net tangible assets less than $2.0 million (if the issuer has
been in continuous operation for at least three years) or $5.0 million (if
in continuous operation for less than three years), or has average annual
revenues of less than $6.0 million for the last three
years.
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Trading
of our stock may be restricted by the SEC’s penny stock regulations that may
limit a stockholder’s ability to buy and sell our stock.
The penny
stock rules impose additional sales practice requirements on broker-dealers who
sell to persons other than established customers and “accredited investors.” The
term “accredited investor” refers generally to institutions with assets in
excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 jointly with their spouse. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document in a form prepared by the SEC that provides information
about penny stocks and the nature and level of risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer’s account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information, must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer’s
confirmation. Moreover, broker/dealers are required to determine whether an
investment in a penny stock is a suitable investment for a prospective investor.
The penny stock rules require that prior to a transaction in a penny stock not
otherwise exempt from these rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser’s written agreement to the transaction.
These
disclosure requirements may have the effects of reducing the number of potential
investors and the level of trading activity in the secondary market for the
stock that is subject to these penny stock rules. Consequently, these penny
stock rules may affect the ability of broker-dealers to trade our securities.
This may make it more difficult for investors in our common stock to sell shares
to third parties or to otherwise dispose of them. This could cause our stock
price to decline. We believe that the penny stock rules discourage investor
interest in and limit the marketability of our common stock.
In
addition, the National Association of Securities Dealers, or NASD, has adopted
sales practice requirements that may also limit a stockholder’s ability to buy
and sell our stock. Before recommending an investment to a customer, a
broker-dealer must have reasonable grounds for believing that the investment is
suitable for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status,
tax status, investment objectives and other information. Under interpretations
of these rules, the NASD believes that there is a high probability that
speculative low priced securities will not be suitable for at least some
customers. The NASD requirements make it more difficult for broker-dealers to
recommend that their customers buy our common stock, which may limit investors’
ability to buy and sell our stock and have an adverse effect on the market for
our shares.
The
Unavailability of Telecommunication Lines Could Threaten Our
Business
Our
ability to deliver good quality services at competitive prices depends on our
ability to obtain access to T-l and dial-up lines pursuant to pricing and other
terms that are acceptable to us. Access to these lines necessary for providing
services to a significant portion of our subscribers is obtained from incumbent
local exchange carriers like Verizon and AT&T. To date, we have been
successful in reaching certain important agreements with each of these carriers
providing us with opportunities to expand services and the geographic coverage
of such services and predictable prices, avoiding any interruption in service to
our customers. In the event that any of the carriers would be unable or
unwilling to provide service to us, even if legally required to do so, our
ability to service existing customers or add new customers could be adversely
impaired in a material manner.
Our
Shareholders Have Authorized Our Board of Directors to Implement up to a
1-for-10 reverse Stock Split, which, if implemented, could cause you to have
fewer shares and lower total value of your shares
While, in theory, a
reverse stock split should cause a company's stock to increase by the reciprocal
of the amount of the reverse stock split, in practice there is no guarantee that
the stock price will indeed behave that way. Therefore, a reverse stock
split may cause a reduction in the value of your stock and further reduce the
market capitalization of the Company.
Item
1B. Unresolved Staff Comments
Not
applicable.
Item
2. Properties
Our
principal executive offices are located in approximately 1,040 square feet of
leased office space at 401 Professional Drive, Suite 128, Gaithersburg, Maryland
20879. The term of the lease expires on June 30, 2014.
In
addition, our subsidiary operations currently occupy leased office space in
locations around the country. A description of the occupancy terms for each of
our significant locations follows.
CloseCall
occupies approximately 14,000 square feet of leased office space in
Stevensville, Maryland, that includes management, finance, sales, and a customer
support call center under a lease with a term that has been extended by written
amendment to February 28, 2011.
AFN
occupies approximately 3,600 square feet of leased office space in Overland
Park, Kansas that includes management, finance, sales, and operations. The term
of the lease, as amended, expires on July 31, 2014.
Davel
occupies approximately 350 square feet of leased office space in Independence,
Ohio; the lease term expires on December 31,
2009. Approximately 4,000 square feet of storage space is also
rented in Cleveland on a month-to-month basis.
Item
3. Legal Proceedings
In
addition to certain other litigation arising in the normal course of its
business that we believe will not materially affect our financial position or
operating results, we were involved with the following legal proceedings during
the fiscal year ended March 31, 2009.
1) At the
time that we acquired Davel, there was existing litigation brought against Davel
and other defendants regarding a claim associated with certain alleged patent
infringement. Davel was named as a defendant in a civil action captioned Gammino
v. Cellco Partnership d/b/a Verizon Wireless, et al., C.A. No. 04-4303 filed in
the United States District Court for the Eastern District of Pennsylvania. The
plaintiff claimed that Davel and other defendants allegedly infringed its patent
involving the prevention of fraudulent long-distance telephone calls. The
plaintiff was seeking monetary relief of at least $7,500,000. Davel
did not believe that the allegations set forth in the complaint were valid, and
accordingly, Davel filed a Motion for Summary Judgment with the United States
District Court. On October 4, 2007 the United States District Court
granted Davel’s Motion for Summary Judgment and the Court entered final judgment
dismissing Plaintiff John R. Gammino’s claims for patent
infringement. On November 1, 2007, Plaintiff filed his Notice of
Appeal commencing an action in the United States Court of Appeal for the Federal
District. In response, Davel filed its appellate brief on February
26, 2008. Notwithstanding the pending appellate proceeding, in July
2008 the parties entered into a Settlement Agreement terminating the litigation
and providing a mutual release of claims, which ended the pending litigation
between the parties.
2) On
April 17, 2007, the Supreme Court of the United States issued an opinion in the
case captioned Global Crossing Telecommunications, Inc. v. Metrophones
Telecommunications, Inc. on Certiorari from the United States Court of Appeals
for the Ninth Circuit (the "Ninth Circuit" and the "Metrophones Case"), No.
05-705, in which it upheld the Ninth Circuit's decision that independent
payphone providers have a private right of action to pursue recovery in federal
court from telecommunication carriers who fail to pay dial around compensation.
The ruling in the Metrophones Case impacts litigation that has been pending in
federal district court against AT&T, Sprint and Qwest (the "Defendants") for
non-payment of dial around compensation (the “District Court Litigation”). Davel
Communications, Inc. and certain of Davel's subsidiaries (collectively, the
"Davel Entities") are directly or indirectly plaintiffs in the District Court
Litigation. Following the Supreme Court ruling in the Metrophones Case, AT&T
and Sprint filed with the United States Supreme Court a Petition for a Writ of
Certiorari No. 07-552 seeking review of the ruling of the United States Court of
Appeals for the District of Columbia Circuit that the plaintiffs had standing in
the District Court Litigation. On January 4, 2008 the United States
Supreme Court granted the Petition for a Writ of Certiorari. The
parties filed their respective briefs during the first calendar quarter of 2008,
with the United States Supreme Court hearing oral arguments on April 21, 2008.
On June 23, 2008, the United Stated Supreme Court issued a ruling affirming the
decision of the United States Court of Appeals. The recent ruling by
the United States Supreme Court has permitted the District Court Litigation to
move forward.
Although
the District Court Litigation has been pending since 1999, the litigation
remains in its preliminary phases. As a result, we cannot predict the likelihood
of success on the merits, the costs associated with the pursuit of the claims,
the timing of any recovery or the amount of recovery, if any. However, the
industry representing a group of independent payphone providers, including the
Davel Entities, has prevailed in a similar Federal Communications Commission
administrative proceeding against another carrier for non-payment of dial-around
compensation using a similar methodology which was accepted and pursuant to
which the Federal Communications Commission assessed pre-judgment interest (the
"Similar Litigation"). Based upon our methodology in the Similar Litigation, we
estimate that the amount in controversy for the Davel Entities against the
Defendants extends well into the eight figures, but any recovery is conditioned
on, among other things (i) prevailing on the merits at trial; (ii) having the
Davel Entities' damages model and other claims approved in whole or in large
part; (iii) prevailing on any appeals that the Defendants may make; and (iv) the
continued solvency of the Defendants. As evidenced by the more than ten years
that this litigation has been in process, the Defendants have shown an interest
in stretching the duration of the litigation and have the means to do so.
Although the Davel Entities could ultimately benefit (in an absolute sense,
although not necessarily on a present value basis) from this delay in the event
that pre-and/or post-judgment interest (awarded at 11.25% per annum in the
Similar Litigation) is assessed against the Defendants and the potential award
of attorneys' fees and/or other remedies (in addition to compensatory damages)
if the Davel Entities prevail, such delay will result in a deferral of the
receipt of any cash to the Davel Entities.
3) Under
the authority granted by the Management Agreement to USA, CloseCall America
filed a complaint in the Circuit Court for Howard County, Maryland, against
Skyrocket Communications, Inc. (“Skyrocket”) Case No. 13-C-07-70296 for breach
of contract and unjust enrichment (the “Skyrocket
Litigation”). CloseCall’s claim arose from an unpaid credit owing to
CloseCall in the amount of $23,914 owed under a terminated technical support
services agreement. In response thereto, Skyrocket filed a
counter-claim alleging breach of contract and asserting damages in the amount of
$1.5 million. In January 2008 Skyrocket filed an amended
counter-complaint asserting an additional claim for intentional
misrepresentation, seeking $5 million in actual damages and $5 million in
punitive damages. Based upon our belief that the counter-claim and
amended counter-claims are without merit, CloseCall filed a motion for summary
judgment. The Court granted CloseCall’s motion on the amended
counter-claim and dismissed Skyrocket’s claim for intentional
misrepresentation. The Skyrocket Litigation was scheduled for trial
on February 9, 2009. During the trial, the court granted CloseCall’s
motion for judgment on the claims alleged in the counter-complaint, leaving
CloseCall’s breach of contract and unjust enrichment claims to be determined by
the jury. After deliberation on the claims against Skyrocket, the
jury returned a verdict in favor of CloseCall. Thereafter, Skyrocket
filed an appeal of the jury verdict. Notwithstanding the favorable
trial court ruling in CloseCall’s favor, in April 2009 the parties entered into
a Settlement Agreement terminating the litigation and providing a mutual release
of claims, which ended the pending litigation between the parties.
4) On or
about March 15, 2008 we were served with a summons and complaint in the Superior
Court of New Jersey in Bergen County captioned Harborside Investments III LLC
vs. Mobilepro Corp. and NeoReach, Inc. The plaintiff alleges claims
of breach of agreement and unjust enrichment arising out of an equipment lease
agreement for wireless equipment and seeks damages in the amount of $976,361
(the “Harborside Litigation”). On or about April 28, 2008 the
Company filed its answer, separate defenses and third party complaint against
JTA Leasing Co., LLC. Although discovery has commenced, the
Harborside Litigation remains in its initial stages. Although we
believe Mobilepro has meritorious defenses to the alleged claims and we intend
to vigorously defend ourselves in this matter we cannot predict the likelihood
of success in the Harborside Litigation. The Company has recorded the liability
for the estimated principal balance relating to this capital lease obligation
and the related accrued interest which is included in current liabilities in the
Company’s consolidated balance sheets at March 31, 2009 and 2008.
5) On
March 4, 2008 the Company filed a complaint in the Circuit Court of Madison
County, Mississippi against Telava Networks, Inc. d/b/a Telava Wireless/Network,
Inc. (“Telava”) asserting claims against Telava for breach of contract and
tortuous breach of contract in connection with a June 2007 purchase agreement
pursuant to which Telava agreed to purchase Mobilepro’s interests in Kite
Networks and the rest of our wireless business. The Company seeks
recovery of all available damages including, but not limited to, actual,
consequential general, expectancy and punitive damages. Telava filed
a motion to remove the case to the United States District Court for the Southern
District of Mississippi, Jackson Division after which it filed an answer denying
the substantive claims made by Mobilepro and asserting certain affirmative
defenses to the claims. On or about September 30, 2008 the parties entered into
a joint stipulation of dismissal, without prejudice. The dismissal
agreement ends the existing litigation while preserving the Company’s right to
re-assert the claims at a later date if the Company so elects.
6) Davel
and certain of its wholly owned subsidiaries have been plaintiffs in a complaint
filed against Qwest Corporation (“Qwest” and the “Qwest Litigation”) in the
United States District Court for the Western District of Washington alleging
various claims concerning Qwest’s billings to the plaintiffs from 1997 to 2003
for certain communication services from Qwest. The proceeding had previously
been stayed through January 2008 to permit the Federal Communications Commission
to issue a ruling that would provide the court guidance concerning the billing
matters at issue in the Qwest Litigation. Despite the failure of the Federal
Communications Commission to timely issue the guidance sought by the district
court, on or about September 30, 2008 the parties entered into a Settlement
Agreement to resolve the Qwest Litigation. The proceeds received as a
result of the Settlement Agreement had previously been assigned to the former
lenders of Davel pursuant to the acquisition and related agreements between the
Company and former secured lenders of Davel. As a result of a
modification to certain agreements between the Company and the former lenders in
December 2007, the Company was permitted to retain $718,314 of the settlement
proceeds.
7) On
January 7, 2009 the Company received notice that it and its subsidiaries, AFN
and CloseCall, had been served with a summons and complaint in the York County
Superior Court in Maine by Nationwide Acquisition Corp. (“Nationwide”) and L.
William Fogg (“Fogg” and the “Complaint”). Fogg is a former executive
officer of USA and allegedly the owner of Nationwide, the company which
allegedly now owns the ISP Business acquired by USA from the Company. Pursuant
to an agreement between USA and Fogg, Fogg allegedly acquired the ISP Business,
agreed to indemnify USA for all of USA’s liabilities under the USA Note and
agreed to indemnify and hold USA harmless against any loss, damage or expense
arising out of the USA Note. Nationwide and its related companies
also agreed to indemnify USA for various USA debts or liabilities outstanding as
of June 4, 2008.
The
Complaint is an action for declaratory relief to resolve certain disputes among
the Company, CloseCall, AFN, USA, Nationwide and Fogg, including, among other
things, the payment of the past due amount under the USA Note. Nationwide and
Fogg allege that the Company made certain misrepresentations in connection with
the USA Agreement for which USA and/or Fogg are entitled to set-off against the
past due amount. The Company believes that the claims alleged in the
Complaint are a tactic to further delay payment of the past due
amount.
On
February 10, 2009 the Company filed its answer to the declaratory relief
complaint, together with cross-claims against USA for (i) the payment default
under the terms of the USA Note, (ii) anticipatory repudiation and breach of the
USA Agreement, (iii) breach of the USA Management Agreement and a related
services agreement, (iii) negligent and intentional misrepresentation in
connection with the USA Agreement, (iv) breach of fiduciary duty, (v)
indemnification under the USA Agreement, (vi) restitution and unjust enrichment
under the USA Management Agreement, (vii) conversion and (viii) securities fraud
under the Maine Uniform Securities Act and Section 10 (b) of the Securities
Exchange Act. In the same pleading, Mobilepro also brought
counterclaims against Nationwide and Fogg for (i) the payment default under the
terms of the USA Note, (ii) breach of a non-disclosure agreement executed in
connection with the USA Agreement, (iii) breach of fiduciary duty and duty of
good faith in connection with the USA Management Agreement, (iv) intentional
misrepresentation in connection with the USA Agreement, (v) restitution and
unjust enrichment under the USA Management Agreement, (vi) securities
fraud under the Maine Uniform Securities Act and Section 10 (b) of the
Securities Exchange Act and (vii) injunctive relief.
On June
8, 2009 the parties participated in a mediation of the claims raised in the
declaratory relief proceeding and the cross-claims alleged by the Company
against USA. As a result of the mediation efforts, the parties agreed
to settle their claims. The settlement agreement is subject to
further documentation which is expected to be finalized by the parties on or
before June 30, 2009.
8) On or
about March 24, 2009 we were served with a summons and complaint in the District
Court of Arizona the Phoenix Division captioned Commonwealth Capital Corp. vs.
City of Tempe, Mobilepro Corp. and NeoReach, Inc. The plaintiff
alleges claims of breach of agreement arising out of an equipment lease
agreement for wireless equipment and seeks damages in an amount in excess of
$904,620 (the “Commonwealth Litigation”). In response thereto, the Company filed
counterclaims against the plaintiff for tortious interference with business
expectancy and breach of the duty of good faith and fair dealing. The
Commonwealth Litigation remains in its initial stages. Although we
believe Mobilepro has meritorious defenses to the alleged claims and we intend
to vigorously defend ourselves in this matter we cannot predict the likelihood
of success in the Commonwealth Litigation. The Company has recorded the
liability for the estimated principal balance relating to this capital lease
obligation and the related accrued interest which is included in current
liabilities in the Company’s consolidated balance sheets at March 31, 2009 and
2008.
9) On or
about June 1, 2009 we were served with a summons and complaint in the Circuit
Court for Montgomery County, Maryland captioned Thomas E. Mazerski vs. Mobilepro
Corp and CloseCall America, Inc. The plaintiff alleges claims of
breach of an employment agreement and seeks the payment of certain wages,
bonuses and legal fees totaling $270,414.28. The plaintiff
further alleges that he is entitled to seek treble damages for his wage claim
under the provisions of the Maryland Labor and Employment Section 3-507(b)
(1). The Company is currently evaluating the defenses and
counterclaims which it intends to assert against the Plaintiff
.. Although we believe Mobilepro and CloseCall have meritorious
defenses to the alleged claims and we intend to vigorously defend ourselves in
this matter we cannot predict the likelihood of success in this
matter.
10) On
or about June 5, 2009 we were served with a summons and complaint in the Circuit
Court for Montgomery County, Maryland captioned Richard Ramlall vs. Mobilepro
Corp and CloseCall America, Inc. The plaintiff, an employee of a
competitor to the Integrated Telecom Business, RCN, alleges that he is owed a
bonus in the amount of $48,333. The plaintiff further alleges that he
is entitled to seek treble dames for his wage claim under the provisions of the
Maryland Labor and Employment Section 3-507(b) (1). The
Company is currently evaluating the defenses which it intends to assert against
the Plaintiff . Although we believe Mobilepro and CloseCall have
meritorious defenses to the alleged claims and we intend to vigorously defend
ourselves in this matter we cannot predict the likelihood of success in this
matter.
11) Other
Ongoing and Threatened Litigation
The
Company is involved in other claims and litigation arising in the ordinary
course of business, which it does not expect to materially affect its financial
position or results of operations. The Company has been threatened by several
former employees with litigation; however, to date, no litigation or other
action has commenced than described above which is material to the
Company. The Company and its subsidiaries are involved from time to
time in disputes with industry providers which are typically resolved through
negotiations. One such industry provider has asserted certain amounts
are owed by AFN. Although AFN has disputed such amounts and does not
believe the amount owed to the industry provider is material, if the dispute is
not resolved through negotiations and is adversely determined against AFN, such
amount could be material.
Item
4. Submission of Matters to a Vote of Security Holders
None.
PART
II
Item
5. Market for Registrant’s Common Equity and Related Stockholder
Matters
Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
“MOBL.” The following
table sets forth the high and low closing prices for the common stock for each
calendar quarter since April 1, 2006, as reported by the National Quotation
Bureau.
|
Price
Per Share
|
|
|
High
|
|
Low
|
|
2006
|
|
|
|
|
April
1, 2006 - June 30, 2006
|
$0.2600
|
|
$0.1710
|
|
July
1, 2006 - September 30, 2006
|
$0.1990
|
|
$0.1050
|
|
October
1, 2006 - December 31, 2006
|
$0.1490
|
|
$0.0650
|
|
2007
|
|
|
|
|
January
1, 2007 - March 31, 2007
|
$0.0760
|
|
$0.0302
|
|
April
1, 2007 - June 30, 2007
|
$0.0430
|
|
$0.0161
|
|
July
1, 2007 - September 30, 2007
|
$0.0390
|
|
$0.0070
|
|
October
1, 2007 – December 31, 2007
|
$0.0089
|
|
$0.0019
|
|
2008
|
|
|
|
|
January
1, 2008 - March 31, 2008
|
$0.0050
|
|
$0.0020
|
|
April
1, 2008 - June 30, 2008
|
$0.0030
|
|
$0.0012
|
|
July
1, 2008 – September 30, 2008
|
$0.0024
|
|
$0.0004
|
|
October
1, 2008 – December 31, 2008
|
$0.0008
|
|
$0.0003
|
|
2009
|
|
|
|
|
January
1, 2009 – March 31, 2009
|
$0.0007
|
|
$0.0003
|
|
April
1, 2009 – June 3, 2009
|
$0.0004
|
|
$0.0002
|
|
Stockholders
As of
March 31, 2009, there were approximately 746 registered holders of record
of our common stock. We believe that a substantially greater number of holders
of our common stock are “street name” or beneficial holders, whose shares are
held of record by banks, brokers, and other financial institutions. Including
such holders, we believe that there may be more than 10,000 holders of our
common stock as of March 31, 2009.
On
December 19, 2008, at our Annual Meeting of Stockholders, our stockholders voted
to increase the number of authorized shares of capital stock from 1,500,000,000
shares to 3,000,000,000 shares. Our stockholders also voted in favor of amending
our certificate of incorporation to permit a reverse stock split by a ratio of
not less than one for two and not more than one for ten, with the exact ratio to
be set within that range at the discretion of the Company’s Board of Directors.
The Board of Directors has not yet authorized the reverse stock split nor the
ratio to be used in the event a reverse stock split is executed by the
Company.
Dividends
We have
never declared or paid cash dividends on our common stock. We currently intend
to retain all available funds and any future earnings to fund the ongoing
operations and growth of our business and do not anticipate declaring or paying
any cash dividends on our common stock in the foreseeable future.
Stock
Price Performance Graph
Recent
Sales of Unregistered Securities
In the
period November 27, 2006 through May 10, 2007, the Company issued a total of
55,089,635 unregistered shares of its common stock to YA Global in satisfaction
of its obligation under the Amended Debenture to make weekly installment
principal payments plus interest in the total amount of $3,252,649.
In the
period January 11, 2007 through May 10, 2007, the Company issued a total of
120,689,655 unregistered shares of its common stock to YA Global in satisfaction
of its obligation under the Secured Debenture to make weekly installment
principal payments plus interest in the total amount of $3,595,740.
On August
27, 2007, the Board of Directors approved the issuance of up to 19,000,000
shares of common stock as follows: a warrant for up to 10,000,000 shares of
common stock to Jay O. Wright, Chairman of the Board and Chief Executive
Officer; a warrant to each of Richard H. Deily, former Chief Accounting Officer,
and Tammy L. Martin, Chief Administrative Officer and General Counsel, for
3,000,000 shares of common stock; and 1,000,000 shares of common stock to each
of the independent directors, Donald Sledge, Michael O’Neil and Christopher
MacFarland. The exercise price for each warrant is $0.0075 per
share.
On
November 5, 2007, the Company’s Board of Directors approved the award of
warrants, exercisable at a purchase price of $0.0089 per share, to purchase
1,000,000 shares of its common stock to Donald Paliwoda, the Company’s Chief
Accounting Officer.
On May
26, 2008, the Board of Directors approved the issuance of up to 36,850,000
shares of common stock as follows: a warrant for up to 20,000,000 shares of
common stock to Jay O. Wright, Chairman of the Board and Chief Executive
Officer, a warrant to each of Douglas Bethell, President of CloseCall and AFN,
and Tammy L. Martin, Chief Administrative Officer and General Counsel, for
4,000,000 shares of common stock, a warrant for up to 1,750,000 shares of common
stock to Donald Paliwoda, the Company’s Chief Accounting Officer, a warrant for
up to 1,500,000 shares of common stock to its independent director, Donald
Sledge, and warrants totaling 5,600,000 to nine non-executive employees of the
Company. The exercise price for each warrant is $0.0016 per share.
On June
30, 2008, in connection with the issuance of the Convertible Debenture, the
Company granted to YA Global a seven-year warrant to purchase 25,000,000 shares
of its common stock at an exercise price of $0.04973 per share which expires on
June 30, 2015. In addition, the outstanding warrants previously granted to YA
Global to purchase 15,000,000 share of common stock at $0.20 per share and
10,000,000 shares of common stock at $0.174 per share were repriced and are now
exercisable at a price of $0.04973 per share.
On
January 19, 2009, the Company and its newly formed subsidiary, MWS Newco, Inc.,
consummated the terms of an asset purchase agreement with MobileWebSurf to
acquire certain mobile email, texting and social networking software products
and related intellectual property technology (the “Acquired Assets”). As
consideration for the Acquired Assets, MobileWebSurf received
5,000,000 shares of the Company’s common stock valued at $2,500 and a nineteen
percent ownership interest in MWS Newco, Inc.
In the
twelve months ended March 31, 2009, the Company issued 629,042,857 shares of its
common stock resulting in the reduction of $324,840 in principal owed to YA
Global relating to the Convertible Debenture. Subsequent to March 31, 2009, the
Company issued 290,700,000 additional shares of common stock which resulted in
the reduction of $87,710 of additional principal owed to YA Global. We believe
such shares are tradable by YA Global pursuant to Rule 144 of the Securities Act
of 1933.
On April
29, 2009, the Company granted warrants to purchase 37,000,000 shares of common
stock at an exercise price of $0.0003 per share to certain officers, directors
and management personnel.
Except as
otherwise noted, the securities described in this Item were issued pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933 and/or Regulation D promulgated under the Securities Act. Each such
issuance was made pursuant to individual contracts that are discrete from one
another and are made only with persons who were sophisticated in such
transactions and who had knowledge of and access to sufficient information about
Mobilepro to make an informed investment decision. Among this information was
the fact that the securities were restricted securities.
Item
6. Selected Financial Data
The
following information as of March 31, 2009 and 2008 and for the fiscal years
ended March 31, 2009, 2008 and 2007 was taken from the audited financial
statements appearing elsewhere in this annual report. The information as of
March 31, 2007, 2006 and 2005 and for the fiscal years ended March 31, 2006 and
2005 was derived from the audited financial statements included in annual
reports previously filed with the SEC. This information should be read in
conjunction with such financial statements and the notes thereto.
|
|
Fiscal
Years Ended March 31
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Statement
of Operations Data (1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
30,857,981 |
|
|
$ |
45,770,689 |
|
|
$ |
62,559,174 |
|
|
$ |
72,356,452 |
|
|
$ |
32,624,084 |
|
Operating
Costs and Expenses (3)
|
|
|
32,697,766 |
|
|
|
51,119,349 |
|
|
|
71,538,674 |
|
|
|
72,442,818 |
|
|
|
35,639,758 |
|
Asset
Impairment Charges
|
|
|
8,764,065 |
|
|
|
- |
|
|
|
1,573,795 |
|
|
|
1,818,909 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
|
(10,603,850
|
) |
|
|
(5,348,660
|
) |
|
|
(10,553,295
|
) |
|
|
(1,905,275
|
) |
|
|
(3,015,674
|
) |
Interest
and Other Expense, net
|
|
|
(1,657,309
|
) |
|
|
(1,821,024
|
) |
|
|
(2,474,309
|
) |
|
|
(2,798,159
|
) |
|
|
(1,680,692
|
) |
Loss
on Extinguishment of Debt
|
|
|
- |
|
|
|
- |
|
|
|
(409,601
|
) |
|
|
- |
|
|
|
- |
|
Loss
on Sale of Assets
|
|
|
- |
|
|
|
(2,778,906
|
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loss
from Continuing Operations
|
|
|
(12,261,159
|
) |
|
|
(9,948,590
|
) |
|
|
(13,437,205
|
) |
|
|
(4,703,434
|
) |
|
|
(4,696,366
|
) |
Income
(Loss) from Discontinued Operations (4)
|
|
|
901,138 |
|
|
|
(8,413,012
|
) |
|
|
(32,461,083
|
) |
|
|
(5,472,973
|
) |
|
|
(663,356
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(11,360,021 |
) |
|
$ |
(18,361,602 |
) |
|
$ |
(45,898,288 |
) |
|
$ |
(10,176,407 |
) |
|
$ |
(5,359,722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) per Common Share, Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
(0.0131 |
) |
|
$ |
(0.0129 |
) |
|
$ |
(0.0222 |
) |
|
$ |
(0.0115 |
) |
|
$ |
(0.0162 |
) |
Discontinued
Operations
|
|
|
0.0010 |
|
|
|
(0.0109
|
) |
|
|
(0.0538
|
) |
|
|
(0.0133
|
) |
|
|
(0.0023
|
) |
Net
Loss per Common Share
|
|
$ |
(0.0121 |
) |
|
$ |
(0.0238 |
) |
|
$ |
(0.0760 |
) |
|
$ |
(0.0248 |
) |
|
$ |
(0.0185 |
) |
|
|
March
31
2009
|
|
|
March
31
2008
|
|
|
March
31
2007
|
|
|
March
31
2006
|
|
|
March
31
2005
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$ |
1,419,130 |
|
|
$ |
2,075,117 |
|
|
$ |
3,098,113 |
|
|
$ |
4,994,248 |
|
|
$ |
4,435,574 |
|
Other
Current Assets
|
|
|
5,287,390 |
|
|
|
7,246,542 |
|
|
|
10,915,691 |
|
|
|
10,915,045 |
|
|
|
14,228,280 |
|
Assets
of Companies Held for Sale (5)
|
|
|
- |
|
|
|
- |
|
|
|
22,400,956 |
|
|
|
42,196,164 |
|
|
|
18,119,943 |
|
Goodwill,
Net of Impairment
|
|
|
11,767,213 |
|
|
|
20,531,278 |
|
|
|
20,531,278 |
|
|
|
20,231,278 |
|
|
|
18,543,703 |
|
Other
Non-Current Assets
|
|
|
2,168,970 |
|
|
|
3,538,016 |
|
|
|
12,362,883 |
|
|
|
15,654,318 |
|
|
|
17,495,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
20,642,703 |
|
|
$ |
33,390,953 |
|
|
$ |
69,308,921 |
|
|
$ |
93,991,053 |
|
|
$ |
72,822,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Portion of Debentures and Other Long-term Debt
|
|
$ |
16,033,615 |
|
|
$ |
17,159,180 |
|
|
$ |
15,163,593 |
|
|
$ |
8,142,786 |
|
|
$ |
24,558,387 |
|
Other
Current Liabilities
|
|
|
7,579,223 |
|
|
|
8,153,837 |
|
|
|
15,594,025 |
|
|
|
14,786,523 |
|
|
|
19,157,596 |
|
Liabilities
of Companies Held for Sale
|
|
|
- |
|
|
|
- |
|
|
|
13,355,291 |
|
|
|
7,691,843 |
|
|
|
6,050,394 |
|
Long-term
Debt, less current portion
|
|
|
1,257,457 |
|
|
|
1,380,900 |
|
|
|
3,237,744 |
|
|
|
10,540,694 |
|
|
|
101,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
24,870,295 |
|
|
|
26,693,917 |
|
|
|
47,350,653 |
|
|
|
41,161,846 |
|
|
|
49,868,278 |
|
Minority
Interests
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
600,000 |
|
Total
Stockholders’ Equity (Deficit)
|
|
|
(4,227,592
|
) |
|
|
6,697,036 |
|
|
|
21,958,268 |
|
|
|
52,829,207 |
|
|
|
22,354,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity (Deficit)
|
|
$ |
20,642,703 |
|
|
$ |
33,390,953 |
|
|
$ |
69,308,921 |
|
|
$ |
93,991,053 |
|
|
$ |
72,822,931 |
|
(1)
Includes the results of operations of acquired companies following their
respective dates of acquisition (see Note 1 to the accompanying Consolidated
Financial Statements).
(2)
Reclassifications have been made to prior year amounts for presentation of
discontinued operations.
(3)
Includes compensation expense related to the adoption of FAS 123R of $97,663,
$843,962 and $1,623,714 in the fiscal years ended March 31, 2009, 2008 and 2007,
respectively.
(4)
Includes asset impairment charges from discontinued operations of $25,702,192
and $2,627,635 in the fiscal years ended March 31, 2007 and 2006, respectively.
No additional charges were recorded in the fiscal years ended March 31, 2009,
2008 and 2005.
(5)
Includes goodwill, net of impairment charges, of $9,015,796, $27,556,889, and
$14,035,396 at March 31, 2007, 2006 and 2005, respectively.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operation
The
following information should be read in conjunction with the audited
consolidated financial statements of Mobilepro Corp. and the notes thereto
appearing elsewhere in this filing. Statements in this “Management’s Discussion
and Analysis of Results of Operation and Financial Condition” and elsewhere in
this report that are not statements of historical or current fact constitute
“forward-looking statements.”
The
following is a discussion and analysis of 1) our results of operations for the
fiscal years ended March 31, 2009, 2008 and 2007, 2) our financial position at
March 31, 2009, and 3) the factors that could affect our future financial
condition and results of operations. Historical results may not be indicative of
future performance.
Overview
Mobilepro
Corp., incorporated under the laws of the State of Delaware in July 2000, is a
holding company with subsidiaries in the telecommunications, pay telephone and
online gaming industries and an affiliate in the software industry. We
previously operated in three industry segments prior to the sale of our
broadband wireless and Internet subsidiaries as discussed below. Together with
its consolidated subsidiaries, Mobilepro Corp. is hereinafter referred to as
“Mobilepro” or the “Company”.
The
Company’s voice services segment has included the operations of CloseCall
America, Inc. (“CloseCall”), a Stevensville, Maryland-based integrated
telecommunications carrier , Davel Communications, Inc. (“Davel”), a
Cleveland, Ohio-based independent payphone provider, and American Fiber Network,
Inc. (“AFN”), an integrated telecommunications carrier and data processor based
in Overland Park, Kansas. The Company’s Internet services segment previously
included DFW Internet Services, Inc. (“DFW”, doing business as Nationwide
Internet), an Irving, Texas-based Internet services provider, its acquired
Internet service provider subsidiaries, and InReach Internet, Inc. (“InReach”),
an Internet service provider based in Stockton, California. The Company’s
municipal wireless networks operations were conducted primarily by a wholly
owned subsidiary, NeoReach, Inc. (“NeoReach”), and its subsidiary, Kite
Networks, Inc. (“Kite Networks”, formerly known as NeoReach Wireless, Inc.). The
wireless networks segment also included the operations of the Company’s
subsidiary, Kite Broadband, LLC (“Kite Broadband”), a broadband wireless service
provider. Both Kite Networks and Kite Broadband were based in Ridgeland,
Mississippi. The corporate segment has included our Internet gaming and mobile
content subsidiary, ProGames Network, Inc. (“ProGames”), that we founded in
December 2005.
On June
30, 2007, the Company entered into a Purchase Agreement (the “USA Agreement”)
with United Systems Access, Inc. (“USA”), pursuant to which USA agreed to
acquire all of the outstanding shares of CloseCall and AFN (the Company’s
“Integrated Telecom Business”, which was previously included in the voice
services business segment) and all of the outstanding shares of DFW and InReach
(together these companies comprised the Company’s Internet services provider
business segment, or “ISP Business”). The sale of the ISP Business was completed
on July 18, 2007. The sale of the Integrated Telecom Business was subject to the
receipt of certain regulatory approvals, which was originally expected to be
obtained by the end of calendar year 2007. On January 14, 2008, the
Company received notice from USA purporting to terminate the USA Agreement with
respect to the sale of the Integrated Telecom Business, but provided that USA
remained interested in discussing terms upon which it would purchase the
Integrated Telecom Business (see “Sale of the ISP and Integrated Telecom
Business” below). USA was unable to complete the purchase on terms acceptable to
the Company and, as a result of this default, the Company subsequently
terminated the sale of its Integrated Telecom Business to USA.
On July
8, 2007, the Company entered into a Purchase Agreement (the “Gobility
Agreement”) with Gobility, Inc. (“Gobility”), pursuant to which Gobility
acquired all of the outstanding shares of NeoReach and Kite Networks, and all of
the outstanding membership interests in Kite Broadband (together these companies
have comprised the Company’s wireless networks business segment, or “Wireless
Networks Business”). As further discussed below, Gobility is in default with
respect to its obligation to obtain funding and to pay amounts due under certain
equipment obligations and leases for which the Company is a co-obligor. The
Company is currently cooperating with Gobility in its efforts to sell the assets
of Kite Networks in order to satisfy these obligations (see “Sale of Wireless
Networks Business “ below).
On June
30, 2007, Davel sold approximately 730 operating payphones to an unaffiliated
payphone operator. On September 7, 2007, Davel sold an additional 21,405
payphones to Sterling Payphones, LLC (“Sterling”). Sterling also assumed certain
liabilities of Davel. Effective September 30, 2007, Davel sold an additional 300
payphones. Following these transactions, Davel’s remaining operations have been
significantly reduced. Davel’s remaining operations are being continued and
Davel is pursuing the recovery of certain claims including the AT&T
Corporation (“AT&T”), Sprint Communications Company, LP (“Sprint”) and Qwest
Communications Company, Inc. (“Qwest”) claims described in Item 3, “Legal
Proceedings”.
Current Business
Conditions
Our
acquisition strategy that began five years ago was executed with one primary
objective being the establishment of a viable telecommunications company with
sufficient credibility to be considered for selection by cities for the
deployment, ownership and management of broadband wireless networks. The
effectiveness of our business plan execution was initially confirmed by the
selection by Tempe, Arizona of Kite Networks (formerly NeoReach Wireless) for
its network. Subsequently, we were selected by several other cities for the
deployment, ownership, and management of such networks and substantially
completed citywide wireless networks deployments in Farmers’ Branch, Texas, and
Longmont, Colorado.
However,
most of our acquired businesses, including the Wireless Networks Business,
experienced declining revenues. Although restructuring measures helped to
control other operating expenses, we were unable to reduce the corresponding
costs of services sufficiently to maintain profitability. In
addition, we funded the start-up and operations of the municipal wireless
networks and online gaming businesses without these companies achieving expected
revenues. Because the cash required to fund the continuing operating losses and
to complete the build-out of planned municipal wireless networks exceeded the
Company’s available capital, the Company signed agreements to sell substantial
portions of its operations to several unaffiliated buyers during the fiscal year
ended March 31, 2008.
The
Company has historically lost money. Our accumulated deficit at March
31, 2009 was $106,992,868. In the fiscal years ended March 31, 2009, 2008 and
2007, we sustained net losses of $11,360,021, $18,361,602 and $45,898,288,
respectively. In addition, the amounts of cash used in operations
during fiscal years ended March 31, 2009, 2008 and 2007 were $70,223, $3,558,996
and $6,558,708, respectively. The decline in cash used in operation was largely
due to the reduction in corporate expenses and the elimination of cash used for
discontinued operations. The Company also received $810,215 of receipts in the
fiscal year ended March 31, 2009 relating to claims involving over-billings by
certain telecommunications carriers of Davel in violation of regulatory rulings
(“Regulatory Receipts”), including $718,314 received from Qwest in the second
fiscal quarter (see Item 3, “Legal Proceedings”). Although the Company continues
to operate the Integrated Telecom Business which has been consistently
profitable and able to generate significant cash flow for the Company, we are
likely to continue to experience liquidity and cash flow problems due to the
Company’s current debt service requirements, including amounts due under the
remaining equipment obligations and leases of the former Wireless Networks
Business.
Historically
YA Global Investments, L.P. (“YA Global”, f/k/a Cornell Capital Partners, L.P.)
was a significant source of capital for the Company, providing financing in
several forms. During fiscal 2007, we borrowed funds under a series of
convertible debentures. The total amount owed to YA Global under the debentures
at March 31, 2007 was $18,149,650. In May 2007, we borrowed $1,100,000 from YA
Global under a promissory note in order to help bridge our cash flow shortfall
during the first quarter of fiscal year 2008. This promissory note and accrued
interest were repaid in July 2007. Using shares of our common stock registered
on Form S-3 in November 2006, we made principal and interest payments on the
debentures that totaled $4,880,489 during the fiscal year ended March 31, 2007,
and that totaled $1,967,908 from April 2007 through May 2007. However, the
supply of registered shares available for the conversion of the debentures was
exhausted. We made additional cash payments of principal and interest
on the debentures that totaled $4,149,651 during the fiscal year ended March 31,
2008, primarily from the proceeds of the sale of the ISP Business and payphone
assets discussed below. However, the Company was unable to make the weekly
scheduled principal payments of $375,000 plus interest commencing February 1,
2008 and made partial payments of interest aggregating $200,000 on May 2 and
June 4, 2008. Effective June
30, 2008, the Company issued a secured convertible debenture to YA Global (the
“Convertible Debenture”) with an aggregate principal balance of $13,391,175,
replacing the former convertible debentures. The Convertible Debenture provides
for monthly payments of interest at 12% with the remaining principal balance due
on May 1, 2009. During the fiscal year ended March 31, 2009, the Company made
the monthly interest payments and YA Global converted $324,840 of principal into
common stock. We believe such shares are tradable by YA Global pursuant to Rule
144 of the Securities Act of 1933 (the “Securities Act”). The total principal
and accrued interest amounts owed to YA Global under the Convertible Debenture
at March 31, 2009 was $13,066,355 and $136,260, respectively. The Convertible
Debenture continues to be secured by substantially all of the assets of the
Company.
The
Company has not paid the outstanding principal balance relating to the
Convertible Debenture that was due on May 1, 2009 and has entered into a
forbearance agreement which expired on June 1, 2009. We subsequently
obtained an extension of the forbearance agreement through June 5, 2009.
However, we have been unsuccessful in obtaining a further extension of the
maturity date or a modification to the payment terms. As a result,
Mobilepro is in default of its obligations under the Convertible Debenture owed
to YA Global and, given current market conditions and Mobilepro’s financial
condition, obtaining the required financing to retire the Convertible Debenture
is unlikely to occur in the immediate future. In the event YA Global
declared the debt to be in default interest would accrue at the default rate of
24% per annum. YA Global has informed the Company that it intends to exercise
its rights as the Company’s senior secured creditor. Such rights
include, but are not limited to, foreclosing on the assets of the Company. In
such event the Company will not have the ability to continue as a going
concern.
Sale of the Wireless
Networks Business to Gobility
The cash
needs of Kite Networks had been substantially funded through borrowings by the
Company from YA Global under a variety of debt instruments and over $5 million
in equipment lease financing. Kite Networks had also been provided extended
payment terms by certain significant equipment suppliers. However, we
realized that sufficient funds were not available from these existing sources
for Kite Networks to effectively continue the execution of its business plan. As
a result, we commenced the search for capital as described below during the
fourth quarter of the fiscal year 2007.
In
December 2006, we engaged an investment banking firm to assist in evaluating
strategic alternatives for the wireless networks business conducted by its Kite
Networks and Kite Broadband subsidiaries. Efforts to secure investment capital
for this business or to find a willing buyer resulted in the sale of the
Wireless Networks Business to Gobility, Inc. (“Gobility”) on July 8, 2007. The
purchase price was $2.0 million, paid in the form of a debenture that is
convertible into shares of Gobility common stock (the “Gobility Debenture”) at a
rate of $5.00 per share, or such lower price, if Gobility issues common stock or
securities convertible into common stock at a price that is less than $5.00 per
share. Unless converted, the Gobility Debenture matures July 8, 2009 with annual
interest at 8%.
Under the
terms of the Gobility Debenture, Gobility was required to raise at least $3.0
million in cash no later than August 15, 2007. Prior to closing, the Company
received a reliance letter from Wingfield Corporation, N.V. (“Wingfield”), a
Brussels, Belgium-based merchant bank, stating that such financing was
forthcoming. To date, Gobility has not obtained financing from Wingfield or any
other source and is in default with respect to the Gobility Debenture. As a
result of this default, the Company has the right but not the obligation to
repurchase the Wireless Networks Business with the surrender of the Gobility
Debenture and the payment of nominal additional consideration. In addition to
its inability to obtain the required financing, Gobility has been unable to fund
its operations including the payment of amounts due under a series of capital
equipment leases and other equipment-related obligations. Because the equipment
leases and other equipment purchases were co-signed by Mobilepro, if Kite
Networks fails to pay the leases, absent any other defenses it may have, the
Company could be obligated to pay the obligations relating to the equipment
leases and equipment purchases. As a result of these defaults by Gobility, the
Company has written off the $2.0 million Gobility Debenture and has recorded the
capital leases and equipment-related obligations as liabilities in connection
with the sale. The Company has also recorded the certificates of deposits
securing the equipment lease obligations during its fiscal year ended March 31,
2008.
The
Company is currently cooperating with Gobility in its efforts to sell the assets
of Kite Networks in order to pay the obligations relating to the equipment
leases and other equipment. In September 2007, the Company was required to make
lease payments totaling $64,165. On March 10, 2008, Gobility sold the assets of
the wireless network in Longmont, Colorado, and the Company received the related
proceeds in the form of promissory notes from the purchaser totaling $1,800,000.
In addition, the Company entered into a forbearance agreement with the principal
equipment vendor and agreed to pay the $1,591,978 equipment obligation, with
interest at the prime rate, and a related lease obligation in the principal
amount of $149,749. In March 2008, the Company also satisfied the
terms of one of the leases relating to the Tempe, Arizona wireless network with
an aggregate principal balance of $318,595, plus accrued interest, by paying
$93,000 in cash and having the $250,000 certificate of deposit that secured the
lease applied thereto. As a result of the sale to Gobility and these
transactions, the Company recorded a net loss on the sale of its Wireless
Networks Business of $3,433,843 that was reported in the loss on sale of
discontinued operations for the fiscal year ended March 31, 2008. Given the lack
of progress by Gobility in selling assets over the past six months, we do not
currently expect any further asset sales by Gobility.
On August
1, 2008, the Company executed a promissory note and release with Data Sales Co.,
Inc. (“Data Sales”) in the principal amount of $330,000. The note is in full
satisfaction of a $1,231,138 lease obligation for which the Company was a
co-borrower with Kite Networks and reflects the impact of a sale of certain
uninstalled wireless equipment by Data Sales to an unaffiliated third party
purchaser that was consummated in July 2008. The Company recorded a
gain of $901,138 in the second fiscal quarter of the year ended March 31, 2009
as a result of the transaction.
The
Company continues to cooperate with Gobility in its efforts to sell the
remaining assets of Kite Networks; however such efforts have been minimal over
the past six months. In the event Gobility is unsuccessful in its
attempts to sell the remaining assets and satisfy the equipment lease
obligations, the Company, subject to any defenses it might have, could be
required to make the payments on the remaining equipment leases. At March 31,
2009, the amounts recorded on the consolidated balance sheet relating to the
capital lease obligations, accrued interest, and the note payable and equipment
obligation were $2,385,736, $447,412 and $1,613,647, respectively. The Company
has also recorded the certificates of deposits securing the lease obligations in
the aggregate amount of $937,664 at March 31, 2009 and 2008 in the Company’s
consolidated balance sheets.
Sale of the ISP and
Integrated Telecom Businesses
In April
2007, we announced that our Board of Directors had decided to explore potential
strategic alternatives for the entire Company, and that it had received
inquiries from potential buyers regarding the purchase of portions of its
business. This initiative was undertaken with the goals of maximizing the value
of our assets, returning value to our stockholders and eliminating the Company’s
debt, particularly amounts owed to YA Global.
We
received letters of interest regarding the acquisition of the CloseCall, AFN,
DFW and InReach (the “Wireline Businesses”) and several potential purchasers
conducted due diligence activities. This process resulted in the execution of an
agreement to sell the Wireline Businesses to USA on June 30, 2007 (the “USA
Agreement”).
Pursuant
to the USA Agreement, we closed the sale of the ISP Business to USA on July 18,
2007, and received cash proceeds of $2,500,000, a promissory note for $2,000,000
(the “USA Note”) and 8,100 shares of preferred stock of USA convertible into
7.5% of the fully diluted shares of USA’s common stock (the “USA Preferred”)
initially valued at $5,763,893. Simultaneously, we used $2,000,000 of this cash
to pay down principal and accrued interest owed to YA Global under the
promissory note and debentures.
Completion
of the sale of CloseCall and AFN required the receipt of certain state
regulatory approvals before it could be completed. Pursuant to
a management agreement that was signed in July 2007 (the “USA Management
Agreement”), USA operated the Integrated Telecom Business, retained any cash
provided by the operations of these companies and funded any cash requirements
of the companies pending completion of the sale of these companies. In addition,
USA was required to make debenture interest payments to YA Global on the
Company’s behalf during the term of the USA Management Agreement based on an
assumed principal balance of $17.4 million at an interest rate of
7.75%.
Upon the
close and pursuant to the terms of the USA Agreement, we expected to receive
cash proceeds of $19.4 million, including payment of the $2.0 million USA Note.
On January 3, 2008, the Company entered into an amendment to the USA Note. USA
made payments of $500,000 each on January 4 and January 11, 2008 with the
remaining balance of $1,000,000, together with accrued interest at the rate of
7.75%, due on the earlier of the date of the closing of the sale of the
Integrated Telecom Business or March 31, 2008. Of the $1,000,000 of payments,
the Company received $125,000 and the remaining $875,000 was used to pay
principal and interest on the convertible debentures due to YA
Global.
On
January 14, 2008, the Company received notice from USA purporting to terminate
the USA Agreement with respect to the sale of the Integrated Telecom Business,
but provided that USA remained interested in discussing terms upon which it
would complete the purchase. The Company had been in communications
with USA and disputes the validity of the claims alleged for the purported
termination, which include the alleged failure to obtain certain regulatory and
contractual approvals and the alleged breach of certain representations and
warranties set forth in the USA Agreement. The Company believes the purported
termination was in bad faith and is pursuing certain legal and equitable
remedies available to it against USA. Despite the on-going discussions with USA,
the Company re-assumed operating control of AFN and CloseCall and has terminated
the agreement to sell its Integrated Telecom Business to USA in the fourth
quarter of the fiscal year ended March 31, 2008.
USA did
not pay the remaining principal balance of $1,000,000 or the accrued interest
due on the USA Note on March 31, 2008. In July 2008, the Company revised the
payment terms relating to the USA Note and received payments totaling $200,000.
The remaining principal balance and accrued interest at 12% per annum was due on
December 29, 2008. USA has not paid the balance due on the USA Note
and certain other receivables and has advised the Company that USA is being
indemnified for the amounts due and owing under the USA Note by its former Chief
Executive Officer, L. William Fogg. Mr. Fogg, and his wholly owned
company, Nationwide Acquisition Corp. are alleged to be the successors in
interest to the ISP Business previously sold to USA. Mr. Fogg has
disputed the amount due under the USA Note and alleges the right to certain
setoffs against the amounts due and owing the Company. Mr. Fogg and
Nationwide Acquisition Corp. have filed a declaratory judgment lawsuit against
the Company, AFN, CloseCall and USA relating to various amounts owed to the
Company including the USA Note. USA is in default with respect to the
USA Note, which provides for interest at a default rate of 18% per
annum. During the fiscal year ended March 31, 2009, the Company wrote
down the carrying value of the USA Note and other amounts due from USA by
$345,534. Subsequent to year end, on June 8, 2009, the Company entered into a
settlement agreement with both Fogg and USA with respect to certain matters (see
paragraph 7 of Item 3 – “Legal Proceedings”).
The loss
incurred in connection with the sale of the ISP Business, after adjustment for
the termination of the sale of the Integrated Telecom Business, of $2,424,785 is
included in the loss on sale of discontinued operations in the fiscal year ended
March 31, 2008 in the Company’s consolidated statements of
operations.
Discontinued
Operations
In the
quarter ended March 31, 2009 the Company reclassified the assets and liabilities
of its Integrated Telecom Business, along with the remaining net liabilities of
the Wireless Networks Business for which the Company is co-obligor, to
continuing operations. Previously those assets and liabilities were classified
as “held for sale” at December 31, 2008 and at the end of each prior annual and
quarterly reporting period. In addition, the operating results of the Integrated
Telecom Business which were previously reported in discontinued operations have
been reclassified to continuing operations for all periods presented in this
Annual Report on Form 10K. At the time of reclassification, in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the
Impairment or Disposal of Long-Lived Assets”, the Company recognized
$235,157 of additional depreciation and amortization expense that would have
been recognized in the fiscal year ended March 31, 2008 if the assets and
liabilities had been classified as held and used. The Company also wrote down
the carrying value of goodwill in the quarter ended March 31, 2009 which reduced
the net assets of the Integrated Telecom Business to its fair value at the date
the net assets were reclassified to continuing operations (see Note 5 to the
consolidated financial statements).
The
Wireless Networks Business and the ISP Business were sold in the fiscal year
ended March 31, 2008. The operating results, including the gain or loss on sale
of these businesses, are included in discontinued operations in the Company’s
consolidated statements of operations for all fiscal years presented in this
Annual Report on Form 10K. In addition, at the end of each fiscal year prior to
the dates of sale, the assets and liabilities of the Wireless Networks Business
and the ISP Business are reported in assets and liabilities of companies held
for sale in the Company’s consolidated balance sheets.
Sales of Payphone
Assets
The
Company completed a series of transactions to sell a majority of Davel’s
payphones in order to provide cash for operating purposes and additional
retirements of convertible debenture debt.
In June
2007, we completed the sale of approximately 730 operating payphones to an
unaffiliated payphone operator and received over $200,000 in cash proceeds. A
gain in the amount of $10,640 was recognized in connection with this
transaction.
In
September 2007, in three transactions, we completed the sale of approximately
21,700 payphones to unaffiliated purchasers. After the direct payment of certain
related liabilities and broker fees in the aggregate amount of approximately
$851,000, and the funding of escrow accounts established for the payment of
vendor obligations and indemnification claims in the aggregate amount of
$1,200,000, proceeds of approximately $1,840,000 were used to retire convertible
debenture debt of approximately $1,672,000 and related accrued interest of
approximately $168,000. A net loss of $2,800,206 was recorded in connection with
these transactions.
Asset Impairment
Charges
During
the fourth quarter of the fiscal year ended March 31, 2009, there was a decline
in the operating performance of the Integrated Telecom Business. In addition,
the Company was previously engaged in negotiations to sell the business which
did not materialize. As a result, management reviewed the carrying values of the
net assets of the Integrated Telecom Business at March 31, 2009 and
determined that an adjustment for goodwill impairment was appropriate. The
Company estimated the fair value the reporting unit, as determined under
Statement of Financial Accounting Standards ("SFAS") No. 142, “Goodwill and
Other Intangible Assets”, using a model developed by the Company which
incorporates growth rates and other adjustments to base revenues and expenses to
estimates future cash flows, and applied a discount rate to those estimated cash
flows. The Company recorded an impairment charge in the amount of $8,764,065 at
March 31, 2009, to write down goodwill and the net assets of the Integrated
Telecom Business to fair value. The asset impairment charge recorded for the
fiscal year ended March 31, 2009 was included in operating costs and expenses of
continuing operations in the Company’s consolidated statements of
operations.
Notwithstanding
our efforts to restructure and improve operations, during the fiscal year ended
March 31, 2007, the Wireless Networks Business, the ISP Business and Davel did
not perform as expected. In addition, as discussed above, the Company was
engaged in negotiations for the sale of all of these businesses. As a result,
management reviewed the carrying values of the assets of these businesses during
fiscal year 2007 and determined that adjustments for goodwill and other asset
impairment were appropriate. The Company recorded impairment charges in the
total amount of $27,275,987 during the fiscal year ended March 31, 2007,
including $17,745,303 representing the entire amount of goodwill and other
intangible assets related to Wireless Networks, $6,474,889 relating to the
goodwill of the ISP Business, $1,482,000 relating to certain deployed wireless
network equipment of Kite Networks, and $1,573,795 relating to certain payphone
equipment and location contracts of Davel. Of the total asset impairment charges
recorded for the fiscal year ended March 31, 2007, $25,702,192 of this amount
was included in the loss from discontinued operations and $1,573,795 was
included in operating costs and expenses relating to continuing
operations.
Critical Accounting
Policies
We
consider the accounting policies related to the disposal of long-lived assets,
discontinued operations, the valuation of goodwill and other intangible assets,
transactions related to our debt and equity financing activity, and revenue and
related cost recognition to be critical to the understanding of our results of
operations. Critical accounting policies include the areas where we
have made what we consider to be particularly subjective or complex judgments in
making estimates and where these estimates can significantly impact our
financial results under different assumptions and conditions. We
prepare our financial statements in conformity with U.S. generally accepted
accounting principles. As such, we are required to make certain
estimates, judgments, and assumptions that we believe are reasonable based upon
the information available. These estimates, judgments, and
assumptions affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the periods presented. Actual results could be different from these
estimates.
Our
estimates relating to the valuation of goodwill are particularly significant due
to the materiality of goodwill as compared to our total assets. In accordance
with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company is
required to test goodwill for impairment at least annually or on an interim
basis if an indicator of impairment is present. Accordingly, the Company
evaluates the carrying value of goodwill for impairment annually as of March
31st. To test goodwill for impairment, the Company is required to estimate the
value, as determined under SFAS No. 142, of the Integrated Telecom Business, its
principal reporting unit. Since quoted market prices in an active market are not
available for the Integrated Telecom Business, the Company uses other valuation
techniques. The Company has developed a model to compute an estimate of the
value, as determined under SFAS No. 142, by incorporating a discounted cash flow
valuation technique. This model incorporates the Company’s estimates of future
cash flows and discounts those estimated future cash flows.
At March
31, 2008, the Company tested goodwill for impairment by comparing the carrying
value of the Integrated Telecom Business to the estimated fair value using the
model developed by the Company. The model incorporates growth rates and other
adjustments to the most recent year’s revenues and expenses of the Integrated
Telecom Business as a basis for estimating the future cash flows of the
reporting unit. In estimating future cash flows, we assumed the revenues and the
related cost of services (excluding depreciation and amortization) of the
Integrated Telecom Business would increase at an annual rate of 5% per year
based on the increase in revenues in fiscal year 2008. We also assumed that base
year operating expenses, excluding non-cash and nonrecurring items, would
increase at a lower rate of 2% per year due to expected cost containment
efforts. We then reduced the results of the projected operating income (before
interest, depreciation and amortization) by estimated capital expenditures of
$100,000 per year to arrive at the estimated future cash flows of the Integrated
Telecom Business for each of the next five years. We also estimated the terminal
value of the Integrated Telecom Business at the end of year five using a
multiple of year five estimated future cash flows. The Company discounted the
estimated annual future cash flows and the terminal value of the reporting unit
at the end of year five using a discount rate of 10% to arrive at the fair value
of the reporting unit. The discount rate was determined based on the Company’s
estimated cost of capital and market conditions at that time. Finally, we
compared the estimated fair value of the reporting unit to the carrying value,
including goodwill. Since the estimated fair value exceeded the carrying value,
no adjustment to goodwill was required at March 31, 2008.
At March
31, 2009, the Company tested goodwill for impairment using the same methodology
that was used at March 31, 2008. The Company used fiscal year 2009 revenues and
expenses, excluding non-cash and nonrecurring items, as a basis for estimating
future annual cash flows. In estimating such cash flows, we assumed that
revenues and the related cost of services (excluding depreciation and
amortization) would increase by 2% in year one of the projection period and
decrease by 2% per year thereafter due to the decline in revenues in fiscal 2009
and the Company’s expectations regarding an economic recovery. We also assumed
that operating expenses will decline by 5% in year one and by 2% per year
thereafter based on the Company’s plans to reduce expenses. Since capital
expenditures were nominal in fiscal 2009, we reduced projected capital
expenditures to $25,000 per year to arrive at the estimated future cash flows of
the Integrated Telecom Business. At March 31, 2009, we used a discount rate of
15%, based on changes in market conditions and the increase in our cost of
capital, to arrive at the estimated fair value of the Integrated Telecom
Business based on the present value of estimated future cash flows. When we
compared the estimated fair value of the Integrated Telecom Business to the
carrying value of this reporting unit, including goodwill, an impairment of
goodwill was indicated. As a result, we allocated the fair value of the
reporting unit to the assets and liabilities of the reporting unit, other than
goodwill, based on their relative fair values and allocated the excess amount to
goodwill to determine the implied fair value of goodwill. The implied fair value
of goodwill exceeded the recorded amount by $8,764,065. Therefore, the Company
wrote down the carrying value of goodwill and recorded a goodwill impairment
expense equal to this amount at March 31, 2009.
As
discussed above, the valuation of goodwill and the recognition of impairment
expense associated with goodwill are dependent upon our estimates of the future
discounted cash flows for the Integrated Telecom Business. Such estimates are
based on our judgment regarding the appropriate discount rate and the
assumptions used to estimate future cash flows. Accordingly, the fair value of
goodwill and the amount of the goodwill impairment expense would vary if
different assumptions were used. An increase or decrease of $100,000 in the
estimated annual future cash flows would result in a change in the amount of the
asset impairment expense of approximately $681,000. Similarly, a 1% change in
the discount rate would result in a change in the amount of the asset impairment
expense of approximately $500,000.
During
the years ended March 31, 2009, 2008 and 2009, there have been no significant
changes in our critical accounting policies.
Impact of Recent Accounting
Standards
In July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in
income tax positions. FIN 48 requires that the Company recognize in the
consolidated financial statements the impact of a tax position that is more
likely than not to be sustained upon examination based on the technical merits
of the position. The provisions of FIN 48 were effective for the Company on
April 1, 2007. Adoption of FIN 48 did not have a material effect on the
consolidated financial statements.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements”. SAB 108 provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. SAB No. 108 states that
registrants should use both a balance sheet approach and income statement
approach when quantifying and evaluating the materiality of a misstatement. SAB
108 also provides guidance on correcting errors under the dual approach as well
as transition guidance for correcting previously immaterial errors that
are now considered material. The provisions of SAB 108 were applicable to
financial statements for the Company’s fiscal year ended March 31, 2007. This
guidance has not had any material impact on the consolidated financial condition
or results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
defines fair value, establishes a framework and gives guidance regarding the
methods used for measuring fair value, and expands disclosures about fair value
measurements. The provisions of SFAS No. 157 are effective for financial
statements issued for the Company’s fiscal year beginning April 1, 2008 (April
1, 2009 with respect to certain non-financial assets and liabilities), and
interim periods within such fiscal years. The adoption of SFAS No. 157 for
financial assets and liabilities in the first quarter of the current fiscal year
did not have a material effect on the Company’s financial position or results of
operations as the Company does not have any material financial assets or
liabilities measured at fair value.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” which provides companies with an
option to report selected financial assets and liabilities at fair value. The
objective is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. The provisions of SFAS No. 159 are effective for
financial statements issued for the Company’s fiscal year beginning April 1,
2008. The Company did not elect to measure its financial instruments or any
other items at fair value as permitted by SFAS No. 159. Therefore, the adoption
of FAS No. 159 did not have a material effect on the Company’s financial
position or results of operations.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No.
141R modifies the accounting for business combinations by requiring that
acquired assets and assumed liabilities be recorded at fair value, contingent
consideration arrangements be recorded at fair value on the date of the
acquisition and preacquisition contingencies will generally be accounted for in
purchase accounting at fair value. The pronouncement also requires that
transaction costs be expensed as incurred, acquired research and development be
capitalized as an indefinite-lived intangible asset and the requirements of SFAS
No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” be
met at the acquisition date in order to accrue for a restructuring plan in
purchase accounting. SFAS No. 141R is required to be adopted prospectively
effective for the Company’s fiscal year beginning April 1, 2009. The Company
does not expect SFAS No. 141R to have a significant impact on the Company’s
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51.” SFAS No.
160 modifies the reporting for noncontrolling interests in the balance sheet and
minority interest income (expense) in the statement of operations. The
pronouncement also requires that increases and decreases in the noncontrolling
ownership interest amount be accounted for as equity transactions. SFAS No. 160
is required to be adopted prospectively, with limited exceptions, effective for
the fiscal year beginning April 1, 2009. The Company does not expect SFAS No.
160 to have a significant impact on the Company’s consolidated financial
statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133.” SFAS No. 161
modifies existing requirements to include qualitative disclosures regarding the
objectives and strategies for using derivatives, fair value amounts of gains and
losses on derivative instruments and disclosures about credit-risk-related
contingent features in derivative agreements. The pronouncement also requires
the cross-referencing of derivative disclosures within the financial statements
and notes thereto. The requirements of SFAS No. 161 are effective for the
Company’s interim and annual fiscal periods beginning on April 1, 2009. The
Company does not expect SFAS No. 161 to have a significant impact on the
Company’s consolidated financial statements or related disclosures.
Results
of Operations and Financial Condition
The
results of continuing operations include the operating results of Mobilepro,
AFN, CloseCall, Davel and ProGames. Due to the sale of a majority of Davel’s
payphones in September 2007, the operating results for the fiscal years ended
March 31, 2009 and 2008 are not comparable. The amounts applicable to
substantially all revenue and expense catagories declined as a result of the
significant curtailment in operations following the sale in fiscal
2008. Results of discontinued operations include the operating
results of the ISP Business and Wireless Networks Business. The operating
results of the current and prior fiscal year are not comparable due to the sale
of the ISP Business and Wireless Networks Business in the second quarter of the
fiscal year ending March 31, 2008.
We
realize that effective analysis of our operations with an approach of comparing
results for a current period with the results of a corresponding prior period
may not be helpful in understanding our financial condition and results of
operation in light of the recent sale of certain of our subsidiaries. In order
to analyze ourselves, we focus not only on achieving increases or decreases in
the amounts of net income/(loss) and EBITDA, but emphasize the change of net
income/(loss) per share.
The
Fiscal Years Ended March 31, 2009 and 2008
Consolidated
revenues of continuing operations for the fiscal year ended March 31, 2009 were
$30,857,981 compared with revenues of $45,770,689 in the prior year, a decrease
of $14,912,708, or 32.6%. This was primarily due to a $9,281,094 decrease in
Davel’s revenues and a $5,760,833 decrease in the revenues of the Integrated
Telecom Business. As discussed above, during the prior fiscal year we sold most
of Davel’s remaining operational payphones in a series of transactions,
that included the sale of approximately 21,700 payphones in September 2007. The
operating results related to the assets sold are reflected in the consolidated
statement of operations for the fiscal year ended March 31, 2008 through the
sale dates. For the year ended March 31, 2009, Davel’s revenues included
$810,215 of Regulatory Receipts compared to $250,000 of Regulatory Receipts last
year. The decline in revenues relating to the Integrated Telecom
Business was due to a reduction in the number of business lines and residential
customers and, to a lesser extent, to reductions applicable to the bundling of
services billed to customers. These declines were also affected by competition
from incumbent local exchange carriers (“ILECs”) and the current economic
recession, particularly as it relates to revenues from the temporary housing
market. The decline in revenues of the Integrated Telecom Business was offset in
part by an increase in software sales.
The cost
of services (excluding depreciation and amortization) for the fiscal year ended
March 31, 2009 of $20,356,273, expressed as a percentage of corresponding
revenues, was 66.0% compared with $29,220,570, or 63.8% of revenues in the prior
fiscal year. The dollar decrease in cost of services was principally due to the
decline in revenues discussed above, including the effects of the sale of
Davel’s payphones. The higher cost of services expressed as a
percentage of revenues was primarily due to the decline in Davel’s revenues
which have a lower percentage cost of services than the Integrated Telecom
Business.
Payroll,
professional fees and related expenses (exclusive of stock compensation)
declined by $7,274,507 from $14,108,986 in the fiscal year ended March 31, 2008
to $6,834,479 in the current year. Excluding Davel, these expenses declined by
$2,474,922, or 28.3%. Professional fees (other than Davel’s) decreased by
$1,479,044 as a result of a decrease in legal fees due to cost reduction efforts
as well as reductions in audit and consulting fees applicable to compliance with
the Sarbanes-Oxley Act of 2002. The decrease in professional fees was also due
to $587,097 of fees incurred in fiscal 2008 relating to the USA Management
Agreement with no corresponding amounts incurred in fiscal 2009. Payroll expense
(other than Davel’s) also decreased by $767,244 as a result of reductions in
personnel made during fiscal 2008 and 2009.
Office
rent and expenses were $1,580,047 in fiscal 2009 compared to $2,304,462 in
fiscal 2008, a decrease of $724,415, or 31.4%. The decrease consists primarily
of a $272,345 decrease In Davel’s expenses and decreases in office supplies,
telephone, customer billing and other office expenses.
Other
general and administrative expenses were $1,759,802 in fiscal 2009 compared to
$3,258,742 in fiscal 2008, a decrease of $1,498,940, or 46.0%. This
decrease includes $508,611 applicable to Davel and other decreases of $990,329
relating to the Company’s cost reduction efforts. The Company has re-evaluated
the effectiveness of advertising strategy relating to contracts with local
professional sports teams and has discontinued those programs. As a result the
Company was able to reduce its advertising expense by $533,228 in fiscal
2009.
Depreciation
and amortization expenses were $723,968 and $1,382,627 in the fiscal years ended
March 31, 2009 and 2008, respectively, representing the reductions in
depreciation of the costs of deployed payphones and the amortization of payphone
location contracts resulting from the payphone sales in fiscal 2008. This
decrease was offset in part by $235,157 of additional depreciation and
amortization recorded in fiscal 2009 that would have been recognized if the
assets of the Integrated Telecom Business had been classified as held and used
in continuing operations in fiscal 2008.
Stock
compensation expense decreased by $746,299, from $843,962 to $97,663 in the
fiscal year ended March 31, 2009, due to the vesting of options and warrants
granted in prior years and a reduction in the fair value of current year
grants.
In the
year ended March 31, 2009, the Company recorded an asset impairment charge of
$8,764,065 to write down the carrying value of goodwill and the related carrying
value of the Integrated Telecom Business. The Company estimated the fair value
of the reporting unit, as determined under SFAS No. 142, using a model developed
by the Company to estimate future cash flows and applied a discount rate to
those estimated cash flows. During the fourth quarter of the fiscal year ended
March 31, 2009, there was a decline in the operating performance of the
Integrated Telecom Business. In addition, the Company was previously engaged in
negotiations to sell the business which did not materialize. As a result,
management revised its prior estimates of future cash flows and increased the
discount rate to reflect the Company’s increase in its cost of capital and the
decline in general economic conditions. Although the Company believes its
estimates are reasonable, there may be additional write downs in goodwill if the
Integrated Telecom Business does not perform as expected or there is a further
decline in the economy. The Company was not required to record an asset
impairment charge in the 2008 fiscal year. Please see “Critical
Accounting Policies” for more detail on this issue.
As
discussed above the Company has significantly reduced its total operating costs
and expenses of continuing operations for the fiscal year ended March 31, 2009.
However these reductions were offset by $1,345,534 of expense relating to the
write down in carrying value of notes receivable and an asset impairment charge
of $8,764,065 to write down the carrying value of goodwill applicable to the
Integrated Telecom Business to fair value. There were no comparable charges to
expense in the prior fiscal year. The operating costs and expenses, excluding
depreciation and amortization, included $169,838 and $510,704 for ProGames for
the fiscal years ended March 31, 2009 and 2008, respectively. Corporate
operating expenses, excluding stock compensation and the write down in notes
receivable, were $1,138,371 in the current year compared to $2,124,252 in the
prior fiscal year, reflecting the Company’s continuing efforts to reduce
expenses.
Interest
and other expense, net, was $1,562,740 for the year ended March 31, 2009
compared with $1,728,057 in the prior fiscal year. During the current fiscal
year, we issued a new 12% convertible debenture to YA Global in the principal
amount of $13,391,175, replacing the 7.75% convertible debentures that were
previously outstanding, and paid $186,024 in financing fees. We also made
principal payments of $392,980 on our other debt and retired $324,840 of
principal on the debenture to YA Global using the Company’s common stock. During
the fiscal year ended March 31, 2008, we retired principal owed under the YA
Global debentures in the amount of approximately $4,801,000 and the YA Global
promissory note in the amount of $1,100,000 that we issued in May 2007. We also
retained $3,830,168 of capital leases and $1,591,978 of equipment obligations
for which the Company was co-obligor following the sale of the Wireless Networks
Business in July 2007. The major components of net interest and other expense
for the fiscal years ended March 31, 2009 and 2008 are presented in the
following schedule:
Type
of Debt
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Convertible
debentures (at stated rates)
|
|
$ |
1,464,400 |
|
|
$ |
1,142,273 |
|
Convertible
debentures (debt discount and financing cost amortization)
|
|
|
206,981 |
|
|
|
412,660 |
|
Capital
lease and equipment obligations
|
|
|
321,547 |
|
|
|
396,092 |
|
Note
payable to YA Global
|
|
|
- |
|
|
|
25,315 |
|
Notes
receivable – Microlog Corporation
|
|
|
(225,000 |
) |
|
|
(53,630 |
) |
Other
notes receivable
|
|
|
(198,617 |
) |
|
|
(30,136 |
) |
Accretion
of discount – USA Preferred Stock
|
|
|
- |
|
|
|
(244,198 |
) |
Interest
and Other (Income) Expense, net
|
|
|
(6,571 |
) |
|
|
79,681 |
|
|
|
$ |
1,562,740 |
|
|
$ |
1,728,057 |
|
The loss
from continuing operations for the year ended March 31, 2009 was $12,261,159, or
$0.0131 per share, compared to a loss of $9,948,590, or $0.0129 per share in
fiscal year 2008. As discussed above, the current year loss included a
$1,345,534 write down of notes receivable and an asset impairment charge of
$8,764,065. The current fiscal year loss from continuing operations also
included our equity in the net loss of Microlog Corporation of $94,569. The
prior year loss included a $2,778,906 loss on sale of assets relating to the
Davel payphones and certain related liabilities and our equity in the net loss
of Microlog Corporation since the date of acquisition of $92,967.
The
income from discontinued operations for the fiscal year ended March 31, 2009 was
$901,138, or $0.0010 per share, compared to a loss of $8,413,012, or $0.0109 in
fiscal 2008. The current year income consists of a $901,138 gain on the sale of
discontinued operations applicable to the settlement of one of the Kite
Networks’ equipment leases. The prior year loss from discontinued operations
includes a loss from operations through the dates of sale of the Wireless
Networks Business and the ISP Business of $2,554,384. It also includes a
$3,433,843 loss on the sale of the Wireless Networks Business, after a
$1,602,447 reduction in the loss relating to the sale of the Longmont, CO
wireless network in the fourth quarter of fiscal 2008, and a $2,424,785 loss on
the sale of the ISP Businesses.
We
reported a net loss of $11,360,021 for the year ended March 31, 2009, or $0.0121
per share, compared with a net loss of $18,361,602 for the fiscal year ended
March 31, 2008, or $0.0238 per share.
The
Fiscal Years Ended March 31, 2008 and 2007
Consolidated
revenues of continuing operations for the fiscal year ended March 31, 2008 were
$45,770,689 compared with revenues of $62,559,174 in the prior year, a decrease
of $16,788,485, or 26.8%. This was primarily due to a $19,496,477 decrease in
Davel’s revenues offset by a $2,677,260 increase in the revenues of the
Integrated Telecom Business. As discussed above, during the fiscal year ended
March 31, 2008 we sold most of Davel’s remaining operational payphones in a
series of transactions, including the sale of approximately 21,700 payphones in
September 2007. The operating results related to the assets sold are reflected
in the consolidated statement of operations for approximately five months in
fiscal 2008 through the sale dates. The increase in revenues relating to the
Integrated Telecom Business was principally due to the acquisition of cellular
telephone service contracts representing over 7,000 subscribers and certain
related assets from TeleCommunication Systems, Inc. (“TCS”) effective in January
1, 2007. Following the date of acquisition, there were approximately
three months of such revenues included in operating results in the fiscal year
ended March 31, 2007 compared to twelve months of revenues in fiscal 2008. The
increase in revenues relating to TCS was partially offset by a reduction in
revenues relating to residential customers.
The cost
of services (excluding depreciation and amortization) for the fiscal year ended
March 31, 2008 of $29,220,570, expressed as a percentage of corresponding
revenues, was 63.8% compared with $36,820,779, or 58.9% of revenues in the prior
fiscal year. The dollar decrease in cost of services was principally due to the
decline in revenues discussed above, including the effects of the sale of
Davel’s payphones. The higher cost of services expressed as a
percentage of revenues was primarily due to the decline in Davel’s revenues
which have a lower percentage cost of services than the Integrated Telecom
Business. There were also increases in software sales and other products of the
Integrated Telecom Business that have a higher percentage cost of service than
local and long-distance line service as well as lower margins resulting from the
bundling of services billed to customers.
Payroll,
professional fees and related expenses (exclusive of stock compensation)
declined by $8,230,262 from $22,339,248 in the fiscal year ended March 31, 2007
to $14,108,986 in fiscal 2008. Excluding Davel, these expenses declined by
$234,409, or 2.6%. This decrease consisted of a $669,405 decrease in payroll and
related expenses offset by a $434,996 increase in professional fees. The
decrease in payroll and related expenses (other than Davel’s) was a result of
reductions in personnel made during fiscal 2008 and 2007. The increase in
professional fees (other than Davel’s) was due to audit and consulting fees
applicable to compliance with the Sarbanes-Oxley Act of 2002 and $587,097 of
fees relating to the USA Management Agreement incurred in fiscal 2008 with no
corresponding amounts incurred in fiscal 2007. These increases were offset in
part by reductions in other professional fees.
Office
rent and expenses were $2,304,462 in fiscal 2008 compared to $2,561,851 in
fiscal 2007, a decrease of $257,389, or 10.0%. The decrease consists primarily
of a $370,427 decrease in Davel’s expenses offset by increases in customer
billing and other office expenses.
Other
general and administrative expenses were $3,258,742 in fiscal 2008 compared to
$4,609,274 in fiscal 2007, a decrease of $1,350,352, or
29.3%. Davel’s expenses increased by $92,659 in fiscal 2008 due to a
$330,178 federal excise tax refund applicable to prior year amounts paid on long
distance services that were received in fiscal 2007. Excluding Davel, other
general and administrative expenses decreased by $1,443.011. This decrease is
primarily due to a $1,490,738 decrease in advertising and related expenses of
the Integrated Telecom Business. In fiscal 2007 and 2008 the Company began to
phase out a number of the Company’s advertising programs and promotional
activities resulting in a significant reduction in expense.
Depreciation
and amortization expenses were $1,382,627 and $3,397,840 in the fiscal years
ended March 31, 2008 and 2007, respectively, representing the reductions in
depreciation of the costs of deployed payphones and the amortization of payphone
location contracts resulting from the payphone sales in fiscal 2008. This
decrease also included a $235,157 reduction in depreciation and amortization in
fiscal 2008 that would have been recognized if the assets of the Integrated
Telecom Business had been classified as held and used in continuing operations
during fiscal 2008.
Stock
compensation expense decreased by $779,752, from $1,623,714 to $843,962 in the
fiscal year ended March 31, 2008, due to the vesting of options and warrants
granted in prior years and a reduction in the fair value of the fiscal year 2008
grants.
The
Company has significantly reduced its total operating costs and expenses of
continuing operations in the fiscal year ended March 31, 2008. The fiscal year
2007 amounts also included asset impairment charges of $1,573,795 relating to
Davel’s payphone equipment and location contracts, and restructuring charges of
$185,968 relating to reductions in personnel. There were no comparable charges
in the 2008 fiscal year. Total operating costs and expenses, excluding
depreciation and amortization, included $510,704 and $428,435 for ProGames in
the fiscal years ended March 31, 2008 and 2007, respectively. Corporate
operating expenses, excluding stock compensation and restructuring charges, were
$2,124,252 in fiscal 2008 compared to $2,606,757 in fiscal 2007, reflecting the
Company’s continuing efforts to reduce expenses.
Interest
and other expense, net, was $1,728,057 for the year ended March 31, 2008
compared with $2,474,309 in the prior fiscal year. During the fiscal year ended
March 31, 2008, we retired principal owed under the YA Global debentures in the
amount of approximately $4,801,000 and the YA Global promissory note in the
amount of $1,100,000 that we issued in May 2007. We also retained
$3,830,168 of capital leases and $1,591,978 of equipment obligations for which
the Company was co-obligor following the sale of the Wireless Networks Business
in July 2007. During the 2007 fiscal year, we issued new debentures
to YA Global in the principal amount of $7,000,000, less $505,000 in financing
fees. We also completed the retirement of notes payable to YA Global in the
aggregate amount of $3,600,000 and retired $4,000,000 of principal on the
debentures to YA Global using the Company’s common stock. The major components
of net interest and other expense for the fiscal years ended March 31, 2008 and
2007 are presented in the following schedule:
Type
of Debt
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Convertible
debentures (at stated rates)
|
|
$ |
1,142,273 |
|
|
$ |
1,332,439 |
|
Convertible
debentures (debt discount amortization)
|
|
|
264,110 |
|
|
|
893,322 |
|
Convertible
debentures (stock issuance discounts)
|
|
|
148,550 |
|
|
|
367,443 |
|
SEDA
Draw Discounts
|
|
|
- |
|
|
|
137,795 |
|
Capital
lease and equipment obligations
|
|
|
396,092 |
|
|
|
- |
|
Note
payable to YA Global
|
|
|
25,315 |
|
|
|
25,074 |
|
Notes
receivable – Microlog Corporation
|
|
|
(53,630 |
) |
|
|
- |
|
Other
notes receivable
|
|
|
(30,136 |
) |
|
|
- |
|
Accretion
of discount – USA Preferred Stock
|
|
|
(244,198 |
) |
|
|
- |
|
Interest
and Other (Income) Expense, net
|
|
|
79,681 |
|
|
|
(281,764 |
) |
|
|
$ |
1,728,057 |
|
|
$ |
2,474,309 |
|
The loss
from continuing operations for the year ended March 31, 2008 was $9,948,590, or
$0.0129 per share, compared to a loss of $13,437,205, or $0.0222 per share in
fiscal year 2007. The fiscal year 2008 loss included a $2,778,906
loss on sale of assets relating to the Davel payphones and certain related
liabilities and our equity in the net loss of Microlog Corporation since the
date of acquisition of $92,967. The fiscal year 2007 loss included
$1,573,795 of asset impairment charges, $185,968 of restructuring charges and a
$409,601 loss on extinguishment of debt relating to the refinancing of the $15
million debenture.
The loss
from discontinued operations for the fiscal year ended March 31, 2008 was
$8,413,012, or $0.0109 per share, compared to $32,461,083, or $0.0538 per share
in fiscal 2007. The fiscal year 2008 loss includes a $3,433,843 loss on the sale
of the Wireless Networks Business, after a $1,602,447 reduction in the loss
relating to the sale of the Longmont, CO wireless network in the fourth quarter
of fiscal 2008, and a $2,424,785 loss on the sale of the ISP Businesses. The
fiscal year 2007 loss from discontinued operations included asset impairment
charges of $25,702,192, including $19,227,303 relating to the Wireless Networks
Business and $6,474,889 relating to the ISP Business.
We
reported a net loss of $18,361,602 for the year ended March 31, 2008, or $0.0238
per share, compared with a net loss of $45,898,288 for the fiscal year ended
March 31, 2007, or $0.0760 per share.
Liquidity
and Capital Resources
During
the fiscal year ended March 31, 2009, the balance of unrestricted cash and cash
equivalents decreased by $652,987 to $1,419,130.
Although
the Company had a net loss of $11,360,021 during the fiscal year ended March 31,
2009, net cash used in operations was $70,223. The net loss included significant
non-cash expenses that reduced actual cash used in operations. Non-cash expenses
consisted of asset impairment charges of $8,764,065 relating to the goodwill of
the Integrated Telecom Business, a $1,345,534 write down in the carrying value
of notes receivable, $723,968 of depreciation and amortization, and other
non-cash expenses totaling $630,177. There was also a non-cash gain on sale of
discontinued operations of $901,138 applicable to the settlement of one the Kite
Networks equipment leases. Net cash used in operating activities included
$727,192 of cash provided from changes in working capital, principally due a
$909,508 reduction in restricted cash resulting from the release of cash
collateral from letters of credit that we were not required to renew and a cash
distribution received from the escrow account established in connection with the
sale of Davel’s payphones.
The net
cash used in operations included cash generated by the Integrated Telecom
Business which was used primarily to help fund the $1,431,577 of interest paid
in fiscal 2009, including amounts paid to YA Global. The net cash
used in operations also included $810,215 of Regulatory Receipts relating to
claims by Davel against certain telecommunication carriers which was used to
help fund the Company’s corporate expenses.
The
amount of cash used in investing activities relating to capital expenditures was
nominal in the fiscal year ended March 31, 2009. The Company does not
expect capital expenditures to be significant in the future.
Our
financing activities for the fiscal year ended March 31, 2009 used net cash of
$579,004. Cash used in financing activities included $392,980 in cash to pay
principal on debt obligations, including the notes payable and equipment and
capital lease obligations relating to the Wireless Networks Business. Cash used
in financing activities also includes $186,024 of financing costs incurred in
connection with the refinancing of the YA Global debt on June 30, 2008 as
described below.
Our
history of net losses, our lack of a sufficient corporate credit history with
significant suppliers and the uncertain payback associated with investments in
municipal wireless networks has proved to be significant obstacles to overcome
in our search for capital. Nevertheless, YA Global has been a significant source
of capital for the Company. On June 30, 2006, we issued an amended 7.75% secured
convertible debenture in the amount of $15,149,650 to YA Global, replacing a
convertible debenture with an outstanding principal amount of $15,000,000 (and
accrued interest of approximately $149,650) that was issued to YA Global in May
2005.
On August
28, 2006, the Company entered into a financing agreement with YA Global that
provided $7.0 million in funding with the proceeds received upon the issuance of
a series of secured, convertible debentures. At each closing, the Company issued
YA Global a 7.75% secured convertible debenture in the principal amount for that
closing, convertible into common stock at $0.174 per share and paid a
transaction fee equal to 7% of the proceeds.
Using
shares of our common stock registered on Form S-3 in November 2006 and as
permitted by the terms of the debentures, the Company made principal and
interest payments on the debentures issued to YA Global that totaled $4,880,489
during the fiscal year ended March 31, 2007, and that totaled $1,967,908 from
April 2007 through May 2007. However, the supply of registered shares
available for the conversion of the debentures was exhausted. We made additional
cash payments of principal and interest on the debentures that totaled
$4,149,651 during the fiscal year ended March 31, 2008, primarily from the
proceeds of the sale of the ISP Business and payphone assets. However, the
Company was unable to make the weekly scheduled principal payments of $375,000
plus interest commencing February 1, 2008. The Company made a partial payment of
interest of $114,530 on February 1, 2008 and made additional payments of
interest aggregating $200,000 on May 2 and June 4, 2008.
Effective
June 30, 2008, the Company issued a secured convertible debenture to YA Global
(the “Convertible Debenture’) with an aggregate principal balance of
$13,391,175, replacing the former convertible debentures. The Convertible
Debenture provides for monthly payments of interest at 12% with the remaining
principal balance due on May 1, 2009. YA Global may convert any portion of the
unpaid principal and interest into shares representing up to 4.99% of the
Company’s common stock at the lesser of $0.04973 per share or the average of the
two lowest volume weighted average prices during the five trading days
immediately preceding the conversion date.
During
the fiscal year ended March 31, 2009, the Company issued 629,042,857 shares of
common stock in satisfaction of $324,840 in principal relating to the
Convertible Debenture. Subsequent to March 31, 2009, YA Global converted an
additional $87,710 of principal into 290,700,000 shares of common stock. Such
shares are tradable by YA Global pursuant to Rule 144 of the Securities Act of
1933 (the “Securities Act”)
The
Company did not pay the remaining principal balance of $13,029,175 that was due
on May 1, 2009. On May 5, 2009, the Company executed an agreement
with YA Global, pursuant to which YA Global has agreed to forbear from enforcing
its rights and remedies against the Company under the Convertible Debenture and
related agreements through June 1, 2009. Although a further forbearance through
June 5, 2009 was executed by YA Global, it has verbally advised the Company that
it does not intend to provide additional forbearance and that it intends to
enforce its rights and remedies as senior secured creditor against the
Company.
As
described above, certain equipment leases and other equipment purchases of Kite
Networks were co-signed by Mobilepro Corp. The Company, subject to any defenses
it may have, could be required to make the payments due on these equipment
leases and other equipment-related obligations that were transferred to Gobility
in connection with the sale of the Wireless Networks Business. To date Gobility
has not made any lease payments and has not raised at least $3.0 million in cash
as required under the terms of the Gobility Debenture. As a result,
the Company has the right but not the obligation to repurchase the Wireless
Networks Business with the surrender of the Gobility Debenture and the payment
of nominal additional consideration.
On March
10, 2008, Gobility sold the assets of the wireless network in Longmont,
Colorado, and the Company received the proceeds in the form of promissory notes
totaling $1,800,000. In addition, the Company entered into a forbearance
agreement with the principal equipment vendor and agreed to pay the $1,591,978
equipment obligation, with interest at the prime rate, and a related lease
obligation in the principal amount of $149,749. In March 2008, the
Company also paid one of the leases with an aggregate principal balance of
$318,595, plus accrued interest, by paying $93,000 in cash and applying the
$250,000 certificate of deposit that secured the lease relating to the Tempe,
Arizona wireless network.
On August
1, 2008, the Company executed a promissory note and release with Data Sales in
the principal amount of $330,000. The note is in full satisfaction of $1,231,138
of the equipment lease obligations of Kite Networks and reflects the impact of a
sale of certain uninstalled wireless equipment by Data Sales to an unaffiliated
third party purchaser that was consummated in July 2008. The note, as
amended, requires seven monthly payments of $10,000 through March 1, 2009 and
sixteen monthly payments of $7,000 thereafter and accrues interest at the rate
of twelve percent. The unpaid principal balance and accrued interest is due and
payable on July 31, 2010. The Company recorded a gain of $901,138 in the second
fiscal quarter of the year ended March 31, 2009 as a result of the
transaction.
The
Company is currently cooperating with Gobility in its efforts to sell the
remaining assets of Kite Networks in order to pay off the obligations relating
to the leases and other equipment. In the event Gobility is
unsuccessful in its attempts to sell the remaining assets and satisfy the lease
obligations, the Company could be required to make the payments on the remaining
leases. Given the passage of nearly two years since the sale of the Wireless
Networks Business and the failure of one of the leasing companies, Commonwealth
Capital Corporation, to cooperate with prior sale efforts, we believe it is
unlikely that Gobility will succeed in selling any additional portions of the
Wireless Networks Business. At March 31, 2009, the aggregate amount recorded on
the consolidated balance sheets relating to the capital lease obligations,
accrued interest, and the note payable and equipment obligation was $4,446,784.
The Company has also recorded the certificates of deposits securing the lease
obligations of $937,664.
Our major
challenge is to sustain the funding of current operations and to meet our debt
service obligations. Following the termination of the USA Agreement relating to
the sale of the Integrated Telecom Business and the USA Management Agreement in
the fourth quarter of fiscal year 2008, the Company re-assumed operating control
of the Integrated Telecom Business. The Integrated Telecom Business
continues to generate cash in amounts that has been sufficient to fund the cost
of debt service relating to the Convertible Debenture. However, we
continue to fund the operations of ProGames which has not yet generated
sufficient revenues to be profitable. We also have corporate expenses and the
equipment lease obligations associated with the Wireless Networks Business that,
subject to certain defenses, the Company may be required to fund. Our existing
cash balance and the expected cash flow generated by the Company’s operations
will not be sufficient to meet our future cash needs if the payments required
under the Convertible Debenture and other debt are not
restructured. To date, YA Global has indicated that it is unwilling
to restructure the Convertible Debenture.
The
Company’s financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and settlement of liabilities and
commitments based on recorded amounts for the foreseeable future. To date, the
Company has been unable to permanently eliminate the cash requirements to fund
certain remaining liabilities of the Wireless Networks Business for which the
Company is co-obligor Although YA Global initially extended the forbearance
period through June 5, 2009. YA Global has not agreed to further extend the
forbearance period or restructure the payment terms of the obligations owing
under the Convertible Debenture. As a result, Mobilepro is in default
of its obligations under the Convertible Debenture owed to YA Global and, given
current market conditions and Mobilepro’s financial condition, obtaining the
required financing to retire the Convertible Debenture is unlikely to occur in
the immediate future. YA Global has informed the Company that it
intends to exercise its rights as the Company’s senior secured
creditor. Such rights include, but are not limited to, foreclosing on
the assets of the Company. In such event the Company will not have the ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Inflation
Our
monetary assets, consisting primarily of cash and receivables, and our
non-monetary assets, consisting primarily of intangible assets and goodwill, are
not affected significantly by inflation. We believe that replacement costs of
equipment, furniture, and leasehold improvements will not materially affect our
operations. However, the rate of inflation affects our expenses, such as those
for employee compensation and costs of network services, which may not be
readily recoverable in the price of services offered by us
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk
Our
exposure to market risk for changes in interest rates relates primarily to our
purchase of certificates of deposit to secure letters of credit and capital
leases. In addition, we own an investment in the common stock of Microlog which
had a market value of $373,333 at March 31, 2009. Microlog’s common
stock is traded on the “Pink Sheets” under the symbol “MLOG” and is subject to
variations in price based on trading volume as well as general market
conditions. Our investment is accounted for under the equity method
of accounting and, along with the notes and other receivables due from Microlog,
had a carrying value of $491,447 at March 31, 2009.
We do not
use derivative financial instruments in our investments. Accordingly, we do not
believe that there is any material market risk exposure with respect to
derivative or other financial instruments that would require disclosure in this
item
Item
8. Financial Statements
SEE
THE INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS ON PAGE
79
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item
9A. Controls and Procedures
Attached
as exhibits to this Form 10-K are certifications of Mobilepro Corp.’s Chief
Executive Officer and Chief Accounting Officer, which are required in accordance
with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). This “Controls and Procedures” section includes information
concerning the controls and controls evaluation referred to in the
certifications. Management’s assessment of internal control over financial
reporting is set forth below in this section.
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”), we conducted an
evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this Annual Report on Form 10-K. Based upon
that evaluation, our CEO and our Principal Accounting Officer have concluded
that the design and operation of our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission and that information required to be disclosed
in the reports that we file or submit under the Exchange Act is accumulated and
communicated to management, including our principal executive and financial
officers, to allow timely decisions regarding required disclosure. Our quarterly
evaluation of disclosure controls includes an evaluation of some components of
our internal control over financial reporting, and internal control over
financial reporting is also separately evaluated on an annual basis for purposes
of providing the management report, which is set forth below.
The
evaluation of our Disclosure Controls included a review of the control’s
objectives and design, the company’s implementation of the controls, and their
effect on the information generated for the use in this Form 10-K. In the course
of the controls evaluation, we reviewed identified data errors, control
problems, or acts of fraud, and sought to confirm that appropriate corrective
actions, including process improvements, were being undertaken. The overall
goals of the evaluation activities are to monitor our Disclosure Controls, and
to modify them as necessary. Our intent is to maintain the Disclosure Controls
as dynamic systems that change as conditions warrant.
Based on
the controls evaluation, our CEO and CAO have concluded that, as of the end of
the period covered by this Form 10-K, our Disclosure Controls, were effective to
provide reasonable assurance that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized, and reported within the
time periods specified by the SEC, and the material information related to
Mobilepro Corp. and its consolidated subsidiaries is made known to management,
including the CEO and CAO, particularly during the period when our periodic
reports are being prepared.
Management
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with authorizations of management and directors of the
Company; and (iii) provide reasonable assurance regarding prevention of timely
detection of unauthorized acquisition, use, or disposition of the Company’s
assets that could have a material effect on the financial
statements.
Management
assessed our internal control over financial reporting as of March 31, 2009, the
end of the fiscal year. Management based its assessment on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Management’s assessment included
evaluation of elements such as the design and operating effectiveness of key
financial reporting controls, process documentation, accounting policies, and
our overall control environment. This assessment is supported by testing and
monitoring performed by our own finance and accounting personnel.
Based on
our assessment, management has concluded that our internal control over
financial reporting was ineffective as of the end of the fiscal year to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles as a result of the
material weaknesses in internal control as described and defined below. We
reviewed the results of management’s assessment with the Audit Committee of our
Board of Directors. In addition, on a quarterly basis we will evaluate any
changes to our internal control over financial reporting to determine if a
material changed has occurred.
Material
Weaknesses in Internal Controls
Bagell,
Josephs, Levine & Company, L.L.C. (“Bagell”) our independent registered
public accounting firm, has provided us with an unqualified report on our
consolidated financial statements for the fiscal year ended March 31, 2009.
However, during the conduct of our assessment of internal control over financial
reporting, we identified material weaknesses in the design of certain general
controls governing computer processing activities and have advised the Audit
Committee that the following material weaknesses existed at March 31, 2009. As
defined by the Public Company Accounting Oversight Board Auditing Standard No.
5, a material weakness is a deficiency or a combination of deficiencies in
internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis.
The
material weaknesses exist in the design and execution of certain general
controls governing computer processing (“I/T”) activities. Most significantly, the
management of the customer information database utilized by the customer care
and customer billing functions of one of our companies is performed offsite by a
subcontracted consultant without proper controls over access to the data or
changes to the system. In addition, we do not have processes established to
document the control over changes made to certain proprietary information
systems that supply transaction amounts.
While
these material weaknesses did not have an effect on our reported results or
result in the restatement of any previously issued financial statements or any
other related disclosure, they nevertheless constituted deficiencies in our
controls. In light of these material weaknesses and the requirements enacted by
the Sarbanes-Oxley act of 2002, and the related rules and regulations adopted by
the SEC, our CEO and CAO concluded that, as of March 31, 2009, our controls and
procedures needed improvement and were not effective at a reasonable assurance
level. Despite those deficiencies in our internal controls, management believes
that there were no material inaccuracies or omissions of material fact in this
annual report.
Management
has plans to strengthen the Company's oversight over the I/T functions and its
attendant controls, procedures, documentation and security beyond what has
existed in prior years. Specifically, we have converted to a new general ledger
system and plan to replace the customer information database system utilized by
the customer care and customer billing functions that is presently maintained
offsite by a subcontrator. During the next fiscal year we plan to convert to a
new billing system that is currently being maintained and used by one of our
other subsidiaries which we believe will provide proper controls over access to
the data and changes to the system. We also plan to take whatever additional
steps are necessary to improve our I/T controls and procedures and eliminate the
identified material weaknesses.
We have
discussed our corrective actions and future plans with our Audit Committee and
Bagell as of the date of this annual report, and believe the planned actions
should serve to correct the above listed material weaknesses in our internal
controls. However, we cannot provide assurance that either we or our independent
auditors will not in the future identify further material weaknesses or
significant deficiencies in our internal control over financial reporting that
we have not discovered to date.
Inherent
Limitations on Effectiveness of Controls
The
Company’s management, including the CEO and CAO, does not expect that our
Disclosure Controls or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that
the control system’s objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions or a
deterioration in the degree of compliance with policies or
procedures.
Item
9B. Other Information
Not
applicable.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance
Our
directors and officers and their ages as of June 30, 2009 are as
follows:
Name
|
Age
|
Position
|
Jay
O. Wright
|
39
|
Director,
Chief Executive Officer and Chairman of the Board
|
Donald
Sledge
|
69
|
Director
|
Donald
Paliwoda
|
56
|
Chief
Accounting Officer and Treasurer
|
Douglas
Bethell
|
59
|
President
of American Fiber Network, Inc. and CloseCall America,
Inc.
|
Tammy
L. Martin
|
44
|
Chief
Administrative Officer, General Counsel and
Secretary
|
The
following is a brief description of the background of our directors and
executive officers.
Background
Information
Jay O. Wright. Jay
Wright has served as our Chief Executive Officer since December 2003 and as a
Director since August 2004. From December 2003 to February 2006, he also held
the title of President. From October 2001 to December 2003, Mr. Wright served as
President of Bayberry Capital, Inc., a Maryland based financial consulting firm.
During that time, he also served from August 2002 to May 2003 as Chief Financial
Officer for Technical and Management Services Corporation where he negotiated
the sale of that company to Engineered Support Systems, Inc. Between December
1999 and September 2001 Mr. Wright served as Chief Financial Officer of Speedcom
Wireless Corporation, a wireless software technology company, where he helped
take that company public via a “reverse merger” and subsequently obtain a NASDAQ
SmallCap listing. From January 1999 to November 1999, Mr. Wright served as
Senior Vice President of FinanceMatrix.com, a Hamilton, Bermuda, based company
focused on developing a proprietary financial software architecture to provide
tax-efficient financing to sub-investment grade companies. Between May 1997 and
January 1999, Mr. Wright served as an investment banker with Merrill Lynch.
Prior to that he was a mergers and acquisitions attorney with Skadden, Arps,
Slate, Meagher and Flom, LLP in New York and Foley & Lardner in Chicago. Mr.
Wright received his Bachelor’s degree in Business from Georgetown University
(summa cum laude) and a JD degree from the University of Chicago Law
School.
Donald Sledge Don
Sledge has served as a Director of the Company since January 2005. Mr. Sledge
serves as the chairman of the Company’s Compensation, Audit and Nominating and
Governance Committees and also serves as the Lead Director. Over the past 10
years, Mr. Sledge has focused on finance and investments. From September 1999 to
March 2007 Mr. Sledge served as a member of the Board of Directors and as
chairman of the Compensation Committee of Merriman, Curhan, & Ford (“MCF”),
a NASDAQ listed broker/dealer. Mr. Sledge has also served as Chief Executive
Officer of MCF between September 1999 and October 2000 and as Chairman of the
Board from September 1999 until May 2001. Mr. Sledge also served as a General
Partner of Fremont Communications from October 2000 until September 2003. In
addition Mr. Sledge sits on the Boards of Directors of two privately held
companies. Mr. Sledge received both a bachelor’s degree and an M.B.A. from Texas
Tech University. He also served in the United States Air Force.
Donald
Paliwoda Donald Paliwoda joined us in November 2004 as the
Chief Financial Officer of our subsidiary, Davel and was promoted in
November 2007 as our Chief Accounting Officer. Prior to the
acquisition of Davel in November 2004, Mr. Paliwoda served as Corporate
Controller from July 2002 to October 2003, at which time he was appointed as
Chief Financial Officer of Davel. Mr. Paliwoda is a Certified Public Accountant
and previously was employed by Deloitte & Touche for eleven years. Mr.
Paliwoda received a Bachelors of Business Administration degree in Accounting
and an MBA from Cleveland State University.
Douglas
Bethell Douglas Bethell joined us in June 2005 as the
President of our subsidiary AFN. Mr. Bethell has also served as the
President of our subsidiary, CloseCall since February 2008. From February 2006
to July 2007 he served as Executive Vice President of the
Company. Prior to the acquisition of AFN in June 2005, Mr.
Bethell served as the President of AFN during which time he was the sole
owner.
Tammy L.
Martin Tammy Martin joined us in November 2004 as the General
Counsel of Davel and was promoted to Chief Executive Officer of Davel in May
2005. In April 2006 Ms. Martin was promoted to Chief Administrative
Officer and Senior Vice President of the Company. In November 2006
Ms. Martin was promoted to General Counsel of the Company. Prior to
the acquisition of Davel in November 2004, Ms. Martin served in various
positions, including General Counsel and Chief Administrative
Officer. Ms. Martin received a Bachelors of Business Administration
degree from Baldwin Wallace College and a JD degree from Cleveland State
University.
Composition
of Board of Directors
Our Board
of Directors may consist of up to seven directors. Our two current directors
currently plan to stand for re-election at the Company’s next Annual
Meeting. The Board of Directors has elected not to amend our bylaws
to reduce the size of our Board and may fill any existing vacancies by Board
resolution.
Board
of Directors Meetings and Committees
During
fiscal 2009, the Board of Directors met six times, including telephone
conference meetings, and acted by unanimous written consent on one occasions. No
director attended fewer than 75% of the total number of meetings of the Board
and the total number of meetings held by all committees of the Board on which
the director served during fiscal 2009.
The Board
has three standing committees: the Audit Committee, the Compensation Committee,
and the Nominating and Governance Committee. The functions of each of these
committees and their members are specified below. All committees operate under
charters approved by the Board, which are available on our website at www.mobileprocorp.com.
The Board
has determined that each director who serves on these committees is
“independent” as defined in Nasdaq Rule 4200(a)(15).
The
members of the committees are identified in the following table.
Director
|
Audit
Committee
|
Compensation
Committee
|
Nominating
and
Governance
Committee
|
Donald
H. Sledge
|
Chair
|
Chair
|
Chair
|
Audit
Committee. The Audit Committee is currently
comprised of Mr. Sledge, who meets the independence and other requirements for
audit committee members under the rules of the Nasdaq Stock Market. The Audit
Committee previously was comprised of three independent members, including Mr.
Sledge. During fiscal 2009, the Audit Committee met four times,
including telephone conference meetings. The Board of Directors has determined
that Mr. Sledge is an “audit committee financial expert” as defined by SEC
regulations. The Audit Committee assists the Board in its oversight of our
financial accounting, reporting and controls by meeting with members of
management and our independent auditors. The committee has the responsibility to
review our annual audited financial statements, and meets with management and
the independent auditors at the end of each quarter to review the quarterly
financial results. In addition, the committee considers and approves the
employment of, and approves the fee arrangements with, independent auditors for
audit and other functions. The Audit Committee reviews our accounting policies
and internal controls. The Audit Committee has a written charter which was
adopted on June 16, 2005. A copy of the Audit Committee charter is available on
our website at www.mobileprocorp.com.
Compensation
Committee. The
Compensation Committee is currently comprised of Mr. Sledge. The Compensation
Committee previously was comprised of three independent members, including Mr.
Sledge. The Compensation Committee recommends cash-based and stock
compensation for executive officers of Mobilepro, administers the Company’s
equity performance plan and makes recommendations to the Board regarding such
matters. The Compensation Committee has a written charter which was adopted on
June 16, 2005. A copy of the Compensation Committee charter is available on our
website at www.mobileprocorp.com. During fiscal 2009, the Compensation
Committee did not meet. However, Mr. Sledge has reviewed and approved the
adjustments to cash and stock based compensation of executive officers and the
amendment to the executive employment agreement of the Company’s Chief Executive
Officer during the current fiscal year.
Nominating and Governance
Committee. The Nominating and Governance Committee is currently comprised
of Mr. Sledge. The Nominating and Governance Committee was previously comprised
of three independent members, including Mr. Sledge. During fiscal
2009, the Nominating and Governance Committee did not meet. The Nominating and
Governance Committee is entrusted with responsibility for consideration and
review of corporate governance matters in addition to its responsibilities for
nominating candidates for membership to the Board. The Nominating and Governance
Committee has a written charter which was adopted on April 26, 2005. A copy of
the Nominating and Governance Committee charter is available on our website at
www.mobileprocorp.com.
Independent
Directors
Mr.
Sledge qualifies as “independent” in accordance with the rules of The Nasdaq
Stock Market. The Nasdaq independence definition includes a series of objective
tests, such as that the director is not an employee of the Company and has not
engaged in various types of business dealings with the Company. In addition, as
further required by the Nasdaq rules, the Board has made a subjective
determination as to each independent director that no relationships exist which,
in the opinion of the Board, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
Director
Nomination Process
The
Nominating and Governance Committee is responsible for identifying and
recommending to the Board of Directors candidates for directorships. The
Nominating and Governance Committee considers candidates for Board membership
who are recommended by members of the Nominating and Governance Committee, other
Board members, members of management and Stockholders. Once the Nominating and
Governance Committee has identified prospective nominees for director, the
chairman of the committee, after discussions with the Chairman of the Board, may
extend an invitation to join the Board of Directors. Additionally, nominees may
be appointed to the Board of Directors by a majority vote of the independent
directors on the Board of Directors. There is no formal procedure by which
stockholders may recommend a candidate for the Board of Directors; however a
stockholder can submit recommendations to Jay Wright, Chairman of the Board, at
jwright22@closecall.com.
As set
forth in the Nominating and Governance Committee Charter, the Board of Directors
seeks to identify as candidates for director persons of the highest ethical
standards and integrity who are willing to act on and be accountable for Board
of Director decisions. The Board of Directors also seeks individuals who have an
ability to provide wise, informed, and thoughtful counsel to top management on a
range of issues, a history of achievement that reflects superior standards for
themselves and others, a loyalty and commitment to driving the success of the
Company, and an ability to take tough positions while at the same time working
as a team player. In addition, the Board of Directors seeks candidates with a
background that provides a combination of experience and knowledge commensurate
with the Company’s needs and activities.
Compliance
under Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Exchange Act and related regulations require the Company’s
directors, certain officers, and any persons holding more than 10% of the
Company’s Common Stock (“reporting persons”) to report their initial ownership
of the Company’s Common Stock and any subsequent changes in that ownership to
the Securities and Exchange Commission. Specific due dates have been
established, and the Company is required to disclose in this Item 10 any failure
to file by these dates during fiscal 2009. We are not aware of any
persons that have held more than 10% of the Company’s Common Stock during fiscal
year 2009, or since the end of the Company’ fiscal year.
In making
this disclosure, the Company has relied on written representations of reporting
persons and filings made with the Commission.
The
Company has adopted its Code
of Ethics and Standards of Business Conduct that applies to all of the
officers, directors and employees of the Company, including the Company’s
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions. The Company will
provide to any person, upon request and at no charge, a copy of the code of
ethics. Any person desiring a copy should make such request in writing to 401
Professional Drive, Suite 128, Gaithersburg, Maryland 20879, Attn: Chief
Financial Officer.
Item
11. Executive Compensation
Compensation
Discussion and Analysis
The
Company’s compensation philosophy is to pay for performance. When the
Company establishes individual compensation awards it bases them on financial
and operational objectives that are consistent with its business strategy,
competitive parameters and creation of long-term stockholder value.
Role
of Company Management
The
members of the Compensation Committee recommend the compensation of the CEO to
the independent directors of the Board for approval. The CEO makes
recommendations to the Compensation Committee concerning the compensation of the
Named Executive Officers. The CEO is also involved in establishing
performance goals for the annual and long-term incentive plans, subject to
Compensation Committee approval.
Performance
Review
The
Company reviews on an annual basis the performance of all executives, including
the Named Executive Officers, to assess individual performance over the course
of the previous year against preset financial and operational
targets. This review is intended to ensure that each executive’s
compensation is tied to the Company’s financial and operational performance,
which includes, but is not limited to, earnings, revenue growth, cash flow and
earnings per share. In reviewing compensation recommendations, the Compensation
Committee evaluates performance results and market data to ensure that awards
are aligned with the contributions made by the executives to the Company and
with compensation paid at similarly situated companies, both within and outside
of its industry.
Components
of Compensation
Base Salary-Base salaries are
established to reward an executive’s sustained performance and to reflect an
executive’s current position and work experience. A Named Executive
Officer’s Base Salary is determined by the Compensation Committee’s assessment
of that person’s continued performance compared to that person’s
responsibilities, including the impact of that performance on the company’s
business results, and the market pay for that person’s role, experience and
potential for advancement.
Annual Incentives-Annual
incentive awards, such as bonuses, are designed to reward the Named Executive
Officers for achieving short-tem financial and operational goals to reward
individual performance. Annual incentive awards for individual Named
Executive Officers are a percentage of that executive’s base salary, typically
ranging from 20% to 100%.
Long-Term
Incentives-Long-term incentives are designed to align the Named Executive
Officers’ interest with those of the Company’s shareholders. The
Company uses stock options and warrants to reward the Named Executive Officers
for creation of long-term shareholder value. The Company believes that by
granting stock options to purchase the Company’s common stock to its executives
which vest over a certain number of years, executives will be encouraged to
remain with the Company. Stock options are priced at the fair market value of
our common stock as the grant effective date. Long-term incentives
also are intended to reward individual performance. The size of a
stock option grant or warrant is determined primarily by the Compensation
Committee’s assessment of the Named Executive Officer’s performance compared to
our financial results. The value to our Named Executive Officers of
the long-term awards is based upon our stock price that directly ties them to
the creation of shareholder value.
Compensation
Committee Report
The
Compensation Committee of Mobilepro Corp. has reviewed and discussed with
management the Compensation Discussion and Analysis in this Form 10-K as
required under Item 402(b) of Regulation S-K. Based on this review
and discussions with management, the Compensation Committee recommended to the
Company’s full Board that the Compensation Discussion and Analysis be included
in the Company’s Annual Report on Form 10-K and the Proxy
Statement.
Respectfully
submitted
Donald H.
Sledge, Chairman
Summary
Compensation
The
following table sets forth information regarding compensation earned in fiscal
2009 by our Chief Executive Officer, our principal financial officer, and our
three other most highly compensated executive officers who were serving as
executive officers as of March 31, 2009, also known as our “Named Executive
Officers”. At March 31, 2009, the Company had only four
executive officers as set forth below.
Summary
Compensation Table
Name
and Principal Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Stock
Awards
($)
|
Option
(2)
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other (3)
Compensation
($)
|
Total
($)
|
Jay
Wright,
Chief
Executive Officer
|
2009
2008
|
251,000
262,500
|
50,000(1)
50,000(4)
|
-
-
|
9,600
239,158
|
-
-
|
-
-
|
-
-
|
310,600
551,658
|
2007
|
247,500
|
29,700
|
-
|
286,718
|
-
|
-
|
-
|
563,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tammy
Martin,
General
Counsel and
Chief
Administrative Officer
|
2009
2008
|
197,125
190,000
|
50,000(1)
39,900(4)
|
-
-
|
5,222
39,620
|
-
-
|
-
-
|
8,400
8,400
|
260,747
277,920
|
2007
|
190,000
|
45,000
|
-
|
41,200
|
-
|
-
|
8,400
|
284,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald
Paliwoda,
Chief
Accounting Officer
|
2009
|
145,250
|
50,000(1)
|
-
|
3,078
|
-
|
-
|
-
|
198,328
|
2008
|
131,650
|
29,400
(4) |
-
|
14,678 |
- |
- |
- |
175,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas
Bethell,
President,
CCA and
AFN
|
2009
2008
2007
|
76,000
76,000
60,000
|
50,000(1)
75,000
75,000
|
-
-
-
|
53,526
124,100
84,567
|
-
-
-
|
-
-
-
|
114,000
114,000
90,000
|
293,526
389,100
309,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
bonus amounts represent estimates of the highest amounts that the Named
Executive Officers might be awarded by the Compensation
Committee. As of the date hereof none of the potential
bonus has been paid
|
(2)
|
The
amounts reflected in this column represent the compensation cost recorded
in our financial statements during fiscal 2009, 2008 and 2007 under FAS
123R for stock warrants awarded in fiscal 2009 and prior fiscal years.
With respect to stock warrants, the compensation cost amounts recorded
under FAS 123R have been calculated using the Black-Scholes option pricing
model based on the following assumptions for grants made in the years
indicated:
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Dividend
yield
|
|
|
-
|
% |
|
|
-
|
% |
|
|
-
|
% |
Expected
volatility
|
|
|
70
|
% |
|
|
60 |
% |
|
|
60 |
% |
Risk-free
interest rate
|
|
|
3.00
|
% |
|
|
4.00 |
% |
|
|
4.00 |
% |
Expected
term (in years)
|
|
|
10.00
|
|
|
|
10.00
|
|
|
|
10.00
|
|
(3)
|
Reflects
payments made to Mr. Bethell under the terms of a consulting agreement
with DNK Enterprises II, Inc. Reflects automobile allowance
payments made to Ms. Martin.
|
(4)
|
Approximately
10% of the bonus amount has been paid in cash subsequent to the end of
fiscal year 2008 and 90% has been deferred until such time as the Company
has sufficient cash to pay the
bonuses.
|
Summary
of Employment and Consulting Arrangements
Jay O. Wright: Jay O. Wright
joined us in December 2003 as Chief Executive Officer. Mr. Wright was paid a
base salary of $180,000 in calendar year 2004 and was eligible to receive a
bonus equal to 1% of the revenues for the most recent 12 month period of each
acquisition made by the Company during his employment period. Mr. Wright also
received warrants to purchase 15,182,500 shares of our Common Stock at an
exercise price of $0.018 per share upon the execution of his initial employment
agreement. Subsequent to year-end March 31, 2005, Mr. Wright’s employment
agreement was amended to, among other things, extend his employment period to
December 31, 2007. Mr. Wright’s base salary was increased to $210,000 for
calendar year 2005, $240,000 for calendar year 2006 and $270,000 for calendar
year 2007. The terms of the new employment agreement eliminated the payment of
bonuses as a result of the closing of an acquisition. Mr. Wright’s bonus amounts
are now based upon the successful completion of management by objective
milestones that are mutually established by Mr. Wright and the Compensation
Committee. In connection with the execution of the new employment agreement, Mr.
Wright also received additional warrants to purchase 5,000,000 shares of our
Common Stock at an exercise price of $0.22 per share, which warrants vest
ratably from April 1, 2005 to December 31, 2007. On June 25, 2008,
the Company entered into a Third Amended and Restated Executive Employment
Agreement with Mr. Wright commencing July 1, 2008. The Agreement is
for an initial term of one-year with a one-year renewal period. Under
the terms of the Agreement, Mr. Wright is entitled to an annual base salary of
$252,000 in calendar year 2008, $260,000 in calendar year 2009 and $270,000 in
calendar year 2010. Mr. Wright is also eligible for certain cash
bonuses of up to $340,000 during the term of the Agreement based on the
achievement of certain objectives and financial goals mutually established by
Mr. Wright and the Compensation Committee. In connection with
the Third Amended and Restated Executive Employment agreement, Mr. Wright was
granted a warrant to purchase 20,000,000 shares of common stock at an exercise
price of $0.0016, which vest one-half each on June 30, 2009 and June 30,
2010. On May 26, 2008, the Company also canceled warrants to purchase
5,000,000 shares of common stock at an exercise price of $0.22 per share
previously granted to Mr. Wright. In consideration for his continued
employment with the Company, on April 29, 2009 Mr. Wright was granted a warrant
to purchase 10,000,000 shares of common stock at an exercise price of $0.0003,
which vest on June 30, 2010.
Donald Paliwoda: Mr. Donald
Paliwoda joined us in November 2004 as the Chief Financial Officer of our
subsidiary, Davel Communications, Inc. and was promoted in November 2007 as our
Chief Accounting Officer. Mr. Paliwoda serves as the Company’s
principal financial officer and principal accounting
officer. While working as the Chief Financial Officer of our
subsidiary, Mr. Paliwoda was granted incentive stock options in November 2005 to
purchase 236,000 shares of common stock at an exercise price of $0.22 per
share. Under the terms of his current employment arrangement, Mr.
Paliwoda receives a salary of $147,000 and is eligible to participate in the
Company’s bonus program. In accordance with Mr. Paliwoda assuming his new
position as Chief Accounting Officer, he was awarded warrants to purchase
1,000,000 shares of Mobilepro’s common stock on November 5, 2007 at a price of
$0.0089 per share, vesting on June 30, 2008. On May 26, 2008 the Board of
Directors also granted Mr. Paliwoda a warrant to purchase 1,750,000 shares of
Mobilepro common stock at an exercise price of $0.0016, which vest on June 30,
2009. In consideration for his continued employment with the Company,
on April 29, 2009 Mr. Paliwoda was granted a warrant to purchase 3,000,000
shares of common stock at an exercise price of $0.0003, which vest on June 30,
2010.
Douglas
Bethell. Mr. Douglas Bethell joined us in June 2005 as
President of our subsidiary, American Fiber Network, Inc.
(“AFN”). Pursuant to the terms of his employment agreement, Mr.
Bethell was paid a base salary of $60,000 per year and was entitled to receive
an annual bonus based on the operating profits of AFN; provided, however, that
in no event shall his annual bonus be less than $25,000. At the same time, the
Company also executed a consulting agreement with DNK Enterprises II, Inc.
(“DNK”), a company controlled by Mr. Bethell, pursuant to which DNK was paid
$90,000 annually for services rendered to the Company by Mr.
Bethell. The term of the employment and consulting agreements were
for a period of two years commencing June 1, 2005. Under the current
employment arrangement with Mr. Bethell, he is paid an annual salary of $76,000
and DNK is paid a consulting fee of $114,000 per year. Mr. Bethell
was also paid a cash bonus in the amount of $75,000 for the 2008 fiscal
year. In February 2006 Mr. Bethell was promoted to Executive Vice
President of the Company. In connection with his promotion Mr.
Bethell was granted warrants to purchase 1,000,000 shares of Mobilepro common
stock at an exercise price of $0.233 which vested ratably over a twenty four
month period commencing April 1, 2006. On March 20, 2007 the Board of Directors
granted Mr. Bethell warrant to purchase 4,000,000 shares of Mobilepro common
stock at an exercise price of $0.036. The warrant vests in two equal
installments on March 31, 2008 and March 31, 2009. On May 26,
2008 the Board of Directors also granted Mr. Bethell a warrant to purchase
4,000,000 shares of Mobilepro common stock at an exercise price of $0.0016,
which vest on June 30, 2009. In consideration for his continued
employment with the Company, on April 29, 2009 Mr. Bethell was granted a warrant
to purchase 7,500,000 shares of common stock at an exercise price of $0.0003,
which vest on June 30, 2010.
Tammy Martin: Ms. Tammy Martin joined us in November
2004 as General Counsel of our subsidiary, Davel Communications, Inc. Pursuant
to the terms of her employment arrangement, Ms. Martin was paid a base salary of
$186,295 per year and receives an annual car allowance of $8,400. In May 2005,
Ms. Martin was promoted to Chief Executive Officer of Davel Communications, Inc.
At that time Ms. Martin received warrants to purchase 1,500,000 shares of our
Common Stock at an exercise price of $0.15 per share that vested ratably from
April 20, 2005 to March 31, 2006. In February 2006, Ms. Martin was named the
Company's Senior Vice President, Chief Administrative Officer, and Treasurer,
effective April 1, 2006 and was promoted to General Counsel of the Company in
September 2006. Her base salary was increased to $190,000 for the
fiscal year ending March 31, 2007. Ms. Martin’s annual bonus plan was
also revised. Effective April 1, 2006, she was eligible for an annual bonus of
up to 50% of her annual base salary, with payment based on the achievement of
certain individual and Company objectives. She was also granted an additional
warrant to purchase 500,000 shares of our Common Stock at an exercise price of
$0.233 per share that vested ratably over 24 months commencing April 1, 2006. On
August 27, 2007, the Board of Directors granted Ms. Martin a warrant to purchase
3,000,000 shares of MobilePro Common Stock at an exercise price of $0.0075,
which vested on June 30, 2008. On May 26, 2008 the Board of
Directors also granted Mr. Martin a warrant to purchase 4,000,000 shares of
Mobilepro Common Stock at an exercise price of $0.0016, which vest on June 30,
2009. Effective July 1, 2008 Ms. Martin’s salary was increased by
five percent (5%) to $199,500. In consideration for her continued employment
with the Company, on April 29, 2009 Ms. Martin was granted a warrant to purchase
4,000,000 shares of common stock at an exercise price of $0.0003, which vest on
June 30, 2010.
Grant
of Plan-Based Awards
|
|
|
|
Estimated
Future Payouts Under
Non-Equity Incentive Plan Awards
|
|
|
Estimated Future Payouts Under
Equity
Incentive Plan Awards
|
|
|
All Other
Stock
Awards:
Number
of
Shares
of
Stock
or
|
|
|
All
Other
Option
Awards:
Number
of
Securities
Underlying
|
|
|
Exercise or
Base
Price
of
Option
|
|
|
Closing
Price on
Grant
|
Name
|
|
Grant
Date
|
|
Threshold
($)
|
|
|
Target
($)
|
|
|
Maximum
($)
|
|
|
Threshold
(#)
|
|
|
Target
(#)
|
|
|
Maximum
(#)
|
|
|
Units
(#)
|
|
|
Options
(#)
|
|
|
Awards
($ / Sh)
|
|
|
Date
($ / Sh)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jay
Wright, Chief
Executive
Officer
|
|
2009
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
20,000,000
|
|
|
|
0.0016
|
|
|
|
0.0016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tammy
Martin,
General
Counsel
and
Chief
Administrative
Officer
|
|
2009
|
|
|
- |
|
|
|
- |
|
|
|
50,000
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,000,000
|
|
|
|
0.0016
|
|
|
|
0.0016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald
Paliwoda,
Chief
Accounting
Officer
|
|
2009
|
|
|
- |
|
|
|
- |
|
|
|
50,000
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,750,000
|
|
|
|
0.0016
|
|
|
|
0.0016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas
Bethell,
President,
CCA
and
AFN
|
|
2009
|
|
|
- |
|
|
|
- |
|
|
|
50,000
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,000,000
|
|
|
|
0.0016
|
|
|
|
0.0016
|
MobilePro
Non-Plan Option and Warrant Grants
Outstanding
Equity Awards at Fiscal Year End
|
Option
Awards
|
Stock
Awards
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
|
Equity
Incentive
Plan Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number of
Shares
or
Units
of
Stock That
Have
Not
Vested
(#)
|
Market
Value of
Shares or
Units
of
Stock That
Have
Not
Vested
($)
|
Equity Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
(#)
|
Equity
Incentive
Plan Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)
|
Name
|
Exercisable
|
Unexercisable
|
|
|
|
|
|
|
|
|
|
|
Jay
Wright, Chief Executive Officer
|
15,182,500
2,000,000
-
|
-
8,000,000
20,000,000
|
-
-
-
-
|
.0180
.0075
.0016
|
04/15/14
08/27/17
05/25/18
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
|
|
|
|
|
|
|
|
|
|
Tammy
Martin, General Counsel and Chief Administrative Officer
|
1,500,000
500,000
3,000,000
-
|
-
-
-
4,000,000
|
-
-
-
-
|
.1550
.2330
.0075
.0016
|
04/20/15
04/01/16
08/27/17
05/25/18
|
-
-
-
-
|
-
-
-
-
|
-
-
-
-
|
-
-
-
-
|
|
|
|
|
|
|
|
|
|
|
Donald
Paliwoda, Chief Accounting Officer
|
236,000
1,000,000
-
|
-
-
1,750,000
|
-
-
-
|
.2200
.0089
.0016
|
11/15/15
11/05/17
05/25/18
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
|
|
|
|
|
|
|
|
|
|
Douglas
Bethell, President, CCA and
AFN
|
1,000,000
4,000,000
-
|
-
-
4,000,000
|
-
-
-
|
.2330
.0360
.0016
|
04/01/16
03/20/17
05/25/18
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
Mobilepro Non-Plan Option and Warrant
Grants
We
currently have warrants outstanding that were granted to individuals or entities
outside of any equity compensation plan adopted by us (“Non-Plan Grants”). As
of March 31, 2009, of these Non-Plan Grants, warrants to purchase
2,500,000 shares were held by outside members of our Board of Directors,
warrants to purchase 65,932,500 shares were held by named executive officers of
Mobilepro and warrants to purchase 26,566,468 shares were held by other
individuals including former directors, executive officers and other employees.
In addition, warrants to purchase 66,100,000 shares of our common stock were
held by former owners of acquired companies or entities that received warrants
in connection with a financing transaction. Such Non-Plan Grants were made
pursuant to the terms of option or warrant agreements, as applicable, with each
such grant authorized by the Board of Directors of Mobilepro. The Non-Plan
Grants have not been approved by our stockholders.
Compensation
Committee Interlocks and Insider Participation
During
fiscal year 2009 the Company has no member of its Compensation Committee that
served as an executive officer of the Company.
The
Company believes its executive compensation should be designed to allow the
Company to attract, motivate and retain executives of a high caliber to permit
the Company to remain competitive in its industry.
Compensation of Chief Executive
Officer
Mr.
Wright joined us in December 2003 as Chief Executive Officer. Mr. Wright was
paid a base salary of $180,000 in calendar year 2004 and was eligible to receive
a bonus equal to 1% of the revenues for the most recent 12 month period of each
acquisition made by the Company during his employment period. Mr. Wright also
received warrants to purchase 15,182,500 shares of our Common Stock at an
exercise price of $0.018 per share upon the execution of his initial employment
agreement. Subsequent to year-end March 31, 2005, Mr. Wright’s employment
agreement was amended to, among other things, extend his employment period to
December 31, 2007. Mr. Wright’s base salary was increased to $210,000 for
calendar year 2005, $240,000 for calendar year 2006 and $270,000 for calendar
year 2007. The terms of the new employment agreement eliminate the payment of
bonuses as a result of the closing of an acquisition. During 2006 and 2007 Mr.
Wright’s bonus was based upon the successful completion of management by
objective milestones that were mutually established by Mr. Wright and the
Compensation Committee. In connection with the execution of the new
employment agreement, Mr. Wright also received additional warrants to purchase
5,000,000 shares of our Common Stock at an exercise price of $0.22 per share,
which warrants vested ratably from April 1, 2005 to December 31,
2007. On June 25, 2008, the Company entered into a Third Amended and
Restated Executive Employment Agreement with Mr. Wright commencing July 1,
2008. The Agreement is for an initial term of one-year with a
one-year renewal period. Under the terms of the Agreement, Mr. Wright
is entitled to an annual base salary of $252,000 in calendar year 2008, $260,000
in calendar year 2009, and $270,000 in calendar year 2010. Mr. Wright
is also eligible for certain cash bonuses of up to $340,000 during the term of
the Agreement based on the achievement of certain objectives and financial goals
mutually established by Mr. Wright and the Compensation
Committee. In connection with the Third Amended and Restated
Executive Employment Agreement, Mr. Wright was granted a warrant to purchase
20,000,000 shares of common stock at an exercise price of $0.0016, which vest
one-half each on June 30, 2009 and June 30, 2010. On May 26, 2008,
the Company also canceled warrants to purchase 5,000,000 shares of common stock
at an exercise price of $0.22 per share previously granted to Mr. Wright. In
consideration for his continued employment with the Company, on April 29, 2009
Mr. Wright was granted a warrant to purchase 10,000,000 shares of common stock
at an exercise price of $0.0003, which vest on June 30, 2010.
Compensation
of Directors
During
fiscal 2009 we provided our independent directors $2,750 per month as
compensation for services provided as a Director. Effective July 1, 2008 the
monthly compensation amount was increased to $3,000.
In
January 2005, in connection with his agreement to serve on our Board of
Directors, we granted Mr. Sledge a warrant to purchase 500,000 shares of our
Common Stock, at an exercise price of $0.185 per share. The warrant was canceled
on January 1, 2009.
In April
2005, we granted our independent director, Mr. Sledge, a warrant to purchase
250,000 shares of our Common Stock, at an exercise price of $0.15 per share. The
warrant, which became fully vested and exercisable in April 2006, was based upon
a recommendation by the Compensation Committee, granted by Mr. Wright on April
20, 2005 and ratified by the Board of Directors on June 16, 2005. The warrant
was canceled on January 1, 2009.
In
February 2006, we granted our independent director, Mr. Sledge, a warrant to
purchase 250,000 shares of our Common Stock, at an exercise price of $0.233 per
share. The warrant was canceled on January 1, 2009.
In August
2007, we granted our independent director, Mr. Sledge, a warrant to purchase
1,000,000 shares of our Common Stock, at an exercise price of $0.0075 per share.
These warrants vested and became exercisable one twelfth each month through
August 2008.
In May
2008, we granted our independent director, Mr. Sledge, a warrant to purchase
1,500,000 shares of our Common Stock, at an exercise price of $0.0016 per share.
These warrants vest and become exercisable on August 31, 2010.
In April
2009, we granted our independent director, Mr. Sledge, a warrant to purchase
2,000,000 shares of our Common Stock, at an exercise price of $0.0003 per share.
These warrants vest and become exercisable on June 30, 2010.
As an
inside director Mr. Wright does not receive any separate compensation for his
service on our Board of Directors.
Warrants
granted to our Director have been priced at market based upon the closing sales
price of our Common Stock on the date of grant. During the fiscal year ended
March 31, 2009, the Company recorded compensation expense in the amount
of $1,458 for our outside director pursuant to the requirements of
Financial Accounting Standard (“FAS”) 123R for warrants awarded in fiscal year
2009 and prior years.
Director
Compensation
Name
|
|
Fees Earned or
Paid in Cash
($)
|
|
|
Stock Awards
($)
|
|
|
Option Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald
H. Sledge
|
|
|
35,250 |
|
|
|
- |
|
|
|
1,458 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
36,708 |
|
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholders Matters
Equity
Compensation Plan Information
The
following table sets forth certain information, as of March 31, 2009, concerning
securities authorized for issuance under the Mobilepro Corp. 2001 Equity
Performance Plan and other compensatory awards:
|
|
Number
of securities to be issued upon exercise of outstanding
options,
warrants
and rights
|
|
|
Weighted-average
exercise price of outstanding
options,
warrants and
rights
|
|
|
Number
of securities remaining available for
future
issuance under
equity
compensation plans (excluding securities
reflected
in column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity
compensation plans approved by security holders (1)
|
|
|
1,551,000
|
|
|
$ |
0.2200 |
|
|
|
28,449,000 |
|
Equity
compensation grants not approved by security holders (2)
|
|
|
110,988,968 |
|
|
$ |
0.0612 |
|
|
|
N/A |
|
Total
|
|
|
112,539,968 |
|
|
$ |
0.0634 |
|
|
|
28,449,000 |
|
(1)
Includes 30,000,000 shares available for issuance under Mobilepro’s 2001 Equity
Performance Plan, all of which may be issued as stock options, restricted stock
or stock bonuses.
(2)
Includes warrants to purchase 110,988,968 shares outstanding as of March 31,
2009 that were issued by Mobilepro under non-plan warrants.
PRINCIPAL
STOCKHOLDERS
The
following table shows the amount of our capital stock beneficially owned by our
independent member of our Board of Directors, the executive officers named in
the Summary Compensation Table above and by all directors and executive officers
as a group as of June 5, 2009. As of June 5, 2009, other than the stockholders,
directors and executive officers identified in the table below, to our
knowledge, no person owned beneficially more than five percent (5%) of our
Common Stock. Unless otherwise indicated, beneficial ownership is direct and the
person indicated has sole voting and investment power. As of June 5, 2009, we
had 1,621,164,653 shares of Common Stock outstanding. Unless otherwise noted in
the footnotes below, the address for each of the individuals listed in the table
below is c/o Mobilepro Corp., 401 Professional Drive, Suite 128, Gaithersburg,
Maryland 20879.
Name
and Address
|
|
Title
of
Class
|
|
Shares
Beneficially
Owned
(1)
|
|
Percent
of
Class
(1)
|
|
Jay
O. Wright (2)
|
|
Common
|
|
|
28,426,500
|
|
1.72
|
%
|
Doug
Bethell (3)
|
|
Common
|
|
|
12,000,000
|
|
*
|
|
Tammy
L. Martin (4)
|
|
Common
|
|
|
9,000,000
|
|
*
|
|
Donald
H. Sledge (4)
|
|
Common
|
|
|
1,000,000
|
|
*
|
|
Donald
Paliwoda (4)
|
|
Common
|
|
|
3,016,000
|
|
*
|
|
Officers
and Directors as a Group (5 Persons) (5)
|
|
Common
|
|
|
53,442,500
|
|
3.20
|
%
|
(1)
|
Applicable percentage of
ownership is based on 1,621,164,653 shares of common stock outstanding as
of June 5, 2009, together with applicable options and warrants for each
shareholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares
of Common Stock subject to options and warrants that are currently
exercisable or exercisable within 60 days of June 5, 2009 are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such person, but are not treated
as outstanding for the purpose of computing the percentage ownership of
any other person.
|
(2)
|
Includes 1,244,000 shares of our
Common Stock and 27,182,500 shares of Common Stock issuable upon the
exercise of warrants to purchase our Common
Stock.
|
(3)
|
Includes 2,500,000 shares of our
Common Stock and 9,500,000 shares of Common Stock issuable upon the
exercise of warrants to purchase our Common
Stock.
|
(4)
|
Includes shares of Common Stock
issuable upon the exercise of options or warrants to purchase our Common
Stock.
|
(5)
|
Includes 3,744,000 shares of our
Common Stock and 49,698,500 shares of Common Stock issuable upon the
exercise of options and warrants to purchase our Common
Stock.
|
|
Item
13. Certain Relationships and Related Transactions, and Director
Independence
RELATED
PARTY TRANSACTIONS
We
granted warrants to purchase our Common Stock to certain of our directors prior
to their appointment to our Board of Directors in connection with their service
as members of our advisory board. We subsequently provided additional grants to
our directors in connection with their service as members of our Board of
Directors. The terms of those grants are described in this Form 10-K in our
discussion of the compensation provided to our directors.
We
believe that each of the above referenced transactions was made on terms no less
favorable to us than could have been obtained from an unaffiliated third party.
Furthermore, any future transactions or loans between us and our officers,
directors, principal stockholders or affiliates, and any forgiveness of such
loans, will be on terms no less favorable to us than could be obtained from an
unaffiliated third party, and will be approved by a majority of our
directors.
On June
30, 2005, the Company entered into a Consulting Agreement with DNK Enterprises
II, Inc. to retain certain of the services of Mr. Doug Bethell for certain of
the Company’s subsidiaries. DNK Enterprises, II, Inc. is substantially owned by
Mr. Bethell. The initial agreement provided for annual payments of $90,000 and
had a two-year term. Under the current employment and consulting arrangement
with Mr. Bethell, DNK is paid a consulting fee of $114,000 per
year. Other than regularly scheduled payments, the Company currently
has no outstanding obligations under this arrangement. On the same date, the
Company entered into a Consulting Agreement with DNK Enterprises, II, Inc. to
retain certain services of the spouse of Mr. Bethell. The agreement calls for
annual payments of $102,000 and had an initial term of one year. The Company
continues to pay DNK $102,000 per year relating to certain services provided by
Mr. Bethell’s spouse. Other than regularly scheduled payments, the
Company currently has no obligations under this agreement. On May 26,
2008, the Company issued a warrant to Ms. Kimberly Bethell to purchase 500,000
shares of the Company’s Common Stock. The warrant has a term of ten
years, is exercisable at $0.0016 per share and vests on June 30, 2009. On April
29, 2009, the Company issued a warrant to Ms. Bethell to purchase 1,000,000
shares of the Company’s Common Stock. The warrant has a term of ten
years, is exercisable at $0.0003 per share and vests on June 30, 2010. In
addition, the Company’s wholly-owned subsidiary, AFN, has an employment
arrangement with Mr. Bethell pursuant to which he serves as AFN’s chief
executive officer and is paid an annual salary of $76,000 plus a bonus
determined based on AFN’s annual operating profit.
In June
2006, Progames Networks, Inc. (“Progames”), a subsidiary of the Company, sold
shares of its common stock to Mr. Jay Wright, Chairman and Chief Executive
Officer and two other employees of the Company representing approximately 12.5%
of the common stock issued in ProGames.
During
fiscal year 2009, Mr. Jay Wright earned compensation in the amount of $31,000 in
connection with his service as Chairman of the Board of Microlog Corporation.
Item
14. Principal Accountant Fees and Services
Fees
The
following represents fees estimated and/or billed by Bagell, Josephs, Levine
& Company, L.L.C. (“Bagell Josephs”) for professional services provided in
connection with the audits of our financial statements for the fiscal years
ended March 31, 2009 and 2008, and the fees billed by Bagell Josephs for
services rendered during fiscal years 2009 and 2008 for audit-related, tax and
other services provided to us.
|
|
2009
|
|
|
2008
|
|
Audit
Fees
|
|
$ |
122,500 |
|
|
$ |
136,000 |
|
Audit-Related
Fees
|
|
|
— |
|
|
|
— |
|
Tax
Fees
|
|
|
57,500 |
|
|
|
55,000 |
|
All
Other Fees
|
|
|
— |
|
|
|
— |
|
Audit
Fees. Consists of fees for professional
services rendered in connection with the audit of our annual consolidated
financial statements, the review of the quarterly consolidated financial
statements and services that are normally provided by Bagell Josephs in
connection with statutory and regulatory filings or
engagements.
Audit-Related Fees. Consists
of fees billed for assurance and related services that are reasonably related to
the performance of the audit or review of our consolidated financial statements
and are not reported under “Audit Fees,” including payroll procedure compliance
reviews, post-audit reviews conducted in connection with the filing of
registration statements, and audit and review services related to the financial
statements.
Tax
Fees. Consists of fees billed for
professional services for tax return preparation, tax advice and tax
planning.
All Other
Fees. Consists of fees for products and
services other than the services reported above.
Audit
Committee Pre-Approval Policies and Procedures
The Audit
Committee of the Board of Directors has established a policy for approving any
non-audit services to be performed by our independent registered public
accounting firm, currently Bagell Josephs. The Audit Committee requires advance
review and approval of all proposed non-audit services that we wish to be
performed by the independent registered public accounting firm. Occasionally,
the Audit Committee chairman pre-approves certain non-audit related fees and the
entire Audit Committee ratifies the chairman’s pre-approval in a subsequent
Audit Committee meeting in accordance with SEC requirements. In fiscal 2009, the
Audit Committee followed these guidelines in approving all services rendered by
Bagell Josephs.
Item
15. Exhibits
The
following exhibits are filed as part of this annual report:
ExhibitNo.
|
Description
|
|
Location
|
2.1
|
Agreement
and Plan of Merger, dated as of March 21, 2002, by and among Mobilepro
Corp., NeoReach Acquisition Corp. and NeoReach, Inc.
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on April 5, 2002
|
2.2
|
Agreement
and Plan of Merger, dated as of January 20, 2004, by and among Mobilepro
Corp., DFWI Acquisition Corp., DFW Internet Services, Inc., Jack W. Beech,
Jr. and Jack W. Beech, Sr.
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on February 4, 2004
|
2.3
|
Agreement
and Plan of Merger, dated as of March 1, 2004, by and among DFW Internet
Services, Inc., DFW Internet Acquisition Corp., Internet Express, Inc., J.
Glenn Hughes and Loretta Hughes
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on April 29, 2004
|
2.4
|
Agreement
and Plan of Merger, dated as of April 21, 2004, by and among DFW Internet
Services, Inc., DFWA Acquisition Corp., August.Net Services, LLC, Louis G.
Fausak, Andrew K. Fullford, John M. Scott, Dennis W. Simpson, Andrew T.
Fausak, and Gayane Manasjan
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on April 29, 2004
|
2.5
|
Agreement
and Plan of Merger, dated as of June 3, 2004, by and among Mobilepro
Corp., DFW Internet Services, Inc., DFWS Acquisition Corp., ShreveNet,
Inc. and the stockholders identified therein
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on June 8, 2004
|
2.6
|
Asset
Purchase Agreement, dated as of June 21, 2004, by and between Crescent
Communications, Inc. and DFW Internet Services, Inc.
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on June 22, 2004
|
2.7
|
Agreement
and Plan of Merger, dated July 6, 2004, by and among the Company, DFW
Internet Services, Inc., DFWC Acquisition Corp., Clover Computer Corp. and
Paul Sadler
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on July 8, 2004
|
2.8
|
Agreement
and Plan of Merger, dated July 14, 2004, by and among DFW Internet
Services, Inc., DFWT Acquisition Corp., Ticon.net, Inc. and the
stockholders identified therein
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on July 15, 2004
|
2.9
|
Agreement
and Plan of Merger, dated July 30, 2004, by and among the Company,
Affinity Acquisition Corp., C.L.Y.K., Inc. and the stockholders identified
therein
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on August 20, 2004
|
2.10
|
Amendment
No. 1 to Agreement and Plan of Merger, dated December 28, 2004, by and
among the Company, Affinity Acquisition Corp., C.L.Y.K., Inc. and the
stockholders identified therein
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on January 21, 2005
|
2.11
|
Asset
Purchase Agreement, dated as of August 13, 2004, by and among Web One,
Inc., DFW Internet Services, Inc. and Jeff McMurphy
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on August 19, 2004
|
2.12
|
Agreement
and Plan of Merger, dated August 31, 2004, by and among the Company, MVCC
Acquisition Corp. and CloseCall America, Inc.
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on October 19, 2004
|
2.13
|
Amendment
No. 1 to Agreement and Plan of Merger, dated September 30, 2004, by and
among the Company, MVCC Acquisition Corp. and CloseCall America,
Inc.
|
|
Incorporated
by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K
filed on October 19, 2004
|
2.14
|
Loan
Purchase Agreement and Transfer and Assignment of Shares, dated September
3, 2004, by and among the Company, Davel Acquisition Corp., Davel
Communications, Inc. and certain stockholders identified
therein
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on September 9, 2004
|
2.15
|
Agreement
and Plan of Merger, dated September 15, 2004, by and among the Company,
DFWW Acquisition Corp., World Trade Network, Inc. and Jack
Jui
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on September 15, 2004
|
2.16
|
Agreement
and Plan of Merger, dated September 16, 2004, by and among the Company,
DFW Internet Services, Inc., DFWR Acquisition Corp., The River Internet
Access Co. and the stockholders identified therein
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on September 17, 2004
|
2.17
|
Agreement
and Plan of Merger by and among Registrant, NeoReach, Inc., Transcordia
Acquisition Corp., Transcordia, LLC and its Unit Holders, dated April
2005
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Form 10-QSB filed August
15, 2005
|
2.18
|
Agreement
and Plan of Merger by and among Registrant, NeoReach, Inc., NeoReach
Wireless, Inc., Evergreen Open Broadband Corporation, and Certain
Shareholders
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Form 10-QSB filed August
15, 2005
|
2.19
|
Agreement
and Plan of Merger, dated June 30, 2005, by and among the Company, AFN
Acquisition Corp., American Fiber Network, Inc. and the individuals and
entities identified therein
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on July 6, 2005
|
2.20
|
Agreement
and Plan of Merger, dated October 31, 2005, by and among the Company,
InReach Internet, Inc., InReach Internet, LLC, and Balco Holdings,
Inc.
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on November 7, 2005
|
2.21
|
Form
of assignment of Limited Liability Company Interest/Release, dated January
31, 2006
|
|
Incorporated
by reference to Exhibit 2.21 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2006
|
2.22
|
Agreement
and Plan of Merger, dated January 31, 2006, by and among Mobilepro Corp.,
Kite Acquisition Corp. and Kite Networks, Inc.
|
|
Incorporated
by reference to Exhibit 2.22 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2006
|
2.23
|
Asset
Purchase Agreement, dated as of December 29, 2006, by and among
TeleCommunication Systems, Inc., Mobilepro Corp., and CloseCall America,
Inc.
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on January 10, 2007
|
2.24
|
Purchase
Agreement, dated as of June 29, 2007, by and between Mobilepro Corp. and
United Systems Access, Inc.
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on July 6, 2007
|
2.25
|
Amendment
to the Purchase Agreement by and between Mobilepro Corp. and United
Systems Access, Inc., dated July 6, 2007
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on July 6, 2007
|
2.26
|
Second
Amendment to the Purchase Agreement by and between Mobilepro Corp. and
United Systems Access, Inc., dated July 13, 2007
|
|
Incorporated
by reference to Exhibit 10.03 to the Registrant’s Current Report on Form
8-K filed on July 19, 2007
|
2.27
|
Third
Amendment to the Purchase Agreement by and between Mobilepro Corp. and
United Systems Access, Inc., dated July 13, 2007
|
|
Incorporated
by reference to Exhibit 10.04 to the Registrant’s Current Report on Form
8-K filed on July 19, 2007
|
2.28
|
Management
Agreement, dated as of July 18, 2007, by and between Mobilepro Corp.,
United Systems Telecom Access, Inc. and United Systems Access,
Inc.
|
|
Incorporated
by reference to Exhibit 10.05 to the Registrant’s Current Report on Form
8-K filed on July 19, 2007
|
2.29
|
Purchase
Agreement, dated as of July 8, 2007, by and between Mobilepro Corp. and
Gobility, Inc.
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on July 10, 2007
|
2.30
|
Convertible
Debenture issued to Mobilepro Corp. by Gobility, Inc., made as of July 8,
2007
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on July 10, 2007
|
2.31
|
Asset
Purchase Agreement by and between Davel Communications, Inc. and Sterling
Payphones, LLC effective as of August 30, 2007
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on September 7, 2007
|
2.32
|
Asset
Purchase Agreement dated December 30, 2008 by and between MobileWebSurf,
Mobilepro Corp., and MWS Newco, Inc.
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on January 19, 2009
|
3.1
|
Certificate
of Incorporation, dated April 20, 2001, of Registrant
|
|
Incorporated by reference to
Exhibit 3.1 to the Registrant’s Registration Statement on Form S-8 filed
on May 11, 2001
|
3.2
|
Certificate
of Amendment of Certificate of Incorporation of Mobilepro Corp dated
November 16, 2001.
|
|
Incorporated
by reference to Exhibit 3.1 to the Registrant’s Registration Statement on
Form S-8 filed on December 4, 2001
|
3.3
|
Certificate
of Amendment to Certificate of Incorporation of Mobilepro Corp. dated
March 11, 2003
|
|
Incorporated
by reference to Exhibit 3.11 to the Registrant’s Registration Statement on
Form SB-2 filed on May 6, 2003
|
3.4
|
By-Laws
of Registrant
|
|
Incorporated
by reference to Exhibit 3.2 to the Registrant’s Registration Statement on
Form S-8 filed on May 11, 2001
|
3.5
|
Amendment
to Certificate of Incorporation of MobilePro Corp. filed with the
Secretary of State of Delaware on January 6, 2009
|
|
Incorporated
by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form
10-Q filed on February 17, 2009
|
4.1
|
2001
Equity Performance Plan
|
|
Incorporated
by reference to Exhibit 4.1 to the Registrant’s Registration Statement on
Form S-8 filed on December 4, 2001
|
4.2
|
Amended
and Restated 2001 Equity Performance Plan
|
|
Incorporated
by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form
10-KSB filed on June 29, 2004
|
4.3
|
Registration
Rights Agreement, dated September 16, 2004, by and among the Company and
the persons and entities identified therein
|
|
Incorporated
by reference to Exhibit 4.3 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
4.4
|
Registration
Rights Agreement, dated November 15, 2004, by and among the Company and
the persons and entities identified therein
|
|
Incorporated
by reference to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed on November 17, 2004
|
4.5
|
Form
of Warrant issued on November 15, 2004
|
|
Incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed on November 17, 2004
|
4.6 |
Registration
Rights Agreement, dated June 30, 2005, by and among the Company and the
persons and entities identified therein |
|
Incorporated
by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
filed on July 6, 2005
|
4.7
|
Registration
Rights Agreement, dated November 1, 2005, by and among the Company and the
persons and entities identified therein
|
|
Incorporated
by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
filed on November 7, 2005
|
10.1
|
Executive
Employment Agreement, dated December 15, 2003, between Jay O. Wright and
the Company
|
|
Incorporated
by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form
10-QSB filed on February 13, 2004
|
10.2
|
Executive
Employment Agreement, dated April 15, 2004 between Jay O. Wright and the
Company
|
|
Incorporated
by reference to Exhibit 10.15 to the Amendment to Registrant’s
Registration Statement on Form SB-2 filed on May 14, 2004
|
10.3
|
Amended
and Restated Executive Employment Agreement, dated June 9, 2004 between
Jay O. Wright and the Company
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on June 15, 2004
|
10.4
|
Standby
Equity Distribution Agreement, dated May 13, 2004 between the Company and
Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.20 to the Registrant’s Registration Statement
on Form SB-2 filed on May 14, 2004
|
10.5
|
Registration
Rights Agreement, dated May 13, 2004 between the Company and Cornell
Capital
|
|
Incorporated
by reference to Exhibit 10.21 to the Registrant’s Registration Statement
on Form SB-2 filed on May 14, 2004
|
10.6
|
Escrow
Agreement, dated May 13, 2004 between the Company and Cornell
Capital
|
|
Incorporated by reference to
Exhibit 10.23 to the Registrant’s Registration Statement on Form SB-2
filed on May 14, 2004
|
10.7
|
Consulting
Agreement by and among Mobilepro Corp., DFW Internet Services, Inc., Beech
Holdings, Inc., and Jack W. Beech, Jr.
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on February 4, 2004
|
10.8
|
Executive
Employment Agreement by and among the Company, CloseCall America, Inc. and
Tom Mazerski
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on October 19, 2004
|
10.9
|
Credit
Agreement, dated November 15, 2004, by and among the Company, Davel
Acquisition Corp. and Airlie Opportunity Master Fund, Ltd.
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on November 17, 2004
|
10.10
|
Employment
Agreement dated February 28, 2005 between Davel Communications, Inc. and
Tammy L. Martin
|
|
Incorporated
by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
10.11
|
Amendment
No. 1 to Employment Agreement between Davel Communications, Inc. and Tammy
L. Martin, dated April 20, 2005
|
|
Incorporated
by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
10.12
|
Amendment
No. 2 to Employment Agreement between Davel Communications, Inc. and Tammy
L. Martin, dated May 26, 2005
|
|
Incorporated
by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
10.13
|
Amended
and Restated Executive Employment Agreement, dated June 16, 2005 between
Jay O. Wright and the Company
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on June 20, 2005
|
10.14
|
Amended
and Restated Executive Employment Agreement, dated June 16, 2005 by and
among the Company, CloseCall America, Inc. and Tom Mazerski
|
|
Incorporated
by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
10.15
|
Securities
Purchase Agreement, dated as of May 13, 2005, by and between the Company
and Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
10.16
|
Secured
Convertible Debenture, issued on May 13, 2005 by the Company to Cornell
Capital
|
|
Incorporated
by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
10.17
|
Amended
and Restated Collateral Assignment of Intellectual Property Rights, made
as of May 13, 2005, by and among the Company, the Company subsidiaries
identified therein and Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.37 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
10.18
|
Amended
and Restated Security Agreement, dated May 13, 2005, by and among the
Company, the subsidiaries identified therein and Cornell
Capital
|
|
Incorporated
by reference to Exhibit 10.38 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
10.19
|
Investor Registration
Rights Agreement, dated as of May 13, 2005 by and between the Company and
Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
10.20
|
Amended
and Restated Guaranty Agreement, dated as of May 13, 2005, made by each of
the direct and indirect subsidiaries of the Company in favor of Cornell
Capital
|
|
Incorporated
by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
10.21
|
Warrant
issued by the Company to Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.41 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
10.22
|
Master
Agreement for Services between Sprint Communications Company L.P. and Kite
Broadband, LLC, dated May 20, 2005*
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Form 10-QSB filed November
14, 2005
|
10.23
|
Agreement
between the City of Tempe and NeoReach, Inc. for the Use of City Property
in Connection with the Operation of a WiFi Network, dated August 17,
2005
|
|
Incorporated
by reference to Exhibit 10.48 to the Registrant’s Annual Report on Form
10-KSB filed on June 29, 2006
|
10.24
|
Executive
Employment Agreement dated February 1, 2006, between Jerry M.
Sullivan, Jr. and the Company
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed February 13, 2005
|
10.25
|
Secured
Convertible Debenture, issued on June 30, 2006 by the Company to Cornell
Capital
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed July 7, 2006
|
10.26
|
Warrant
issued by the Company to Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.40 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2006
|
10.27
|
Master
Lease Agreement dated June 28, 2006 between JTA Leasing Co., LLC,
Mobilepro Corp., and NeoReach, Inc.
|
|
Incorporated
by reference to Exhibit 10.41 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2006
|
10.28
|
Letter
Agreement between American Fiber Network, Inc. and FSH Communications LLC,
dated June 30, 2006*
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K, dated July 11, 2006
|
10.29
|
Securities
Purchase Agreement, dated as of August 28, 2006, by and between the
Company and Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on August 30, 2006
|
10.30
|
Secured
Convertible Debenture, issued on August 28, 2006, by the Company to
Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed on August 30, 2006
|
10.31
|
Investor
Registration Rights Agreement, dated as of August 28, 2006, by and between
the Company and Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.4 to the Registrant’s Current Report on Form
8-K filed on August 30, 2006
|
10.32
|
Irrevocable
Transfer Agent Instructions dated August 28, 2006 among the Company,
Interwest Transfer Company, Inc. and David Gonzalez, Esq., as Escrow
Agent
|
|
Incorporated
by reference to Exhibit 10.5 to the Registrant’s Current Report on Form
8-K filed on August 30, 2006
|
10.33
|
Warrant
issued by the Company to Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed on August 30, 2006
|
10.34
|
Amendment
No. 1 to the Securities Purchase Agreement, dated September 20, 2006,
between the Company and Cornell Capital, and the related
Convertible Debenture
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on September 21, 2006
|
10.35
|
Amendment
No. 2 to the Securities Purchase Agreement, dated October 23, 2006,
between the Company and Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on October 24, 2006
|
10.36
|
Master
Equipment Lease dated September 27, 2006, between Data Sales Co.,
Mobilepro Corp., and Kite Networks, Inc.
|
|
Incorporated
by reference to Exhibit 10.46 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended September 30,
2006
|
10.37
|
Amendment
No. 1 to Convertible Debentures issued to Cornell Capital, dated January
17, 2007
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on January 23, 2007
|
10.38
|
Amendment
No. 2 to Convertible Debenture
issued
to Cornell Capital, dated February 20, 2007
(the
$15,149,650 debenture)
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on February 26, 2007
|
10.39
|
Amendment
No. 2 to Convertible Debentures
issued
to Cornell Capital, dated February 20, 2007
(the
$7,000,000 debentures)
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on February 26, 2007
|
10.40
|
Amendment
No. 3 to Convertible Debentures
issued
to Cornell Capital, dated April 2, 2007
(the
$7,000,000 debentures)
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on April 5, 2007
|
10.41
|
Consent
and Waiver Agreement dated March 30, 2007 with Cornel
Capital
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on April 5, 2007
|
10.42
|
Amendment
No. 4 to Convertible Debentures
issued
to Cornell Capital, dated May 11, 2007
(the
$7,000,000 debentures)
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on May 15, 2007
|
10.43
|
Promissory
Note, dated May 11, 2007, issued to Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on May 15, 2007
|
10.44
|
Amendment
No. 5 to Convertible Debentures
issued
to Cornell Capital, dated July 18, 2007
(the
$7,000,000 debentures)
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on July 19, 2007
|
10.45
|
Amendment
No. 3 to Convertible Debenture
issued
to Cornell Capital, dated July 18, 2007
(the
$15,149,650 debenture)
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on July 19, 2007
|
10.46
|
Addendum
to Second Amended and Restated Executive Employment Agreement for Jay O.
Wright, dated August 27, 2007
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on August 29, 2007
|
10.47
|
Asset
Purchase Agreement by and between Davel Communications, Inc. and Sterling
Payphones, L.L.C. dated September 7, 2007
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on September 10, 2007
|
10.48
|
Amendment
to Promissory Note dated January 3, 2008 by and between Mobilepro Corp.
and United System Access, Inc.
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on January 8, 2008
|
10.49
|
Amendment
No. 4 to Convertible Debenture issued to YA Global, dated January 16, 2008
(the $15,149,650 debenture)
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on January 18, 2008
|
10.50
|
Amendment
No. 6 to Convertible Debenture issued to YA Global, dated January 16, 2008
(the $7,000,000 debenture)
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on January 18, 2008
|
10.51
|
Second
Amended and Restated Executive Employment Agreement, dated June 25, 2008
between Jay O. Wright and the Company
|
|
Incorporated
by reference to Exhibit 10.51 to the Registrant’s Annual Report on Form
10-K filed on June 27, 2008
|
|
|
|
|
10.52
|
Securities
Purchase Agreement dated June 30, 2008 between Mobilepro Corp. and YA
Global Investments, L.P.
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
|
10.53
|
12%
Secured Convertible Debenture dated June 30, 2008 issued by Mobilepro
Corp. to YA Global Investments, L.P.
|
|
Incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
|
10.54
|
Global
Security Agreement dated June 30, 2008 between Mobilepro Corp. and YA
Global Investments, L.P.
|
|
Incorporated
by reference to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
|
10.55
|
Intellectual
Property Security Agreement dated June 30, 2008 between Mobilepro Corp.
and YA Global Investments, L.P.
|
|
Incorporated
by reference to Exhibit 10.4 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
|
10.56
|
Global
Guarantee Agreement dated June 30, 2008 between Mobilepro Corp. and YA
Global Investments, L.P.
|
|
Incorporated
by reference to Exhibit 10.5 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
|
10.57
|
Global
Pledge Agreement dated June 30, 2008 between Mobilepro Corp. and YA Global
Investments, L.P.
|
|
Incorporated
by reference to Exhibit 10.6 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
|
10.58
|
Warrant
dated June 30, 2008 issued by Mobilepro Corp. to YA Global Investments,
L.P.
|
|
Incorporated
by reference to Exhibit 10.7 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
|
10.59
|
Promissory
Note made as of August 1, 2008 by and among Mobilepro Corp. and Data Sales
Co., Inc. in the amount of Three Hundred Thirty Thousand Dollars
($330,000).
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on August 4, 2008
|
10.60
|
Forbearance
Agreement dated May 5, 2009 between Mobilepro Corp, and YA
Global Investments, L.P.
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on May 5, 2009
|
10.61
|
Letter
dated June 2, 2009 between Mobilepro Corp. and YA Global Investments,
L.P.
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on June 5, 2009
|
|
|
|
|
21.1
|
Subsidiaries
of Registrant
|
|
Provided
herewith
|
|
|
|
|
31.1
|
Certification
by Jay O. Wright, Chief Executive Officer, pursuant to Rule
13a-14(a)
|
|
Provided
herewith
|
31.2
|
Certification
by Donald L. Paliwoda, Principal Financial Officer, pursuant to Rule
13a-14(a)
|
|
Provided
herewith
|
32.1
|
Certification
by Jay O. Wright and Donald L. Paliwoda, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002**
|
|
Provided
herewith
|
99.1
|
Power
Point Presentation by Mobilepro Corp. at its Annual Meeting
of Shareholders on October 23, 2008
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on October 24, 2008
|
99.1
|
Transcript
of the on-line interview conducted by the Registrant’s Chief
Executive Officer, Jay O. Wright, on December 16, 2008
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on December 16, 2008
|
*
Confidential treatment has been requested for certain portions of this document
pursuant to an application for confidential treatment sent to the Securities and
Exchange Commission. Such portions are omitted from this filing and filed
separately with the Securities and Exchange Commission.
** These
certifications are not deemed filed by the SEC and are not to be incorporated by
reference in any filing of the Registrant under the Securities Act of 1933 or
the Securities Exchange Act of 1934, irrespective of any general incorporation
language in any filings.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
Mobilepro
Corp.
|
|
|
|
|
|
|
By:
|
/s/ Jay
O. Wright |
|
|
|
Name:
Jay O. Wright |
|
|
|
Title:
Chief Executive Officer |
|
|
|
|
|
|
|
Date: June
25, 2009
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ Jay O.
Wright
|
|
Chief
Executive Officer,
|
|
June
25, 2009
|
Jay
O. Wright
|
|
Principal
Executive Officer and Director
|
|
|
|
|
|
|
|
/s/ Donald L.
Paliwoda
|
|
Chief
Accounting Officer, Principal
|
|
June
25, 2009
|
Donald
L. Paliwoda
|
|
Financial
and Principal Accounting Officer
|
|
|
|
|
|
|
|
/s/ Donald H.
Sledge
|
|
Director
|
|
June
25, 2009
|
Donald
H. Sledge
|
|
|
|
|
MOBILEPRO
CORP. AND SUBSIDIARIES
INDEX
TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2009, 2008 AND 2007
|
Page(s)
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Balance Sheets as of March 31, 2009 and 2008
|
F-2
to F-3
|
|
|
Consolidated
Statements of Operations for the Years Ended
March 31, 2009, 2008 and 2007
|
F-4
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for
the Years Ended March 31, 2009, 2008 and
2007
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended March
31, 2009, 2008 and 2007
|
F-6
to F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
to F-38
|
BAGELL,
JOSEPHS, LEVINE & COMPANY, L.L.C.
Certified
Public Accountants
406
Lippincott Drive, Ste. J
Marlton,
NJ 08053-4168
(856)
355-5900 Fax (856) 396-0022
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Mobilepro
Corp.
401
Professional Drive, Suite 128
Gaithersburg,
MD 20817
We have
audited the accompanying consolidated balance sheets of Mobilepro Corp. as of
March 31, 2009 and 2008, and the related consolidated statements of operations,
changes in stockholders’ equity (deficit) and cash flows for each of the years
in the three-year period ended March 31, 2009. Mobilepro Corp.’s
management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Mobilepro Corp. as of March
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the years in the three-year period ended March 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company did not generate sufficient
cash flows from revenues during the year ended March 31, 2009, to fund its
operations. Also at March 31, 2009, the Company’s accumulated deficit
was $106,992,868. In addition, in years ended March 31, 2009, 2008
and 2007, the Company sustained net losses of $11,360,021, $18,361,602 and
$45,898,288. These matters raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plan
in regard to these matters is also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.
Bagell,
Josephs, Levine & Company, L.L.C.
Marlton,
NJ 08053
June 17,
2009
MOBILEPRO
CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF MARCH 31
ASSETS
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,419,130 |
|
|
$ |
2,075,117 |
|
Restricted
cash
|
|
|
1,072,054 |
|
|
|
1,981,562 |
|
Accounts
receivable, net
|
|
|
2,791,774 |
|
|
|
2,950,295 |
|
Notes
receivable, net
|
|
|
513,594 |
|
|
|
1,065,000 |
|
Prepaid
expenses and other current assets
|
|
|
909,968 |
|
|
|
1,249,685 |
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
6,706,520 |
|
|
|
9,321,659 |
|
|
|
|
|
|
|
|
|
|
FIXED
ASSETS, NET OF ACCUMULATED DEPRECIATION
|
|
|
389,961 |
|
|
|
796,702 |
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
Goodwill,
net of impairment
|
|
|
11,767,213 |
|
|
|
20,531,278 |
|
Customer
contracts and other intangible assets, net of amortization
|
|
|
229,349 |
|
|
|
539,816 |
|
Notes
receivable, long-term
|
|
|
974,817 |
|
|
|
1,800,000 |
|
Investments
and other assets
|
|
|
574,843 |
|
|
|
401,498 |
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
13,546,222 |
|
|
|
23,272,592 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
20,642,703 |
|
|
$ |
33,390,953 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF MARCH 31
(CONTINUED)
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
Current
portion of convertible debentures and other long-term debt
|
|
$ |
16,033,615 |
|
|
$ |
17,159,180 |
|
Accounts
payable and accrued expenses
|
|
|
6,265,052 |
|
|
|
6,852,199 |
|
Deferred
revenue
|
|
|
1,314,171 |
|
|
|
1,301,638 |
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
23,612,838 |
|
|
|
25,313,017 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
|
Convertible
debentures and other long-term debt, net of current
portion
|
|
|
1,257,457 |
|
|
|
1,380,900 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
24,870,295 |
|
|
|
26,693,917 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value, 20,035,425 shares authorized,
35,378
|
|
|
|
|
|
|
|
|
shares
issued and outstanding at March 31, 2009 and 2008
|
|
|
35 |
|
|
|
35 |
|
Common
stock, $.001 par value, 2,979,964,575 and 1,500,000,000
|
|
|
|
|
|
|
|
|
shares
authorized, 1,409,864,653 and 775,821,796 shares issued
and
|
|
|
|
|
|
|
|
|
outstanding
at March 31, 2009 and 2008
|
|
|
1,409,865 |
|
|
|
775,822 |
|
Additional
paid-in capital
|
|
|
101,355,376 |
|
|
|
101,554,026 |
|
Accumulated
deficit
|
|
|
(106,992,868 |
) |
|
|
(95,632,847 |
) |
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity (Deficit)
|
|
|
(4,227,592 |
) |
|
|
6,697,036 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
$ |
20,642,703 |
|
|
$ |
33,390,953 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED MARCH 31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$ |
30,857,981 |
|
|
$ |
45,770,689 |
|
|
$ |
62,559,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization)
|
|
|
20,356,273 |
|
|
|
29,220,570 |
|
|
|
36,820,779 |
|
Payroll, professional fees and related expenses (exclusive of stock
compensation)
|
|
|
6,834,479 |
|
|
|
14,108,986 |
|
|
|
22,339,248 |
|
Office
rent and expenses
|
|
|
1,580,047 |
|
|
|
2,304,462 |
|
|
|
2,561,851 |
|
Other
general and administrative expenses
|
|
|
1,759,802 |
|
|
|
3,258,742 |
|
|
|
4,609,274 |
|
Write-down
in carrying value of notes receivable
|
|
|
1,345,534 |
|
|
|
- |
|
|
|
- |
|
Depreciation
and amortization
|
|
|
723,968 |
|
|
|
1,382,627 |
|
|
|
3,397,840 |
|
Stock
compensation
|
|
|
97,663 |
|
|
|
843,962 |
|
|
|
1,623,714 |
|
Asset
impairment charges
|
|
|
8,764,065 |
|
|
|
- |
|
|
|
1,573,795 |
|
Restructuring
charges
|
|
|
- |
|
|
|
- |
|
|
|
185,968 |
|
Total
Operating Costs and Expenses
|
|
|
41,461,831 |
|
|
|
51,119,349 |
|
|
|
73,112,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(10,603,850 |
) |
|
|
(5,348,660 |
) |
|
|
(10,553,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
INCOME (EXPENSE), NET
|
|
|
(1,562,740 |
) |
|
|
(1,728,057 |
) |
|
|
(2,474,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
ON SALE OF ASSETS
|
|
|
- |
|
|
|
(2,778,906 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
ON EXTINGUISHMENT OF DEBT
|
|
|
- |
|
|
|
- |
|
|
|
(409,601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
IN NET LOSS OF MICROLOG CORPORATION
|
|
|
(94,569 |
) |
|
|
(92,967 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(12,261,159 |
) |
|
|
(9,948,590 |
) |
|
|
(13,437,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operation of discontinued operations
|
|
|
- |
|
|
|
(2,554,384 |
) |
|
|
(32,461,083 |
) |
Gain
(loss) on sale of discontinued operations
|
|
|
901,138 |
|
|
|
(5,858,628 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS
|
|
|
901,138 |
|
|
|
(8,413,012 |
) |
|
|
(32,461,083 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS APPLICABLE TO COMMON SHARES
|
|
$ |
(11,360,021 |
) |
|
$ |
(18,361,602 |
) |
|
$ |
(45,898,288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) PER SHARE, BASIC AND DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.0131 |
) |
|
$ |
(0.0129 |
) |
|
$ |
(0.0222 |
) |
Discontinued
operations
|
|
|
0.0010 |
|
|
|
(0.0109 |
) |
|
|
(0.0538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE, BASIC AND DILUTED
|
|
$ |
(0.0121 |
) |
|
$ |
(0.0238 |
) |
|
$ |
(0.0760 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING
|
|
|
938,338,782 |
|
|
|
770,392,506 |
|
|
|
603,759,813 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
MOBILEPRO
CORP AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
|
FOR
THE YEARS ENDED MARCH 31, 2009, 2008 AND
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Stockholders'
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
- MARCH 31, 2006
|
|
|
35,378 |
|
|
$ |
35 |
|
|
|
560,666,949 |
|
|
$ |
560,667 |
|
|
$ |
83,641,462 |
|
|
$ |
(31,372,957 |
) |
|
$ |
52,829,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued under the $100 million Standby Equity Distribution
Agreement
|
|
|
- |
|
|
|
- |
|
|
|
18,586,633 |
|
|
|
18,587 |
|
|
|
6,636,537 |
|
|
|
- |
|
|
|
6,655,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in payment of convertible debentures and related
interest
|
|
|
- |
|
|
|
- |
|
|
|
93,177,199 |
|
|
|
93,177 |
|
|
|
5,154,755 |
|
|
|
- |
|
|
|
5,247,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with acquisition of TCS assets
|
|
|
- |
|
|
|
- |
|
|
|
9,079,903 |
|
|
|
9,080 |
|
|
|
665,920 |
|
|
|
- |
|
|
|
675,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock options and warrants
|
|
|
- |
|
|
|
- |
|
|
|
6,822,620 |
|
|
|
6,823 |
|
|
|
3,177 |
|
|
|
- |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in acquisition of subsidiaries and assets
|
|
|
- |
|
|
|
- |
|
|
|
3,944,214 |
|
|
|
3,944 |
|
|
|
197,211 |
|
|
|
- |
|
|
|
201,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants in connection with convertible debentures
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,090,499 |
|
|
|
- |
|
|
|
1,090,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
fees related to the issuance of convertible debentures
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(505,000 |
) |
|
|
- |
|
|
|
(505,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for consulting and investment banking services
|
|
|
- |
|
|
|
- |
|
|
|
200,000 |
|
|
|
200 |
|
|
|
35,800 |
|
|
|
- |
|
|
|
36,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock registration costs
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10,189 |
) |
|
|
- |
|
|
|
(10,189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
of ProGames issued for cash
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,114 |
|
|
|
- |
|
|
|
3,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,623,714 |
|
|
|
- |
|
|
|
1,623,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(45,898,288 |
) |
|
|
(45,898,288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
- MARCH 31, 2007
|
|
|
35,378 |
|
|
|
35 |
|
|
|
692,477,518 |
|
|
|
692,478 |
|
|
|
98,537,000 |
|
|
|
(77,271,245 |
) |
|
|
21,958,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in payment of convertible debentures and related
interest
|
|
|
- |
|
|
|
- |
|
|
|
82,602,090 |
|
|
|
82,602 |
|
|
|
2,033,855 |
|
|
|
- |
|
|
|
2,116,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
843,962 |
|
|
|
- |
|
|
|
843,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in settlement of consulting agreement
|
|
|
- |
|
|
|
- |
|
|
|
742,188 |
|
|
|
742 |
|
|
|
118,008 |
|
|
|
- |
|
|
|
118,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
of ProGames issued for cash
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21,201 |
|
|
|
- |
|
|
|
21,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(18,361,602 |
) |
|
|
(18,361,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
- MARCH 31, 2008
|
|
|
35,378 |
|
|
|
35 |
|
|
|
775,821,796 |
|
|
|
775,822 |
|
|
|
101,554,026 |
|
|
|
(95,632,847 |
) |
|
|
6,697,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in payment of convertible debentures
|
|
|
- |
|
|
|
- |
|
|
|
629,042,857 |
|
|
|
629,043 |
|
|
|
(304,203 |
) |
|
|
- |
|
|
|
324,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants in connection with convertible debenture
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,390 |
|
|
|
- |
|
|
|
10,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
97,663 |
|
|
|
- |
|
|
|
97,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with acquisition of MobileWebSurf
assets
|
|
|
- |
|
|
|
- |
|
|
|
5,000,000 |
|
|
|
5,000 |
|
|
|
(2,500 |
) |
|
|
- |
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(11,360,021 |
) |
|
|
(11,360,021 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
- MARCH 31, 2009
|
|
|
35,378 |
|
|
$ |
35 |
|
|
|
1,409,864,653 |
|
|
$ |
1,409,865 |
|
|
$ |
101,355,376 |
|
|
$ |
(106,992,868 |
) |
|
$ |
(4,227,592 |
) |
The
accompanying notes are an integral part of the consolidated financial
statements.
|
MOBILEPRO
CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED MARCH 31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(11,360,021 |
) |
|
$ |
(18,361,602 |
) |
|
$ |
(45,898,288 |
) |
(Gain)
loss from discontinued operations
|
|
|
(901,138 |
) |
|
|
8,413,012 |
|
|
|
32,461,083 |
|
Loss
from continuing operations
|
|
|
(12,261,159 |
) |
|
|
(9,948,590 |
) |
|
|
(13,437,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
723,968 |
|
|
|
1,382,627 |
|
|
|
3,397,840 |
|
Asset
impairment charges
|
|
|
8,764,065 |
|
|
|
- |
|
|
|
1,573,795 |
|
Write-down
in carrying value of notes receivable
|
|
|
1,345,534 |
|
|
|
- |
|
|
|
- |
|
Stock
compensation
|
|
|
97,663 |
|
|
|
843,962 |
|
|
|
1,623,714 |
|
Noncash
interest expense
|
|
|
437,945 |
|
|
|
216,204 |
|
|
|
1,398,556 |
|
Equity
in net loss of Microlog Corporation
|
|
|
94,569 |
|
|
|
92,967 |
|
|
|
- |
|
Loss
on sale of payphone assets
|
|
|
- |
|
|
|
2,778,906 |
|
|
|
- |
|
Loss
on debt extinguishment
|
|
|
- |
|
|
|
- |
|
|
|
409,601 |
|
Restructuring
charges
|
|
|
- |
|
|
|
- |
|
|
|
185,968 |
|
Other
|
|
|
- |
|
|
|
214,452 |
|
|
|
68,418 |
|
Changes
in current assets and liabilities, net of disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in restricted cash
|
|
|
909,508 |
|
|
|
342,302 |
|
|
|
(758,035 |
) |
Decrease
in accounts receivable
|
|
|
158,521 |
|
|
|
4,409,704 |
|
|
|
1,897,794 |
|
Decrease
in notes receivable
|
|
|
140,872 |
|
|
|
- |
|
|
|
- |
|
Decrease in
other current assets
|
|
|
339,717 |
|
|
|
1,104,807 |
|
|
|
429,632 |
|
Decrease
(increase) in other assets
|
|
|
(246,225 |
) |
|
|
518,651 |
|
|
|
(324,758 |
) |
Decrease
in accounts payable and accrued expenses
|
|
|
(587,734 |
) |
|
|
(4,365,459 |
) |
|
|
(2,077,566 |
) |
Increase
(decrease) in deferred revenue
|
|
|
12,533 |
|
|
|
(614,889 |
) |
|
|
537,804 |
|
Net
cash used in operating activities of discontinued
operations
|
|
|
- |
|
|
|
(534,640 |
) |
|
|
(1,484,266 |
) |
|
|
|
12,190,936 |
|
|
|
6,389,594 |
|
|
|
6,878,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(70,223 |
) |
|
|
(3,558,996 |
) |
|
|
(6,558,708 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures, net
|
|
|
(6,760 |
) |
|
|
(339,490 |
) |
|
|
(1,650,452 |
) |
Proceeds
from sale of payphones
|
|
|
- |
|
|
|
3,248,741 |
|
|
|
- |
|
Proceeds
from sale of investments
|
|
|
- |
|
|
|
361,503 |
|
|
|
- |
|
Investment
in Microlog Corporation
|
|
|
- |
|
|
|
(274,254 |
) |
|
|
- |
|
Investing
activities of discontinued operations
|
|
|
- |
|
|
|
2,963,557 |
|
|
|
(2,719,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(6,760 |
) |
|
|
5,960,057 |
|
|
|
(4,369,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from common stock issuances
|
|
|
- |
|
|
|
- |
|
|
|
6,666,917 |
|
Proceeds
from the issuance of convertible debentures
|
|
|
- |
|
|
|
- |
|
|
|
7,000,000 |
|
Payments
of long-term debt
|
|
|
(392,980 |
) |
|
|
(4,803,365 |
) |
|
|
(3,303,600 |
) |
Debt
financing fees
|
|
|
(186,024 |
) |
|
|
- |
|
|
|
(505,000 |
) |
Proceeds
from notes payable
|
|
|
- |
|
|
|
1,100,000 |
|
|
|
- |
|
Financing
activities of discontinued operations
|
|
|
- |
|
|
|
(53,423 |
) |
|
|
(896,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
$ |
(579,004 |
) |
|
$ |
(3,756,788 |
) |
|
$ |
8,961,365 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED MARCH 31
(CONTINUED)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
$ |
(655,987 |
) |
|
$ |
(1,355,727 |
) |
|
$ |
(1,967,037 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF YEAR
|
|
|
2,075,117 |
|
|
|
3,430,844 |
|
|
|
5,397,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF YEAR
|
|
|
1,419,130 |
|
|
|
2,075,117 |
|
|
|
3,430,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS
CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS
|
|
|
- |
|
|
|
- |
|
|
|
(332,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS OF CONTINUING OPERATIONS
|
|
$ |
1,419,130 |
|
|
$ |
2,075,117 |
|
|
$ |
3,098,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW
|
|
|
|
|
|
|
|
|
|
|
|
|
INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for interest
|
|
$ |
1,431,577 |
|
|
$ |
1,475,137 |
|
|
$ |
1,140,998 |
|
Income
taxes paid
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH
|
|
|
|
|
|
|
|
|
|
|
|
|
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
receivable from sale of assets
|
|
$ |
- |
|
|
$ |
2,800,000 |
|
|
$ |
- |
|
Issuance
of debentures to YA Global
|
|
$ |
13,391,175 |
|
|
$ |
- |
|
|
$ |
15,149,650 |
|
Retirement
of debentures issued to YA Global
|
|
$ |
13,168,944 |
|
|
$ |
- |
|
|
$ |
15,000,000 |
|
Capital
leases
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
5,174,173 |
|
Debenture
maturities and accrued interest paid with common stock
|
|
$ |
324,840 |
|
|
$ |
1,967,908 |
|
|
$ |
4,880,489 |
|
Goodwill
recorded in acquisitions
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
201,155 |
|
Issuance
of common stock for acquisitions
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
675,000 |
|
Amortization
of SEDA deferred financing fees
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
146,666 |
|
Issuance
of warrants with new convertible debenture
|
|
$ |
10,390 |
|
|
$ |
- |
|
|
$ |
- |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2009, 2008 AND 2007
NOTE
1-ORGANIZATION
Overview
MobilePro
Corp., incorporated under the laws of the State of Delaware in July 2000, is a
holding company with subsidiaries in the telecommunications, pay telephone and
mobile content industries and an affiliate in the software industry. We
previously operated in three industry segments prior to the sale of our
broadband wireless and Internet subsidiaries as discussed below. Together with
its consolidated subsidiaries, Mobilepro Corp. is hereinafter referred to as
“Mobilepro” or the “Company”.
The
Company’s voice services segment included the operations of CloseCall America,
Inc. (“CloseCall”), a Stevensville, Maryland-based integrated telecommunications
carrier, Davel Communications, Inc. (“Davel”), a Cleveland, Ohio-based
independent payphone provider, and American Fiber Network, Inc. (“AFN”), an
integrated telecommunications carrier and data processor based in Overland Park,
Kansas. The Company’s Internet services segment previously included DFW Internet
Services, Inc. (“DFW”, doing business as Nationwide Internet), an Irving,
Texas-based Internet services provider, its acquired Internet service provider
subsidiaries, and InReach Internet, Inc. (“InReach”), an Internet service
provider based in Stockton, California. The Company’s municipal wireless
networks operations were conducted primarily by a wholly owned subsidiary,
NeoReach, Inc. (“NeoReach”), and its subsidiary, Kite Networks, Inc. (“Kite
Networks”, formerly known as NeoReach Wireless, Inc.). The wireless networks
segment also included the operations of the Company’s subsidiary, Kite
Broadband, LLC (“Kite Broadband”), a broadband wireless service provider. Both
Kite Networks and Kite Broadband were based in Ridgeland,
Mississippi. The Internet and broadband wireless divisions were both
sold in July 2007. The corporate segment has included our Internet
gaming and mobile content subsidiary, ProGames Network, Inc. (“ProGames”), that
we founded in December 2005.
On June
30, 2007, the Company entered into a Purchase Agreement (the “USA Agreement”)
with United Systems Access, Inc. (“USA”), pursuant to which USA agreed to
acquire all of the outstanding shares of CloseCall and AFN (the Company’s
“Integrated Telecom Business”, which was included in the voice services business
segment) and all of the outstanding shares of DFW and InReach (together these
companies comprised the Company’s Internet services provider business segment,
or “ISP Business”). The sale of the ISP Business was completed on July 18, 2007.
The sale of the Integrated Telecom Business was subject to the receipt of
certain regulatory approvals, which was originally expected to be obtained by
the end of calendar year 2007. On January 14, 2008, the Company
received notice from USA purporting to terminate the USA Agreement with respect
to the sale of the Integrated Telecom Business, but provided that USA remained
interested in discussing terms upon which it would purchase the Integrated
Telecom Business (see Note 3). USA was unable to complete the purchase on terms
acceptable to the Company and, as a result of this default, the Company
subsequently terminated the sale of its Integrated Telecom Business to
USA.
On July
8, 2007, the Company entered into a Purchase Agreement (the “Gobility
Agreement”) with Gobility, Inc. (“Gobility”), pursuant to which Gobility
acquired all of the outstanding shares of NeoReach and Kite Networks, and all of
the outstanding membership interests in Kite Broadband (together these companies
have comprised the Company’s wireless networks business segment, or “Wireless
Networks Business”). As further discussed below, Gobility is in default with
respect to its obligation to obtain funding and to pay amounts due under certain
equipment obligations and leases for which the Company is a co-obligor. The
Company is currently cooperating with Gobility in its efforts to sell the assets
of Kite Networks in order to satisfy these obligations (see Note
3).
On June
30, 2007, Davel sold approximately 730 operating payphones to an unaffiliated
payphone operator. On September 7, 2007, Davel sold an additional 21,405
payphones to Sterling Payphones, LLC (“Sterling”). Sterling also assumed certain
liabilities of Davel. Effective September 30, 2007, Davel sold an additional 300
payphones (see Note 3). Following these transactions, Davel’s remaining
operations have been significantly reduced. Davel’s remaining operations are
being continued and Davel is pursuing the recovery of certain claims including
the AT&T Corporation (“AT&T”), Sprint Communications Company, LP
(“Sprint”) and Qwest Communications Company, Inc. (“Qwest”) claims described in
Note 12.
Going Concern
Uncertainty
The
Company has historically lost money. Our accumulated deficit at March
31, 2009 was $106,992,868. In the years ended March 31, 2009, 2008 and 2007, we
sustained net losses of $11,360,021, $18,361,602 and $45,898,288, respectively.
Over the last few years, most of the acquired businesses experienced declining
revenues. Although restructuring measures controlled other operating expenses,
the Company was unable to reduce the corresponding costs of
services. In addition, the Company funded the start-up and operations
of the municipal wireless networks and mobile content businesses without these
companies achieving expected revenues. Because the cash required to fund the
continuing operating losses and to complete the build-out of planned municipal
wireless networks exceeded the Company’s available capital, the Company signed
agreements to sell substantial portions of its operations to several
unaffiliated buyers during the fiscal year ended March 31, 2008.
The
amount of cash used in operations during fiscal years ended March 31, 2009, 2008
and 2007 were $70,223, $3,558,996 and 6,558,708, respectively. The decline in
cash used in operation was largely due to the reduction in corporate expenses
and the elimination of cash used for discontinued operations. The Company also
received $810,215 of receipts in the fiscal year ended March 31, 2009 relating
to claims involving over-billings by certain telecommunications carriers of
Davel in violation of regulatory rulings (“Regulatory Receipts”), including
$718,314 received from Qwest in the second fiscal quarter (see Note
12). Although the Company continues to operate the Integrated Telecom
Business which has been consistently profitable and able to generate significant
cash flow for the Company, we are likely to continue to experience liquidity and
cash flow problems due to the Company’s current debt service requirements,
including amounts due under the remaining equipment obligations and leases of
the former Wireless Networks Business.
YA Global
Investments, L.P. (“YA Global”, f/k/a Cornell Capital Partners, L.P.) has been a
significant source of capital for the Company, providing financing in several
forms. Effective June 30, 2008, the Company issued a secured convertible
debenture to YA Global with an aggregate principal balance of $13,391,175,
replacing the previous convertible debentures. The Company did not pay the
remaining principal balance of $13,029,125 that was due May 1, 2009. On May 5,
2009, the Company executed an agreement with YA Global, pursuant to which YA
Global has agreed to forbear from enforcing its rights and remedies against the
Company under the convertible debenture through May 31, 2009. Although YA Global
initially extended the forbearance period through June 5, 2009, YA Global has
not agreed to further extend the forbearance period. As a result, Mobilepro is
in default of its obligations under the secured convertible
debenture.
The
Company is currently cooperating with Gobility in its efforts to sell the assets
of Kite Networks in order to satisfy the remaining equipment obligations and
leases of the former Wireless Networks Business for which the Company is
co-obligor. However, two of the leasing companies have each filed separate
lawsuits against the Company to collect the balances due on their respective
equipment leases. If Gobility is unable to sell its wireless networks assets to
satisfy these obligations and/or the leasing companies are able to obtain a
judgment against the Company, the Company could be required to pay the
outstanding balance on those leases and equipment obligations (see Note
7). Given the passage of nearly two years since the sale of the
Wireless Networks Business and the failure of one of the leasing companies,
Commonwealth Capital Corporation, to cooperate with prior sale efforts, we
believe it is unlikely that Gobility will succeed in selling any additional
portions of the Wireless Networks Business.
Notwithstanding
expected cash flow deficits, the Company has significant claims against third
parties which, if successful, could be used by the Company to fund its
obligations and/or pay a portion of the amount due to YA Global (see Note 12).
Claims against third parties include litigation against AT&T, Sprint and
Qwest for non-payment of dial around compensation to the Davel entities,
portions of amounts claimed from telecommunications carriers for Regulatory
Receipts, and contractual claims for damages in connection with the sale of the
Integrated Telecom Business and the Wireless Networks Business. However, there
can be no assurance that the Company will be able to prevail in its claims
against third parties, that the amount awarded will be material, or that such
amounts, if any, can be collected by the Company.
The
Company’s financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and settlement of liabilities and
commitments based on recorded amounts for the foreseeable future. To date, the
Company has been unable to permanently eliminate the cash requirements to fund
certain remaining liabilities of the Wireless Networks Business for which the
Company is co-obligor. Although YA Global initially extended the forbearance
period through June 5, 2009, YA Global has not agreed to further extend the
forbearance period or restructure the payment terms of the obligations owing
under the secured convertible debenture. As a result, Mobilepro is in
default of its obligations under the secured convertible debenture owed to YA
Global and, given current market conditions and Mobilepro’s financial condition,
obtaining the required financing to retire the secured convertible debenture is
unlikely to occur in the immediate future. YA Global has informed the
Company that it intends to exercise its rights as the Company’s senior secured
creditor. Such rights include, but are not limited to, foreclosing on
the assets of the Company. In such event the Company will not have the ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Acquisition
Activities
Effective
January 1, 2007, CloseCall acquired cellular telephone service contracts and
certain related net assets from TeleCommunication Systems, Inc. (“TCS”),
consisting of over 7,000 cellular subscribers. In consideration therefore, the
Company issued 9,079,903 unregistered shares of its common stock to TCS and will
pay TCS a percentage of future revenues or gross profits provided by the
acquired service contracts. In addition, TCS was granted certain registration
rights related to the shares of common stock it received from the Company. The
number of shares issued to TCS was determined based on the agreed-upon price of
$675,000 and the volume weighted average price of the Company’s common stock for
the 10 trading days prior to December 29, 2006, the date of the asset purchase
agreement.
On
January 31, 2006, the Company acquired the remaining minority interest in Kite
Broadband and the business of Kite Networks. In February 2007, pursuant to the
terms of the acquisition agreement requiring a purchase price adjustment based
on working capital, the Company issued 3,944,214 additional shares of its common
stock to the former owners. Such shares were valued at $201,155 and their
issuance resulted in an increase to goodwill.
The
Company has looked at other acquisition opportunities over the past twelve
months but, due to the Company’s financial condition, has not been able to
consummate any transactions.
NOTE
2-SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial
Statement Presentation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in consolidation. Certain prior-period financial statement balances
have been reclassified to conform to the March 31, 2009
presentation.
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those
estimates.
Companies Held for
Sale
In the
quarter ended March 31, 2009, the Company reclassified the assets and
liabilities of its Integrated Telecom Business, along with the remaining net
liabilities of the Wireless Networks Business for which the Company is
co-obligor, to continuing operations. Previously those assets and liabilities
were classified as “held for sale” at December 31, 2008 and at the end of each
prior annual and quarterly reporting period. In addition, the operating results
of the Integrated Telecom Business which were previously reported in
discontinued operations have been reclassified to continuing operations for all
periods presented in these consolidated financial statement. At the
time of reclassification, in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets”, the Company recognized
$235,157 of additional depreciation and amortization expense that would have
been recognized in the fiscal year ended March 31, 2008 if the assets and
liabilities had been classified as held and used. The Company also wrote down
the carrying value of goodwill in the quarter ended March 31, 2009 which reduced
the net assets of the Integrated Telecom Business to its fair value at the date
the net assets were reclassified to continuing operations (see Note
5).
The
Wireless Networks Business and the ISP Business were sold in the fiscal year
ended March 31, 2008. The operating results, including the gain or loss on sale
of these businesses, are included in discontinued operations in the accompanying
consolidated statements of operations for the fiscal years ended March 31, 2009,
2008 and 2007.
Cash and Cash
Equivalents
The
Company considers all highly liquid debt instruments and other short-term
investments with an initial maturity of three months or less to be cash or cash
equivalents. The Company maintains cash and cash equivalents with financial
institutions that exceed the limit of insurability under the Federal Deposit
Insurance Corporation. However, due to management’s belief in the financial
strength of its financial institutions, management does not believe the risk of
keeping deposits in excess of federal deposit limits to be a material
risk.
Restricted
Cash
The
Company is required to maintain letters of credit collateralized by cash as
additional security for the performance of obligations under certain service
agreements. Restricted cash also includes $937,664 of certificates of deposit at
March 31, 2009 and 2008 that secure various capital lease obligations. In
addition, restricted cash included $206,397 at March 31, 2008 that was held in
escrow to indemnify Sterling for possible claims that could arise in connection
with the sale of Davel’s payphones on September 7, 2007 (see Note 3). On
September 12, 2008, the remaining balance of the escrow account and accrued
interest was transferred to unrestricted cash. The cash collateral is restricted
and is not available for the Company’s general working capital needs. The
letters of credit expire at various dates through March 2010.
Revenue
Recognition
The
Company derives a material portion of its revenues through the provision of
local telephone, long distance, and wireless calling by subscribers. The Company
recognizes revenue related to these telecommunications services when such
services are rendered and collection is reasonably assured; it defers revenue
for services that the Company bills in advance. Revenue related to service
contracts covering future periods is deferred and recognized ratably over the
periods covered by the contracts.
Historically,
a material amount of the Company’s revenues was also generated from the use of
Davel’s payphones. Davel derives its payphone revenue from two principal
sources: coin calls and non-coin calls. Revenue related to all calls, including
dial-around compensation and operator service revenue, is recognized in the
periods that the customers place the calls. Any variations between recorded
amounts of revenue and actual cash receipts are accounted for at the time of
receipt.
Non-coin
operator service calls are handled by independent operator service providers.
These carriers assume billing and collection responsibilities for
operator-assisted calls originating on Davel’s payphone network and pay
commissions to Davel based upon gross revenue. Davel recognizes revenue related
to operator service calls in amounts equal to the commissions that it is
entitled to receive in the periods that the services are rendered.
Davel
also recognizes revenue related to non-coin dial-around calls that are initiated
from a Company payphone in order to gain access to a specific long distance
company or to make a standard toll free call. Revenue related to such
dial-around calls is recognized initially based on estimates. The inter-exchange
carriers have historically paid for fewer dial-around calls than are actually
made and the collection period for dial-around revenue is generally four to six
months, but can be in excess of one year. Most dial-around receivable amounts
are received early in each calendar quarter from an industry clearinghouse
organization, one quarter in arrears. For example, Davel was entitled
to receive its dial-around receipts related to the quarter ended June 30, 2007
in October 2007, allowing it to adjust the second calendar quarter dial-around
receivable amount included in the balance sheet at September 30, 2007 based on
the actual collection experience. Davel’s estimate of revenue for the most
recent calendar quarter is based on the historical analysis of calls placed and
amounts collected. These analyses are updated on a periodic basis. Recorded
amounts of revenue may be adjusted based on actual receipts and/or the
subsequent revision of prior estimates. Total dial-around revenue amounts for
the fiscal years ended March 31, 2009, 2008 and 2007 were approximately
$418,000, $2,297,000, and $6,198,000, respectively.
Accounts
Receivable
The
Company conducts business and may extend credit to customers based on an
evaluation of the customers’ financial condition, generally without requiring
collateral. Exposure to losses on receivables is expected to vary by customer
due to the financial condition of each customer. The Company monitors exposure
to credit losses and maintains allowances for anticipated losses considered
necessary under the circumstances and based to a significant extent on recent
historical overall account write-off experience. The Company had allowances for
doubtful accounts of $773,696 and $993,356 at March 31, 2009 and 2008,
respectively, relating to accounts receivable other than dial-around
compensation amounts.
Dial-around
receivable amounts included in the consolidated balance sheets at March 31, 2009
and 2008 were $31,671 and $45,692, respectively. During all periods presented,
credit losses, to the extent identifiable, were generally within management’s
overall expectations.
Fair Value of Financial
Instruments
The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, restricted cash, accounts receivable, and accounts payable and
accrued expenses approximate fair value because of the immediate or short-term
maturity of these financial instruments. See Note 14 for further information
regarding fair value measurements.
Financing
Fees
The
Company incurred financing costs of $186,024 in connection with the refinancing
of the secured convertible debenture issued to YA Global on June 30, 2008. These
costs, representing primarily legal and other fees paid in cash, are included in
other assets at December 31, 2008 and are being amortized to interest expense
through the maturity date of the debentures on May 1, 2009. Total financing fees
charged to interest expense for the fiscal year ended March 31, 2009 was
$167,422. At March 31, 2009, the unamortized balance of deferred financing fees
included in the condensed consolidated balance sheets was $18,602.
The
financing fees paid in May 2004 to YA Global and others related to the
negotiation of the Standby Equity Distribution Agreement (the “SEDA”) were
deferred and, in the prior years, were amortized against additional
paid-in-capital on a straight-line basis over the twenty-four (24) month term of
the SEDA. These fees were paid with the issuance of 8,000,000 shares of
Mobilepro common stock valued in the amount of $1,760,000. The Company recorded
amortization of approximately $147,000 in the fiscal year ended March 31, 2007,
completing the amortization of the cost of the deferred asset.
The
Company also incurred financing costs of $505,000 in the fiscal year ended March
31, 2007 in connection with issuance of a convertible debenture to YA Global.
These costs, representing primarily fees paid in cash to YA Global, were charged
to additional paid-in-capital.
Accounting for Stock Options
and Warrants
Effective
April 1, 2006, the Company adopted SFAS No. 123R, “Share Based Payments,”
relating to stock-based compensation issued to employees, including options,
warrants, restricted share plans, performance-based awards, stock appreciation
rights, stock purchase plans and other stock-based awards. Under SFAS
No. 123R, compensation cost is recorded in the financial statement based on the
fair value of the award on the date of grant and is recognized as compensation
expense over the period in which the award vests. The Company uses the
Black-Scholes pricing model to determine the fair value of options and warrants.
The amounts of compensation expense recorded for the fiscal years ended March
31, 2009, 2008 and 2007 were $97,663, $843,962 and $1,623,714,
respectively.
Property, Plant and
Equipment
Furniture and equipment are included in
fixed assets in the accompanying consolidated balance sheets and are stated at
cost. Depreciation expense is computed using the straight-line method during the
estimated useful life of each asset. The amounts of depreciation related to
continuing operations included in the consolidated statements of operations for
the fiscal years ended March 31, 2009, 2008 and 2007 were approximately $413,501
$1,118,916 and $2,624,295, respectively. When an asset is retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized in income for the period.
The costs of maintenance and repairs are charged to expense as incurred;
significant renewals and betterments are capitalized. At March 31, 2009 and 2008, property,
plant and equipment values related to continuing operations were as
follows:
|
|
Estimated
Useful
Lives
(in years)
|
|
|
2009
|
|
|
2008
|
|
Furniture
and fixtures
|
|
|
7
|
|
|
$ |
388,192 |
|
|
$ |
388,192 |
|
Machinery
and equipment
|
|
|
5
|
|
|
|
1,512,552 |
|
|
|
1,505,792 |
|
Leasehold
Improvements
|
|
|
7
|
|
|
|
101,621 |
|
|
|
101,621 |
|
Subtotals
|
|
|
|
|
|
|
2,002,365 |
|
|
|
1,995,605 |
|
Less
accumulated depreciation
|
|
|
|
|
|
|
(1,612,404
|
) |
|
|
(1,198,903
|
) |
Fixed
assets, net
|
|
|
|
|
|
$ |
389,961 |
|
|
$ |
796,702 |
|
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, furniture and equipment and other long-lived assets included
in assets of companies held for sale were not depreciated or amortized while
such assets were classified as held for sale. In the quarter ended March 31,
2009, the Company reclassified the assets and liabilities of its Integrated
Telecom Business to continuing operations. At that time, the Company recognized
$91,371 and $107,064 of additional depreciation expense that would have been
recognized if the assets and liabilities had been classified as held and used in
the fiscal year ended March 31, 2008 and the first three quarters of the fiscal
year ended March 31, 2009, respectively.
Advertising
Contracts
CloseCall
has used print, signage, radio and television advertising to market services to
customers of certain local professional sports teams. Advertising programs
include the use of long-term contracts. Upon the negotiation of such a contract,
the Company records the cost of the advertising program as an asset, and
amortizes the balance to operating expenses over the life of the contract. The
Company has re-evaluated the effectiveness of its long-term advertising
contracts and has decided to discontinue such programs. At March 31, 2008,
current assets included prepaid expenses of $137,749 related to such contracts.
The corresponding contract liability has been typically paid in installments. At
March 31, 2008, current liabilities included accounts payable and accrued
expenses of $171,375 that were payable under such contracts. At March 31, 2009,
there were no prepaid expense or contract liability amounts included in current
assets and current liabilities in the accompanying consolidated balance
sheets.
Customer Contracts and Other
Intangible Assets
Customer
contracts and other intangible assets had a cost of $1,026,544 at March 31, 2009
and 2008, and accumulated amortization of $797,195 and $486,728, respectively.
These assets are being amortized over their estimated useful lives or contract
terms (generally five years) on a straight-line basis. The amounts of
amortization expense included in continuing operations for the years ended March
31, 2009, 2008 and 2007 were $310,467, $48,025 and $162,720,
respectively. In the quarter ended March 31, 2009, the Company
reclassified the assets and liabilities of its CLEC Business to continuing
operations. In accordance with SFAS No. 144, the Company recognized $143,786 and
$128,441 of additional amortization expense that would been recognized if the
assets and liabilities had been classified as held and used in the fiscal year
ended March 31, 2008 and the first three quarters of the fiscal year ended March
31, 2009, respectively.
Intangible
assets previously included amounts paid to property location owners in
connection with payphone installation contracts. These other assets, which were
sold in conjunction with the sale of a majority of Davel’s payphones in
September 2007, were amortized on a straight-line basis over their estimated
useful lives based on the contract terms (generally 5 years). Amortization
expense related to location contracts was $215,686 and $610,825 for the fiscal
years ended March 31, 2008 and 2007, respectively. There was no
amortization expense relating to these intangible assets in fiscal
2009.
In
connection with the acquisition of certain customer rights to provide broadband
services under an agreement with Sprint Communications Company L.P. (“Sprint”),
Kite Broadband made an up-front payment of $6,578,550, which was
capitalized and allocated between the value ascribed to the initial
three-year term of the agreement with Sprint, amounting to $1,966,200, and the
value ascribed to the bargain purchase option, amounting to $4,612,350. The
amount assigned to the initial term of the agreement was being amortized on
a straight-line basis over the initial three-year term. For the fiscal year
ended March 31, 2007, amortization expense included in discontinued operations
was approximately $663,000. In addition, the Company recorded an impairment
charge at March 31, 2007 in the amount of $5,468,215 representing the entire
remaining carrying value of this asset.
Accounts Payable and Accrued
Expenses
Accounts
payable and accrued expenses consisted of the following at the indicated
dates:
|
|
March
31
2009
|
|
|
March
31
2008
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
2,221,474 |
|
|
$ |
2,706,063 |
|
Accrued
taxes and fees
|
|
|
1,485,302 |
|
|
|
1,355,175 |
|
Accrued
restructuring costs
|
|
|
100,218 |
|
|
|
100,218 |
|
Accrued
compensation
|
|
|
531,001 |
|
|
|
549,922 |
|
Accrued
interest expense
|
|
|
583,672 |
|
|
|
505,647 |
|
Other
accrued liabilities
|
|
|
1,343,385 |
|
|
|
1,635,174 |
|
Totals
|
|
$ |
6,265,052 |
|
|
$ |
6,852,199 |
|
At March
31, 2009 and 2008, the accrued restructuring costs balance of $100,218 was
included in accounts payable and accrued expenses. During the fiscal year ended
March 31, 2007, the Company recorded restructuring charges related primarily to
the termination of employees in the amount of $283,839. Of this amount, $185,968
was included in continuing operations and $97,871 was included in discontinued
operations. During the fiscal year ended March 31, 2007, the Company made
payments totaling $485,032 relating to balances that had previously been
accrued. At March 31, 2007, the accrued restructuring costs balance
was $284,918 including $184,700 related to the loss expected on the abandonment
of leased facilities and $100,218 related to the termination of certain
employees. During the 2008 fiscal year, a portion of the liability for the
abandoned leased facilities was paid and a portion was transferred in connection
with the sale of the ISP Business.
Income
Taxes
Effective
July 14, 2000, the Company adopted the provisions of SFAS No. 109, “Accounting
for Income Taxes”. The statement requires an asset and liability approach for
financial accounting and reporting for income taxes, and the recognition of
deferred tax assets and liabilities for the temporary differences between the
financial reporting bases and tax bases of the Company’s assets and liabilities
at enacted tax rates expected to be in effect when such amounts are realized or
settled. Because of its history of losses, the Company has not had any material
federal or state income tax obligations.
Impact of Recent Accounting
Standards
In July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in
income tax positions. FIN 48 requires that the Company recognize in the
consolidated financial statements the impact of a tax position that is more
likely than not to be sustained upon examination based on the technical merits
of the position. The provisions of FIN 48 were effective for the Company on
April 1, 2007. Adoption of FIN 48 did not have a material effect on the
consolidated financial statements.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements”. SAB 108 provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. SAB No. 108 states that
registrants should use both a balance sheet approach and income statement
approach when quantifying and evaluating the materiality of a misstatement. SAB
108 also provides guidance on correcting errors under the dual approach as well
as transition guidance for correcting previously immaterial errors that are now
considered material. The provisions of SAB 108 were applicable to financial
statements for the Company’s fiscal year ended March 31, 2007. This guidance has
not had any material impact on the consolidated financial condition or results
of operations.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value,
establishes a framework and gives guidance regarding the methods used for
measuring fair value, and expands disclosures about fair value measurements. The
provisions of SFAS No. 157 are effective for financial statements issued for the
Company’s fiscal year beginning April 1, 2008 (April 1, 2009 with respect to
certain non-financial assets and liabilities), and interim periods within such
fiscal years. The adoption of SFAS No. 157 for financial assets and liabilities
in the first quarter of the current fiscal year did not have a material effect
on the Company’s financial position or results of operations as the Company does
not have any material financial assets or liabilities that required
remeasurement at fair value. See Note 14 for further information regarding fair
value measurements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” which provides companies with an
option to report selected financial assets and liabilities at fair value. The
objective is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. The provisions of SFAS No. 159 are effective for
financial statements issued for the Company’s fiscal year beginning April 1,
2008. The Company did not elect to measure its financial instruments or any
other items at fair value as permitted by SFAS No. 159. Therefore, the adoption
of FAS No. 159 did not have a material effect on the Company’s financial
position or results of operations.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No.
141R modifies the accounting for business combinations by requiring that
acquired assets and assumed liabilities be recorded at fair value, contingent
consideration arrangements be recorded at fair value on the date of the
acquisition and preacquisition contingencies will generally be accounted for in
purchase accounting at fair value. The pronouncement also requires that
transaction costs be expensed as incurred, acquired research and development be
capitalized as an indefinite-lived intangible asset and the requirements of SFAS
No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” be
met at the acquisition date in order to accrue for a restructuring plan in
purchase accounting. SFAS No. 141R is required to be adopted prospectively
effective for the Company’s fiscal year beginning April 1, 2009. The Company
does not expect SFAS No. 141R to have a significant impact on the Company’s
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51.” SFAS No.
160 modifies the reporting for noncontrolling interests in the balance sheet and
minority interest income (expense) in the statement of operations. The
pronouncement also requires that increases and decreases in the noncontrolling
ownership interest amount be accounted for as equity transactions. SFAS No. 160
is required to be adopted prospectively, with limited exceptions, effective for
the fiscal year beginning April 1, 2009. The Company does not expect SFAS No.
160 to have a significant impact on the Company’s consolidated financial
statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133.” SFAS No. 161
modifies existing requirements to include qualitative disclosures regarding the
objectives and strategies for using derivatives, fair value amounts of gains and
losses on derivative instruments and disclosures about credit-risk-related
contingent features in derivative agreements. The pronouncement also requires
the cross-referencing of derivative disclosures within the financial statements
and notes thereto. The requirements of SFAS No. 161 are effective for the
Company’s interim and annual fiscal periods beginning on April 1, 2009. The
Company does not expect SFAS No. 161 to have a significant impact on the
Company’s consolidated financial statements or related disclosures.
NOTE
3-DISPOSITION OF
BUSINESSES
Sale of the ISP and
Integrated Telecom Business
On June
30, 2007, the Company entered into a Purchase Agreement with USA, pursuant
to which USA agreed to acquire all of the outstanding shares of CloseCall, AFN,
DFW and InReach (the “Wireline Businesses”). The USA Agreement was subsequently
amended to extend the closing date for the sale of the ISP Business which was
completed on July 18, 2007. The closing for the Integrated Telecom Business was
expected to occur following receipt of the necessary regulatory approvals. Until
the closing, USA agreed to manage the Integrated Telecom Business pursuant to a
management agreement entered into with USA (the “USA Management
Agreement”).
On
January 14, 2008, the Company received notice from USA purporting to terminate
the USA Agreement with respect to the sale of the Integrated Telecom Business,
but provided that USA remained interested in discussing terms upon which it
would complete the purchase. The Company has been in communications
with USA and disputes the validity of the claims alleged for the purported
termination, which include the alleged failure to obtain certain regulatory and
contractual approvals and the alleged breach of certain representations and
warranties set forth in the USA Agreement. The Company believes the purported
termination was in bad faith and commenced action in pursuit of all available
legal and equitable remedies available to it against USA. Despite the on-going
discussions with USA, the Company re-assumed operating control of AFN and
CloseCall and terminated the agreement to sell the Integrated Telecom Business
to USA in the fourth quarter of the fiscal year ended March 31,
2008.
Under the
USA Agreement, the total purchase price for the ISP and Integrated Telecom
Businesses was $27,663,893 consisting of $21.9 million in cash and 8,100 shares
of convertible preferred stock of USA (the “USA Preferred”) with a fair value of
$5,763,893. The 8,100 shares of USA Preferred, received as an advanced payment
towards the purchase of the Integrated Telecom Business, are convertible into
7.5% of the outstanding common stock of USA and could be redeemed for $8.1
million in cash, at the option of the Company, anytime following the third
anniversary of the closing of the Integrated Telecom Business (the “Put
Option”). Prior to that time, USA had the option to redeem all of the
unconverted USA Preferred for $12,960,000. The fair value of the USA preferred
was originally based on the present value of the $8.1 million Put Option
discounted at an interest rate of 10%. Through December 31, 2007, the discount
on the USA preferred of $2,336,107 was being accreted to income through the
estimated date the Put Option was to become exercisable using the interest
method. During the second and third quarters of the fiscal year ended March 31,
2008, the Company recorded and included as an offset to interest expense
$244,198 of income relating to the discount. Following the
termination of the sale of the Integrated Telecom Business to USA in the fourth
quarter of fiscal 2008, the value of the USA Preferred was considered impaired.
The Company discontinued the accretion of the discount and wrote-off the
carrying value of the USA Preferred against the liability recorded for the
advanced proceeds from USA. The net difference in carrying values of $56,442 was
recorded as a reduction in the loss on sale of discontinued operations in the
fourth quarter of the fiscal year ended March 31, 2008.
Upon the
closing of the sale of the ISP Business on July 18, 2007, the Company received
$2.5 million in cash, a $2 million note (the “USA Note”), which was originally
payable upon the earlier of the closing of the Integrated Telecom Business or
January 1, 2008, and the 8,100 shares of USA Preferred. The remaining cash
proceeds of $17,400,000 were to be paid by USA at the time of the Integrated
Telecom closing. Until that time, USA was required to cause the
managed companies to make monthly payments of interest on this balance at a rate
of 7.75% directly to YA Global, two months in arrears. The Company received the
monthly payments due through January 1, 2008, which payments were applied to
principal and interest on the debentures held by YA Global. The Company
initially recorded these payments as an offset to interest expense in the amount
of $616,985 through December 31, 2007. In the fourth quarter of
fiscal year 2008, the Company reversed this amount that was previously credited
to interest expense.
On
January 3, 2008, the Company and USA entered into an amendment to the USA
Note. USA made payments of $500,000 each on January 4 and January 11,
2008 with the remaining balance of $1,000,000, together with accrued interest at
the rate of 7.75%, due on the earlier of the date of the closing of the sale of
the Integrated Telecom Business or March 31, 2008. Of the $1,000,000 of
payments, the Company received $125,000 and the remaining $875,000 was used to
pay principal and interest on the convertible debentures due to YA
Global. USA did not pay the remaining principal balance of $1,000,000
or the accrued interest due on March 31, 2008. In July 2008, the Company revised
the payment terms relating to the USA Note and received payments totaling
$200,000. The remaining principal balance and accrued interest at 12% per annum
was due on December 29, 2008. USA has not paid the balance due on the
USA Note and certain other receivables and has advised the Company that USA is
being indemnified for the amounts due and owing under the USA Note by its former
Chief Executive Officer, L. William Fogg. Mr. Fogg, and his wholly
owned company, Nationwide Acquisition Corp. are alleged to be the successors in
interest to the ISP Business previously sold to USA. Mr. Fogg has
disputed the amount due under the USA Note and alleges the right to certain
setoffs against the amounts due and owing the Company. Mr. Fogg and
Nationwide Acquisition Corp. previously filed a declaratory judgment lawsuit
against the Company, AFN, CloseCall and USA relating to various amounts owed to
the Company including the USA Note. In response thereto, the Company
has filed certain counterclaims against USA, Nationwide Acquisition Corp. and
Mr. Fogg (see Note 12). At March 31, 2009, USA was in default with
respect to the USA Note, which provides for interest at a default rate of 18%
per annum. The claims alleged in the declaratory judgment lawsuit and
various counterclaims alleged against USA were settled at a mediation that was
held on June 8, 2009. During the year ended March 31, 2009, the Company wrote
down the carrying value of the USA Note by $345,534.
The loss
incurred in connection with the sale of the ISP Business, after adjustment for
the termination of the sale of the Integrated Telecom Business, of $2,424,785 is
included in the loss on sale of discontinued operations in the accompanying
consolidated statements of operations.
Sale of the Wireless
Networks Business
On July
8, 2007, the Company entered into a Purchase Agreement with Gobility, pursuant
to which Gobility acquired all of the outstanding shares of Neoreach, and
indirectly Kite Networks, and all of the outstanding membership interests in
Kite Broadband. The purchase price was $2.0 million, paid in the form of a
debenture that is convertible into shares of Gobility common stock (the
“Gobility Debenture”) at a rate of $5.00 per share, or such lower price, if
Gobility issues common stock or securities convertible into common stock at a
price that is less than $5.00 per share. Unless converted, the Gobility
debenture is due July 8, 2009 with annual interest at 8%.
Under the
terms of the Gobility Debenture, Gobility was required to raise at least $3.0
million in cash no later than August 15, 2007. Prior to closing, the Company
received a reliance letter from Wingfield Corporation, N.V. (“Wingfield”), a
Brussels, Belgium-based merchant bank, stating that such financing was
forthcoming. To date, Gobility has not obtained financing from Wingfield or any
other source and is in default with respect to the Gobility Debenture. As a
result of this default, the Company has the right but not the obligation to
repurchase the Wireless Networks Business with the surrender of the Gobility
Debenture and the payment of nominal additional consideration. In addition to
its inability to obtain the required financing, Gobility has been unable to fund
its operations including the payment of amounts due under a series of capital
equipment leases and other equipment-related obligations. Because the equipment
leases and other equipment purchases were co-signed by Mobilepro, if Kite
Networks fails to pay the leases, absent any other defenses it may have, the
Company could be obligated to pay the obligations relating to the equipment
leases and equipment purchases. As a result of these defaults by Gobility, the
Company has written off the $2.0 million Gobility Debenture and has recorded the
capital leases and equipment-related obligations as liabilities in connection
with the sale in the fiscal year ended March 31, 2008. The Company has also
recorded the certificates of deposits securing the equipment lease
obligations.
The
Company has cooperated with Gobility in its efforts to sell the assets of Kite
Networks in order to pay the obligations relating to the equipment leases and
other equipment. In September 2007, the Company was required to make lease
payments totaling $64,165. On March 10, 2008, Gobility sold the assets of the
wireless network in Longmont, Colorado, and the Company received the related
proceeds in the form of promissory notes from the purchaser totaling $1,800,000
(see Note 4). In addition, the Company entered into a forbearance agreement with
the principal equipment vendor and agreed to pay the $1,591,978 equipment
obligation, with interest at the prime rate, and a related lease obligation in
the principal amount of $149,749. In March 2008, the Company also
satisfied the terms of one of the leases relating to the Tempe, Arizona wireless
network with an aggregate principal balance of $318,595, plus accrued interest,
by paying $93,000 in cash and having the $250,000 certificate of deposit that
secured the lease applied thereto. As a result of the sale to Gobility and these
transactions, the Company recorded a net loss on the sale of its Wireless
Networks Business of $3,433,843 that was reported in the loss on sale of
discontinued operations for the fiscal year ended March 31, 2008.
On August
1, 2008, the Company executed a promissory note and release with Data Sales Co.,
Inc. (“Data Sales”) in the principal amount of $330,000. The note is in full
satisfaction of a $1,231,138 lease obligation for which the Company was a
co-borrower with Kite Networks and reflects the impact of a sale of certain
uninstalled wireless equipment by Data Sales to an unaffiliated third party
purchaser that was consummated in July 2008. The Company recorded a
gain of $901,138 in the second fiscal quarter of the year ended March 31, 2009
as a result of the transaction.
The
Company continues to cooperate with Gobility in its efforts to sell the
remaining assets of Kite Networks; however, the Company is not confident that
additional sales by Gobility are likely. In the event Gobility is
unsuccessful in its attempts to sell the remaining assets and satisfy the
equipment lease obligations, the Company, subject to any defenses it might have,
could be required to make the payments on the remaining equipment leases. At
March 31, 2009, the amounts recorded on the consolidated balance sheets relating
to the capital lease obligations, accrued interest, and the note payable and
equipment obligation were $2,385,736, $447,412 and $1,613,647, respectively. The
corresponding amounts outstanding at March 31, 2008 were $3,569,518, $342,592
and $1,571,978, respectively. The Company has also recorded the certificates of
deposits securing the lease obligations in the aggregate amount of $937,664 at
March 31, 2009 and 2008 in the accompanying consolidated balance
sheets.
The
Company has sold its Wireless Networks and ISP Businesses. Revenues, operating
costs and expenses, and other income and expense attributable to the Wireless
Networks and ISP Businesses have been aggregated to a single line, loss from
discontinued operations, in the consolidated statements of operations for all
periods presented. The Company has no income taxes due to operating losses
incurred for tax purposes. No interest expense, other than amounts relating to
the capital leases or other debt recorded by the discontinued businesses prior
to the sales, has been allocated to discontinued operations.
The revenues, income and losses of
discontinued operations were as follows:
|
|
Years
Ended March 31
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
- |
|
|
$ |
6,730,697 |
|
|
$ |
26,530,154 |
|
Loss
from operations of discontinued operations
|
|
$ |
- |
|
|
$ |
(2,554,384
|
) |
|
$ |
(32,461,083
|
) |
Gain
(loss) on disposal
|
|
|
901,138 |
|
|
|
(5,858,628
|
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
$ |
901,138 |
|
|
$ |
(8,413,012 |
) |
|
$ |
(32,461,083 |
) |
There
were no remaining assets and liabilities associated with the Wireless Networks
and ISP Businesses classified as asset or liabilities of companies held for sale
at March 31, 2009 and 2008.
The
Company completed a series of transactions to sell a majority of Davel’s
payphones in order to provide cash for operating purposes and to retire
additional amounts owed to YA Global under the convertible debentures. On June
30, 2007, we completed the sale of approximately 730 operating payphones to an
unaffiliated payphone operator and received over $200,000 in cash proceeds. A
gain in the amount of $10,640 was recognized in connection with this transaction
in the quarter ended June 30, 2007.
On September 7, 2007, Davel sold
approximately 21,405 payphones to Sterling. Under the terms of the sale
agreement, the Company received $50,000 in cash and $1,839,821 in cash was paid
to YA Global to reduce the amount of principal and interest owed under the
outstanding convertible debentures. Pursuant to the sale agreement, proceeds in
the amount of $850,832 were used for the direct payment of certain related
liabilities and broker fees and $1,200,000 of proceeds was used for the funding
of escrow accounts established for the payment of key vendor obligations and
indemnification claims. Sterling also assumed certain other liabilities of
Davel. Effective September 30, 2007, Davel sold an additional 300 payphones for
approximately $85,000. After these sales, Davel’s remaining operations have been
significantly reduced. Davel’s remaining operations are being continued and
Davel is pursuing the recovery of certain claims including the AT&T, Sprint
and Qwest claims described in Note 12. A loss on sale of assets of $2,800,206
was included in the loss from continuing operations in the second quarter of the
fiscal year ended March 31, 2008 in connection with these transactions. The net
gain and loss relating to the sale of Davel’s payphone assets are included in
continuing operations as loss on sale of assets in the accompanying consolidated
statements of operations.
NOTE
4-NOTES
RECEIVABLE
Notes
receivable consist of a $2,000,000 note receivable from USA, as amended, with a
remaining principal balance of $859,128 and $1,000,000 at March 31, 2009 and
2008, respectively, and notes receivable with an original principal balance of
$1,865,000 that the Company received in connection with the sale of the
Longmont, Colorado wireless network (see Note 3). In July 2008, the Company
revised the payment terms relating to the USA Note and received payments
totaling $200,000. The remaining principal balance and accrued interest at 12%
per annum was due on December 29, 2008. USA has not paid the balance due on the
note and certain other receivables and has advised the Company that USA is being
indemnified for the amounts due and owing under the USA Note by its former Chief
Executive Officer, L. William Fogg. Mr. Fogg, and his wholly owned
company, Nationwide Acquisition Corp. are alleged to be the successors in
interest to the ISP Business previously sold to USA. Mr. Fogg has
disputed the amount due under the USA Note and alleges the right to certain
setoffs against the amounts due and owing the Company. Mr. Fogg and
Nationwide Acquisition Corp. have filed a declaratory judgment lawsuit against
the Company, AFN, CloseCall and USA relating to various amounts owed to the
Company including the USA Note. In response thereto, the Company filed certain
counterclaims against USA, Nationwide Acquisition Corp. and Mr. Fogg (see Note
12). At March 31, 2009, USA was in default with respect to the USA
Note, which provides for interest at a default rate of 18% per
annum. The claims raised in the declaratory judgment lawsuit and
various counterclaims alleged against USA and Mr. Fogg were settled at a
mediation that was held on June 8, 2009. During the fiscal year ended
March 31, 2009, the Company wrote down the carrying value of the USA Note by
$345,534. The Company has also discontinued the accrual of interest for
financial reporting purposes effective January 1, 2009. The net carrying values
of the USA Note of $513,594 and $1,000,000 and the related accrued interest of
$45,534 and $19,852 are included in current assets in the accompanying
consolidated balance sheets at March 31, 2009 and 2008,
respectively.
Notes
receivable with an original principal balance of $1,865,000 are due from DHB
Networks, LLC (“DHB”), the purchaser of the Longmont, Colorado wireless network,
and consist of four notes. The notes generally provide for quarterly payments of
interest only at 9% beginning September 1, 2008 plus equal quarterly principal
payments of $141,050 commencing March 1, 2011. The notes and any unpaid interest
are due in March 2015. The notes are guaranteed by the principal owner of
DHB.
In
October 2008, the Company revised the payment terms on the DHB notes and
subsequently received $12,500 towards the interest that was due in September
2008. The remaining unpaid interest accrued through November 30, 2008
totaling $109,817 was capitalized. Thereafter, interest is payable quarterly
beginning February 28, 2009 at a new rate of 10% per annum. The maturity and
principal payments dates have not changed. DHB has not paid the interest
payments that were due on February 28 and May 31, 2009. The Company
is presently negotiating with DHB regarding the payment terms of the notes and
has written down the carrying value of the notes by $1,000,000 in the fiscal
year ended March 31, 2009. The Company has also discontinued the accrual of
interest for financial reporting purposes effective December 1, 2008. These
notes receivable, with a net carrying value of $974,817 and $1,865,000
(including the current portion of $65,000 at March, 31, 2008), are included in
notes receivable, long-term in the consolidated balance sheets at March 31, 2009
and 2008, respectively.
NOTE
5- IMPAIRMENT OF
GOODWILL AND LONG-LIVED ASSETS
At March
31, 2009 and 2008, the Company’s consolidated balance sheets include goodwill of
$11,767,213 and $20,531,278, respectively, relating to the Company’s Integrated
Telecom Business. These and other goodwill amounts were previously
recorded in connection with the series of acquisitions completed by the Company
since January 1, 2004. SFAS No. 142, “Goodwill and Other Intangible
Assets”, requires that the Company assess the fair value of goodwill
amounts relating to acquired entities at least annually in order to identify any
impairment in the values. However, on a quarterly basis, management is alert for
events or circumstances that would indicate that, more likely than not, the fair
value amounts of goodwill for reporting segments have been reduced below the
corresponding carrying amounts. If there is a determination that the fair value
of an acquired entity is less than the corresponding net assets amount,
including goodwill, an impairment loss would be identified and recorded at that
time.
During
the fourth quarter of the fiscal year ended March 31, 2009, there was a decline
in the operating performance of the Integrated Telecom Business. In addition,
the Company was previously engaged in negotiations to sell the business which
did not materialize. As a result, management reviewed the carrying values of the
net assets of the Integrated Telecom Businesses at March 31, 2009 and determined
that an adjustment for goodwill impairment was appropriate. The Company
estimated the fair value, as determined under SFAS No. 142, of the reporting
unit using a model developed by the Company which incorporates growth rates and
other adjustments to base revenues and expenses to estimate future cash flows,
and applies a discount rate to those estimated cash flows. The Company recorded
an impairment charge in the amount of $8,764,065 at March 31, 2009, to write
down goodwill and the net assets of the Integrated Telecom Business to fair
value. The asset impairment charge recorded for the fiscal year ended March 31,
2009 was included in operating costs and expenses of continuing operations in
the accompanying consolidated statements of operations.
During
the fiscal year ended March 31, 2007, the Wireless Networks Business, the ISP
Business and Davel did not perform as expected. In addition, as discussed above,
the Company was engaged in negotiations for the sale of all of these businesses.
As a result, management reviewed the carrying values of the assets of these
businesses during fiscal year 2007 and determined that adjustments for goodwill
and other asset impairment were appropriate. The Company recorded impairment
charges in the total amount of $27,275,987 during the fiscal year ended March
31, 2007, including $17,745,303 representing the entire amount of goodwill and
other intangible assets related to Wireless Networks, $6,474,889 relating to the
goodwill of the ISP Business, $1,482,000 relating to certain deployed wireless
network equipment of Kite Networks, and $1,573,795 relating to certain payphone
equipment and location contracts of Davel. Of the total asset
impairment charges recorded for the fiscal year ended March 31, 2007,
$25,702,192 of this amount was included in the loss from discontinued operations
and $1,573,795 was included in operating costs and expenses relating to
continuing operations.
NOTE
6-INVESTMENTS
During
the year ended March 31, 2005, the Company provided certain management services
to two emerging technology firms. As consideration, the Company received a
non-affiliate equity interest in each firm. These investments were recorded in
the amounts of $300,000 and $150,000, respectively, approximating the value of
the services provided. The shares of common stock held by the Company are
considered to be available-for-sale securities. If a decline in the fair value
of these securities is judged by management to be other than temporary, the cost
basis of the securities would be written down to fair value at that time. During
the fiscal year ended March 31, 2008, the Company received $361,503 from the
sale of a portion of the shares and wrote down the carrying value of the
remaining shares. The Company recognized a loss of $81,587 in fiscal 2008
relating to these transactions. The carrying value of the common stock included
in other assets of continuing operations at March 31, 2008 was $6,910. In the
fiscal year March 31, 2009, the Company wrote off the remaining carrying value
of the shares.
The
Company received advanced proceeds, primarily in the form of an investment in
8,100 shares of the USA Preferred, in connection with the sale of the ISP
Business and Integrated Telecom Business in the second quarter of the fiscal
year ended March 31, 2008 (see Note 3). The fair value of the USA Preferred of
$5,763,893, net of a $2,336,107 discount, was initially recorded and a portion
of the discount in the amounts of $244,198 was accreted to income in fiscal year
ended March 31, 2008. Following the termination of the sale of the Integrated
Telecom Business to USA in the fourth quarter of the 2008 fiscal year, the value
of the convertible preferred stock was considered impaired and was written-off
against the liability recorded for the advance from USA. The difference between
the carrying values of the asset and liability of $56,442 was recorded as a
reduction in the loss on sale of discontinued operations reported in the
consolidated statements of operations during the fourth quarter of the fiscal
year ended March 31, 2008.
On
January 5, 2008, the Company entered into an agreement to purchase 2,666,667
shares of the outstanding common stock of Microlog Corporation (“Microlog”) from
TFX Equities, Inc. (“TFX”) for $1,000 in cash (the “Microlog Agreement”). The
Company also received from TFX $2,000,000 of 10% subordinated notes, due from
Microlog on January 5, 2011, that are convertible into Microlog common stock at
a price of $0.10 per share, warrants to purchase 100 shares of Series A
convertible preferred stock of Microlog, and warrants to purchase 750,000 shares
of Microlog common stock at an exercise price of $0.10 per share in connection
with the Microlog Agreement. In addition, the Company invested $250,000 in cash
directly in Microlog in exchange for a 10% subordinated note with a face value
of $250,000, due January 5, 2011, that is convertible into Microlog common stock
at a price of $0.10 per share.
The
Company currently owns approximately 30% of the outstanding common stock of
Microlog and accounts for its investment using the equity method of
accounting. If all of the warrants and convertible securities issued
by Microlog were exercised or converted to common stock, the Company would own
approximately 70% of the outstanding common stock on a fully diluted basis.
Microlog is a Gaithersburg, Maryland based government contractor that develops,
sells and installs software for integrated voice response and web-based customer
contact systems in the healthcare industry. Microlog’s common stock
is traded on the “Pink Sheets” under the symbol “MLOG”. The market value of the
Company’s investment in the common stock of Microlog at March 31, 2009 was
$373,333.
In
January 2008, the Company also entered into a management agreement to provide
financial, legal and administrative services to Microlog at a rate of $8,800 per
month. The accompanying consolidated statements of operations include revenues
of $105,600 and $22,000 related to this management agreement and $225,000 and
$53,630 of interest income related to notes receivable from Microlog for the
fiscal years ended March 31, 2009 and 2008, respectively. At March 31, 2009 and
2008, the carrying value of the investment and amounts due from Microlog of
$491,447 and $256,917, respectively, are included in investments and other
assets in the accompanying consolidated balance sheets. Microlog and
the Company are currently negotiating a potential modification to the management
agreement.
NOTE
7-DEBT
A summary
of the balances owed under the debentures, notes payable, and other long-term
liabilities at March 31, 2009 and 2008 is as follows:
|
|
March
31,
2009
|
|
|
March
31,
2008
|
|
Convertible
Debenture issued to YA Global
|
|
$ |
13,066,335 |
|
|
$ |
- |
|
Amended
Debenture issued to YA Global
|
|
|
- |
|
|
|
11,006,823 |
|
Secured
Debentures issued to YA Global
|
|
|
- |
|
|
|
2,162,121 |
|
Capital
leases
|
|
|
2,385,736 |
|
|
|
3,569,518 |
|
Equipment
obligation
|
|
|
1,331,978 |
|
|
|
1,571,978 |
|
Equipment
note payable
|
|
|
281,669 |
|
|
|
- |
|
Other
notes payable and long-term obligations
|
|
|
226,393 |
|
|
|
259,848 |
|
|
|
|
17,292,111 |
|
|
|
18,570,288 |
|
Less:
Unamortized debt discounts
|
|
|
(1,039 |
) |
|
|
(30,208 |
) |
Less:
Amounts due within one year
|
|
|
(16,033,615 |
) |
|
|
(17,159,180 |
) |
Long-term
portion of debt
|
|
$ |
1,257,457 |
|
|
$ |
1,380,900 |
|
Based on
the current terms of the YA Global debenture, notes payable and other long-term
liabilities, the entire long-term portion of the debt at March 31, 2009 will
become due for payment in the twelve-month period ending March 31,
2011.
The Convertible Debenture
Agreement
Effective
June 30, 2008, the Company issued a secured convertible debenture to YA Global
(the “Convertible Debenture”) with an aggregate principal balance of
$13,391,175, replacing the Amended Debenture and the Secured Debenture described
below. The Convertible Debenture provides for monthly payments of interest at a
12% annual interest rate with the remaining principal balance due on May 1,
2009. The Company did not pay the remaining principal balance due on May 1,
2009.
On May 5,
2009, the Company executed a Forbearance Agreement with YA Global, pursuant to
which YA Global agreed to forbear for a period ending June 1, 2009 (the
“Forbearance Period”) which was later extended to June 5, 2009, from enforcing
its rights and remedies against the Company under the Convertible Debenture and
related agreements. The Convertible Debenture continues to carry an interest
rate of 12% during the Forbearance Period. Despite the Company’s
efforts to restructure the terms of the Convertible Debenture, YA Global has
informed the Company that it intends to exercise its rights as the Company’s
senior secured creditor. Such rights include, but are not limited to,
foreclosing on the assets of the Company. In such event the
Company may not have the ability to continue as a going concern (see Note
1).
Under the
terms of the Convertible Debenture, YA Global may convert any portion of the
unpaid principal and interest into shares representing up to 4.99% of the
Company’s common stock at the lesser of $0.04973 per share or the average of the
two lowest volume weighted average prices during the five trading days
immediately preceding the conversion date. If certain conditions are met, the
Company has the option to pay a portion of the total interest due in common
stock at the applicable conversion price on the day immediately prior to the
interest payment date. The conversion price is subject to adjustment if the
Company is deemed to have issued shares at a price that is lower than the
effective conversion price on the date such shares are issued. The
Convertible Debenture is secured by substantially all of the assets of the
Company.
During
the fiscal year ended March 31, 2009, the Company issued 629,042,857 shares of
common stock to YA Global which caused a reduction of $324,840 in
principal relating to the Convertible Debenture. Subsequent to March 31, 2009,
YA Global converted additional shares totaling 290,700,000 shares of common
stock. Principal was reduced by $87,710 as part of those conversions.
We believe that such shares were sold by YA Global pursuant to Rule 144 of
the Securities Act of 1933 (the “Securities Act”).
In
connection with the issuance of the Convertible Debenture, the Company granted
to YA Global a seven-year warrant to purchase 25,000,000 shares of its common
stock at an exercise price of $0.04973 per share, which expires on June 30,
2015. In addition, the outstanding warrants previously granted to YA Global to
purchase 15,000,000 share of common stock at $0.20 per share and 10,000,000
shares of common stock at $0.174 per share were repriced and are now exercisable
at a price of $0.04973 per share. The Convertible Debenture was
recorded in the accounts net of an unamortized debt discount of $10,390
reflecting the fair value of the related warrants on the date of issuance or
repricing. The discount amounts are being amortized as charges to interest
expense over the term of the Convertible Debenture.
The Secured Debenture
Agreement
On August
28, 2006, the Company entered into a financing agreement with YA Global that
provided $7.0 million in debt financing with the proceeds received in a series
of four closings (the “Secured Debenture Agreement”). At each closing, the
Company issued YA Global a 7.75% secured convertible debenture in the gross
amount for the closing, convertible into shares of common stock at $0.174 per
share. The Company received cash proceeds of $6,495,000, net of financing fees
of $505,000. In addition, YA Global was issued warrants to purchase 10,000,000
shares of common stock that expire on various dates in 2011 at an exercise price
of $0.174 per share, as amended. As set forth above, the warrants
were repriced on June 30, 2008 and are now exercisable at a price of $0.04973
per share.
The
debentures issued pursuant to the Secured Debenture Agreement were recorded in
the balance sheet net of unamortized debt discounts reflecting the fair market
values of the debentures on the dates of issuance after allocating a like amount
of proceeds to the related warrants. The discount amounts were amortized as
charges to interest expense over the terms of the related
debentures.
Under
conditions similar to those included in the Amended Debenture (see discussion
below), the Company had the right to make any and all such principal and
interest payments by issuing shares of its common stock to YA Global with the
amount of such shares based upon the lower of $0.174 per share or 93% of the
average of the two lowest daily volume weighted average per share prices of its
common stock during the five days immediately following the scheduled payment
date. Through March 31, 2007, the Company issued 42,598,498 shares of its common
stock in satisfaction of $1,500,000 in principal and $198,654 in accrued
interest. From April 1, 2007 through May 10, 2007, the Company issued an
additional 78,091,157 shares of its common stock in satisfaction of $1,849,343
in principal and $47,743 in accrued interest. The Company used cash to pay
$29,836 in principal and $6,614 in interest on May 10, 2007. On July 18, 2007,
the Company also paid $145,821 in principal and $265,678 in accrued interest
from the proceeds of sale of the ISP Business. On September 7, 2007 and October
19, 2007, the Company paid an additional $347,009 in principal and $68,493 of
interest from the proceeds of sale of Davel’s payphones. During the
quarter ended December 31, 2007, the Company paid $42,117 in principal and
$38,128 of interest from the monthly interest payments received from USA on the
$17.4 million cash balance due at the time of the closing of the sale of the
Integrated Telecom Business. In January 2008, the Company paid
$865,393 of principal and $26,521 of interest from the payments received from
USA relating to the USA Note and the monthly interest payment.
Under the
terms of the Secured Debenture Agreement, as amended through January 16, 2007,
the Company agreed to make weekly principal payments of at least $125,000 in
satisfaction of the remaining principal commencing February 1, 2008, with
interest on the outstanding principal balance payable at the same time. The
Company made a partial payment of $114,530 toward the amounts due on the Secured
Debenture and Amended Debenture on February 1, 2008. The Company also made
partial payments of interest on the debentures aggregating $200,000 on May 2 and
June 4, 2008. On June 30, 2008, the Company issued the Convertible Debenture in
exchange for the Secured Debenture and Amended Debenture as described
above.
The Amended
Debenture
On June
30, 2006, the Company entered into an amended secured convertible debenture in
the amount of $15,149,650 with YA Global (the “Amended Debenture”), replacing
the debenture that was previously outstanding (the “Debenture”). The Debenture
was originally recorded in the accounts net of unamortized debt discount
reflecting the fair value on the date of issuance of the related warrant. The
net carrying amount of the Debenture and the related amount of accrued interest
of $14,590,399 and $149,650, respectively, were eliminated from the accounts in
connection with the issuance of the Amended Debenture, resulting in a loss on
the extinguishment of the Debenture debt in the amount of $409,601 in June
2006.
Under the
Amended Debenture, the Company had the right to make any and all principal and
interest payments by issuing shares of its common stock to YA Global provided
that all such shares may only be issued by the Company if such shares are
tradable under Rule 144 of the Securities Act, are registered for sale under the
Securities Act, or are freely tradable by YA Global without restriction. The
value assigned to such shares was based upon the lower of $0.275 per share or
93% of the average of the two lowest daily volume weighted average per share
prices of the Company’s common stock during the five days immediately following
the scheduled payment date. YA Global had the right to convert all or any part
of the unpaid principal and accrued interest owed under the Amended Debenture
into shares of our common stock at a conversion price of $0.275 per share. The
Amended Debenture was secured by a blanket lien on our assets. The Amended
Debenture bore interest at an annual rate of 7.75%.
In
connection with the issuance of the Debenture, the Company issued to YA Global a
five-year warrant that expires on May 13, 2010, as modified, to purchase
15,000,000 shares of its common stock at an exercise price of $0.20 per share
(the “Warrant”). As indicated above, the Warrant was repriced on June 30, 2008
and is now exercisable at a price of $0.04973 per share. In connection with the
issuance of the Amended Debenture, YA Global was issued an additional warrant,
as modified, to purchase 13,750,000 shares of the Company’s common stock at a
purchase price of $0.20 per share (the “Additional Warrant”). This Additional
Warrant expired in November 2007.
The face
amount of the Amended Debenture was recorded initially in the balance sheet net
of unamortized debt discount of $319,000. During the quarter ended December 31,
2006, the fair value of the Additional Warrant was recalculated based on its
reset terms resulting in an increase to such value of $192,500. The net amount
of the Amended Debenture reflects the fair market value after allocating
additional proceeds in the amount of $192,500 to the Additional Warrant. The
increased discount on the Amended Debenture was amortized as a charge to
interest expense over the term of the Amended Debenture.
Through
March 31, 2007, the Company issued 50,578,702 shares of its common stock in
satisfaction of $2,500,000 in principal and $681,827 in accrued interest. On May
10, 2007, the Company issued 4,510,933 shares of its common stock in
satisfaction of $70,822 in principal. On July 18, 2007, the Company also paid
$247,005 in principal and $216,181 in accrued interest from the proceeds of sale
of the ISP Business. On September 7, 2007, the Company paid an additional
$1,325,000 in principal and $116,853 of interest from the proceeds of sale of
Davel’s payphones. During the quarter ended December 31, 2007, the Company paid
$196,313 of interest from the monthly interest payments received from USA on the
$17.4 million cash balance due at the time of the CLEC closing. In
January 2008, the Company paid $98,157 of interest from the payments received
from USA relating to the USA Note and the monthly interest payment.
Under the
terms of the Amended Debenture, as revised through January 16, 2008, the Company
agreed to make weekly scheduled principal payments of at least $250,000
commencing February 1, 2008 with interest on the outstanding principal balance
payable at the same time. The Company made a partial payment of
$114,530 toward the amounts due on the Secured Debenture and Amended Debenture
on February 1, 2008. The Company also made partial payments of interest on the
debentures aggregating $200,000 on May 2 and June 4, 2008. On June 30, 2008, the
Company issued the Convertible Debenture in exchange for the Secured Debenture
and Amended Debenture as described above.
Availability of Registered
Shares
The
Company filed a registration statement on Form S-3 on October 12, 2006 covering
the resale of a total of 404,474,901 shares of the Company’s common stock by
various selling stockholders, including 55,089,635 shares that may be issued to
YA Global under the Amended Debenture, 120,689,655 shares related to convertible
debentures issued under the Secured Debenture Agreement, and 38,750,000 shares
related to the corresponding stock warrants. This registration statement was
declared effective by the SEC, enabling the Company’s use of common stock to
make installment payments to YA Global under the various debentures. As of May
10, 2007, the Company had issued all of the approximately 175,779,000 shares
covered by the registration statement relating to the convertible
debentures.
The Debentures – Interest
Expense
For the
fiscal years ended March 31, 2009, 2008 and 2007, the amounts of interest
expense related to the debentures issued to YA Global, and included in the loss
from continuing operations in the accompanying consolidated statements of
operations based on the stated interest rates, were $1,464,400, $1,142,273 and
$1,332,439, respectively.
Interest
expense amounts included in the accompanying consolidated statements of
operations for the current and prior year periods also included total debt
discount amortization related to the debentures issued to YA Global.
Amortization amounts were $39,559, $264,110, and $893,322, respectively, for the
fiscal years ended March 31, 2009, 2008 and 2007. Interest expense
for the fiscal year ended March 31, 2009 also included an amount, $167,422,
relating to the amortization of deferred financing fees totaling $186,024 paid
in connection with the issuance of the Convertible Debenture.
The
discounts provided to YA Global in connection with the issuance of shares of
common stock in satisfaction of principal and interest payments due under the
Secured Debentures and Amended Debenture were charged to interest expense. The
amounts included in interest expense for the fiscal years ended March 31, 2008
and 2007 were $148,550 and $367,443, respectively.
Notes Payable to YA
Global
In May
2007, the Company borrowed $1,100,000 from YA Global under a one-year promissory
note with annual interest at a rate of 12% for the first six months of its term
and an annual rate of 15% thereafter. This promissory note and the related
accrued interest were repaid in July 2007 from the proceeds of sale of the ISP
Business. Interest expense was $25,315 for the year ended March 31,
2008.
During
the two-year period ended March 31, 2006, the Company borrowed amounts from YA
Global that totaled $31,500,000 pursuant to a series of promissory notes with
maturities of one-year or less and annual interest rates ranging from 8% to
12%. Notes with a remaining principal balance of $3,600,000, plus
accrued interest of $392,953, were owed to YA Global at March 31,
2006. These amounts were paid during the quarter ended June 30, 2006
with cash provided by the Company’s operating units. Interest expense for the
fiscal year ended March 31, 2007, based on the stated rates of interest, was
$25,704.
Sale/Leaseback
Transactions
On June
28, 2006, Mobilepro, along with Kite Networks, executed a master equipment lease
agreement intended to cover certain qualifying municipal wireless network
equipment. During the remainder of the fiscal year ended March 31, 2007, the
Company received approximately $2,000,000 in gross cash proceeds from the sale
of certain municipal wireless network equipment that was deployed in Tempe,
Arizona. Pursuant to the master lease agreement, the Company leased
back the equipment with the transactions representing capital
leases. Accordingly, fixed assets and capital lease liabilities were
recorded in the accounts of Kite Networks at the present values of the future
lease payments, or $1,875,721.
On
December 27, 2006, the Company received approximately $1,207,000 in gross cash
proceeds from the sale of certain municipal wireless network equipment that was
deployed in Farmers’ Branch, Texas. Pursuant to the terms of the master lease
agreement, the Company leased back the subject equipment with the transaction
representing a capital lease. Accordingly, a fixed asset and a
capital lease liability were recorded in the accounts of Kite Networks at the
present value of the future lease payments, or $1,187,703.
Under the
terms of the master lease agreement, the Company was obligated to make 36
monthly payments related to each city in the amounts of $63,800 and $42,950,
respectively. The lease terms include options to purchase the equipment at the
end of the respective lease-terms at a price equal to the fair market value of
the equipment which amount shall not to exceed 23% of the original cost of the
equipment. The aggregate gain on the sale of the Tempe equipment in the amount
of approximately $234,000 was deferred and is being amortized to income over the
term of the respective lease schedules. The incremental borrowing rates used to
determine the present values of the future lease payments ranged from 10.25% to
14.75%.
Aggregate
sale proceeds in the amount of approximately $1,062,000 were used to purchase
certificates of deposit that are pledged to secure the lease obligations. An
additional $125,664 was used to purchase certificates of deposit that are
pledged to secure the lease obligations in April 2007 and a portion of the
restricted cash, $250,000, was released in connection with the payment of a
portion of the lease balance in March 2008 as further described below. The
remaining balance of $937,664 is included in restricted cash in the accompanying
consolidated balance sheets at March 31, 2009 and 2008.
Equipment Lease
Commitment
On
October 10, 2006, Mobilepro, along with Kite Networks, signed another master
equipment lease agreement with a lease financing firm that permitted up to $3
million in lease financing capital for wireless network equipment purchases. The
master lease agreement was available only for the purchase of certain equipment
manufactured by Cisco Systems. The lease term for each lease schedule was
twenty-four months. Pursuant to this arrangement and as of March 31, 2007, fixed
assets and capital lease liabilities were recorded in the accounts of Kite
Networks at the present value of the future lease payments discounted at an
assumed incremental borrowing rate of 14.75%, or $1,950,405. This master lease
agreement included an option to purchase the equipment at the end of the lease
term at a price equal to the fair market value of the equipment which amount was
not to exceed 21% of the original cost of the equipment.
Remaining Capital Leases and
Equipment Obligations
The
Company remains the co-obligor on certain capital leases and equipment
obligations of Kite Networks that were assumed by Gobility under the terms of
the Gobility Agreement. The lease terms range from 24 to 36 months. As a result
of Gobility’s default under the Gobility Agreement as described in Note 3,
including their failure to make the monthly lease payments, the Company
continues to be liable for these capital leases and equipment
obligations.
In
September 2007, the Company was required to make lease payments totaling
$64,165. On March 10, 2008, Gobility sold the assets of the wireless
network in Longmont, Colorado, and the Company received the proceeds in the form
of promissory notes from the purchaser totaling $1,800,000. In addition, the
Company entered into a forbearance agreement with the principal equipment vendor
and agreed to pay the $1,591,978 equipment obligation, with interest at the
prime rate, and a related lease obligation in the principal amount of
$149,749. In March 2008, the Company also paid off one of the leases
relating to the Tempe, Arizona wireless network with an aggregate principal
balance of $318,595, plus accrued interest, by paying $93,000 in cash and
applying the $250,000 certificate of deposit that secured the lease. As a result
of the sale to Gobility and these transactions, the Company recorded a net loss
on the sale of its Wireless Networks Business of $3,433,843 that is included in
the loss on sale of discontinued operations in the consolidated statements of
operations for the fiscal year ended March 31, 2008.
The
Company continues to cooperate with Gobility in its efforts to sell the
remaining assets of Kite Networks. However the Company is not
confident that Gobility will be successful in its attempts to sell the remaining
assets and satisfy the equipment lease obligations. As discussed in Note 12, on
March 15, 2008 Harborside Investments III LLC, one of the lessors, filed a
lawsuit against the Company to collect amounts due under its equipment lease. On
March 24, 2009, Commonwealth Capital Corporation, another lessor, also filed a
lawsuit against the Company to collect amounts allegedly due under its equipment
lease. If these leasing companies are successful in obtaining a judgment against
the Company, the Company could be required to pay the outstanding balances due
to the leasing companies as a result of the default in equipment lease payments
by Gobility. The Company could also be subject to late payment penalties and
interest at the default rate.
In
connection with the sale of the Wireless Networks Business to Gobility, the
Company recorded the outstanding principal amounts of the capital leases,
equipment obligation and accrued interest in the accounts of Mobilepro. The
remaining liabilities, other than accrued interest, are included in convertible
debentures and other long-term debt at March 31, 2009 and 2008 in the
accompanying consolidated balance sheets. At March 31, 2009, a
summary of the future scheduled payments based on the original terms of the
capital leases and the equipment and interest obligations were as
follows:
Lease
payments due in the twelve months ending --
|
|
|
|
March
31, 2010
|
|
$
|
2,870,799
|
|
Less
– interest portions
|
|
|
(485,063)
|
|
Capital
leases – principal portions
|
|
|
2,385,736
|
|
Equipment
obligation
|
|
|
1,331,978
|
|
Equipment
note payable
|
|
|
281,669
|
|
Accrued
interest on capital leases and equipment obligations
|
|
|
447,412
|
|
Total
liabilities
|
|
$
|
4,446,795
|
|
The
Company has also recorded the certificates of deposits securing the lease
obligations in the aggregate amount of $937,664, which are available to offset a
portion of the capital lease liabilities. The certificates of deposit are
included in restricted cash in the accompanying consolidated balance sheets at
March 31, 2009 and 2008.
The
equipment obligation provides for monthly principal payments of $20,000, plus
interest at the prime rate, with additional principal payments due on a
quarterly basis based on the scheduled payments due on the notes receivable from
the purchaser of the Longmont, Colorado wireless network. The remaining unpaid
principal balance and accrued interest is due and payable on September 7, 2010.
The annual scheduled maturities of the equipment obligation are $388,500 and
$943,478 for the twelve months ended March 31, 2010 and 2011,
respectively.
As
discussed in Note 3, on August 1, 2008, the Company executed a promissory note
and release in the principal amount of $330,000 in full satisfaction of
$1,231,138 of the lease obligations. The equipment note payable, as amended,
requires seven monthly payments of $10,000 through March 1, 2009 and sixteen
monthly payments of $7,000 thereafter and accrues interest at the rate of twelve
percent. The remaining unpaid principal balance and accrued interest
is due and payable on July 31, 2010. The Company recorded a gain of
$901,138 in the second quarter of the fiscal year ended March 31, 2009 as a
result of this transaction.
NOTE
8-INCOME
TAXES
The
provision for income taxes results in an effective tax rate that differs from
the Federal statutory tax rate as follows for the years ended March 31, 2009,
2008 and 2007:
|
|
Years
Ended March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Statutory
federal income tax rate
|
|
|
(35.0
|
)% |
|
|
|
(35.0
|
)% |
|
|
|
(35.0
|
)% |
|
State
income taxes, net of federal benefit
|
|
|
(3.0
|
) |
|
|
|
(3.0
|
) |
|
|
|
(3.0
|
) |
|
Permanent
differences
|
|
|
0.1 |
|
|
|
|
0.1 |
|
|
|
|
0.1 |
|
|
Change
in valuation allowance
|
|
|
37.9 |
|
|
|
|
37.9 |
|
|
|
|
37.9 |
|
|
Effective
tax rate
|
|
|
-
|
% |
|
|
|
-
|
% |
|
|
|
-
|
% |
|
The
components of the Company’s net deferred tax asset were as follows:
|
|
March
31
|
|
|
|
2009
|
|
|
2008
|
|
Net
operating loss carryforwards
|
|
$ |
29,757,615 |
|
|
$ |
28,427,504 |
|
Capital
loss carryforward
|
|
|
11,007,969 |
|
|
|
11,350,402 |
|
Goodwill
impairment/amortization
|
|
|
1,820,148 |
|
|
|
(945,820
|
) |
Depreciation/asset
impairment
|
|
|
(131,694
|
) |
|
|
(93,694
|
) |
Write
down of notes receivable
|
|
|
511,303 |
|
|
|
- |
|
Deferred
revenue
|
|
|
228,000 |
|
|
|
228,000 |
|
Stock
compensation
|
|
|
520,622 |
|
|
|
483,510 |
|
Other
differences
|
|
|
310,853 |
|
|
|
271,406 |
|
Valuation
allowance
|
|
|
(44,024,816
|
) |
|
|
(39,721,308
|
) |
Total
net deferred tax asset
|
|
$ |
- |
|
|
$ |
- |
|
As of
March 31, 2009 and 2008, the Company’s valuation allowance fully offset the net
deferred tax asset. The Company calculated the valuation allowance in accordance
with the provisions of SFAS No. 109, “Accounting for Income Taxes”, which
requires an assessment of both positive and negative evidence when measuring the
need for a valuation allowance. Evidence, such as operating results during
recent years, is given more weight when assessing whether the level of future
profitability needed to recognize the deferred assets will be achieved. The
Company’s cumulative loss in since inception represents sufficient negative
evidence to require a full valuation allowance under the provisions of SFAS No.
109. The Company intends to maintain a full valuation allowance until sufficient
positive evidence exists to support the reversal of any portion of the
allowance.
The
Company’s tax net operating loss carryforwards (“NOL Carryforwards”) were
approximately $78,309,513 at March 31, 2009, and expire at various dates through
March 31, 2029. In addition, certain of the Company’s subsidiaries have
substantial pre-acquisition NOL Carryforwards. When there has been a change in
an entity’s ownership, utilization of NOL Carryforwards relating to periods
prior to acquisition may be limited. Because of the changes in the ownership of
prior acquisitions of the Company, the use of these acquired net operating
losses will be limited and may not be available to offset future taxable income.
At March 31, 2009, the Company also had a capital loss carryforward of
$28,968,340 arising principally from the sale of the Wireless Networks Business
and the ISP Business. Such capital losses may only be used to offset future
capital gains, if any, and expire on March 31, 2013.
NOTE
9-STOCKHOLDERS’
EQUITY
Standby Equity Distribution
Agreement (the “SEDA”)
On May
13, 2004, the Company entered into the SEDA with YA Global that provided,
generally, that YA Global would purchase up to $100 million of the common stock
of Mobilepro over a two-year period, with the time and amount of such purchases,
if any, at the Company’s discretion. YA Global was entitled to purchase the
shares at a 2% discount to a weighted-average market price of the common stock.
The Company was obligated to pay a fee to YA Global and other advisors at the
time of each draw. On May 19, 2006, the SEDA expired. The discount
under this arrangement that were provided to YA Global upon the sale of
shares of common stock of $137,795 in the year ended March 31, 2007 was included
in interest expense.
Common Stock Transactions in
the Year Ended March 31, 2007
During
the first quarter of fiscal year 2007, the Company issued 22,000,000 shares of
common stock to the escrow agent under the requirements of the SEDA. The
termination of the SEDA in May 2006 resulted in the return of 3,413,367 shares
of common stock to the Company by YA Global. The return of the shares was
recorded in October 2006. Draws under the SEDA during the fiscal year ended
March 31, 2007 totaled $6,655,124.
In April
2006, the Company issued 6,021,624 shares of its common stock to a former
officer pursuant to the exercise of a stock warrant.
In June
2006, the Company issued 200,000 shares of its common stock, valued at $36,000,
in connection with the termination of an agreement with an investment banking
firm.
In August
2006, the Company issued 300,996 shares of its common stock to a former employee
pursuant to the exercise of stock options.
In
January 2007, the Company issued 500,000 shares of its common stock to a former
advisor pursuant to the exercise of a stock warrant.
In
January 2007, the Company also issued 9,079,903 shares of its common stock to
TCS as consideration for the acquisition of certain net assets as described in
Note 1 above. The number of shares was determined based on a formula included in
the asset purchase agreement and an agreed-upon purchase price of
$675,000.
In
February 2007, the Company issued an additional 3,944,214 shares of common stock
to the former owners of Kite Networks and Kite Broadband in connection with the
working capital adjustment to the purchase price as described in the
corresponding acquisition agreement. These shares were valued at
$201,155 based on the market price of Company’s common stock on the date of
issuance.
During
the fiscal year ended March 31, 2007, the Company issued 93,177,199 shares of
its common stock to YA Global in satisfaction of its payment obligations under
the convertible debentures.
Common Stock Transactions in
the Year Ended March 31, 2008
In the
first quarter of the fiscal year ended March 31, 2008, the Company issued
82,602,090 shares of its common stock in satisfaction of $1,920,164 in principal
and $47,743 in accrued interest owed to YA Global pursuant to the convertible
debentures.
In
September 2007, the Company issued 742,188 shares of common stock, valued at
$118,750 in settlement of an obligation to an officer of one of the Company’s
subsidiaries.
Common Stock Transactions in
the Year Ended March 31, 2009
On
December 19, 2008, at our Annual Meeting of Stockholders, our stockholders voted
to increase the number of authorized shares of capital stock from 1,500,000,000
shares to 3,000,000,000 shares. Our stockholders also voted in favor of amending
our certificate of incorporation to permit a reverse stock split by a ratio of
not less than one for two and not more than one for ten, with the exact ratio to
be set within that range at the discretion of the Company’s Board of
Directors.
During
the fiscal year ended March 31, 2009, the Company issued 629,042,857 shares of
common stock to YA Global which caused a reduction of $324,840 in
principal relating to the Convertible Debenture. Subsequent to March 31, 2009,
YA Global converted additional shares totaling 290,700,000 shares of common
stock. Principal was reduced by $87,710 as part of those conversions.
We believe that such shares were sold by YA Global pursuant to Rule 144 of
the Securities Act.
On
January 19, 2009, the Company and its newly formed subsidiary, MWS Newco, Inc.,
consummated the terms of an asset purchase agreement with MobileWebSurf to
acquire certain mobile email, texting and social networking software products
and related intellectual property technology (the “Acquired Assets”). As
consideration for the Acquired Assets, MobileWebSurf received 5,000,000 shares
of the Company’s common stock valued at $2,500 and an initial nineteen percent
ownership interest in MWS Newco, Inc.
Stock Options and
Warrants
The
stockholders of the Company have approved the issuance of 30,000,000 shares of
common stock in connection with stock options granted pursuant to the 2001
Equity Performance Plan (the “2001 Plan”). In addition, the Company has issued
options and warrants to purchase common stock to key personnel pursuant to
specific authorization of the Board of Directors outside the scope of the 2001
Plan. The following tables summarize the stock option activity and the warrant
activity for the years ended March 31, 2009, 2008 and 2007:
|
|
|
Weighted-Average
|
|
Stock Options --
|
Number
of Options
|
|
Exercise
Price
|
|
Outstanding
– March 31, 2006
|
11,076,000
|
|
$
|
0.2260
|
|
Granted
|
750,000
|
|
$
|
0.1150
|
|
Exercised
|
(300,996)
|
|
$
|
0.0528
|
|
Cancelled
|
(7,648,004)
|
|
$
|
0.0232
|
|
Outstanding
– March 31, 2007
|
3,877,000
|
|
$
|
0.2053
|
|
Granted
|
-
|
|
$
|
-
|
|
Exercised
|
-
|
|
$
|
-
|
|
Cancelled
|
(2,221,000)
|
|
$
|
0.1943
|
|
Outstanding
– March 31, 2008
|
1,656,000
|
|
$
|
0.2200
|
|
Granted
|
-
|
|
$
|
-
|
|
Exercised
|
-
|
|
$
|
-
|
|
Cancelled
|
(105,000)
|
|
$
|
0.2200
|
|
Outstanding
– March 31, 2009
|
1,551,000
|
|
$
|
0.2200
|
|
|
|
|
|
|
|
Exercisable
– March 31, 2009
|
1,551,000
|
|
$
|
0.2200
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
Stock Warrants --
|
|
Warrants
|
|
|
Exercise
Price
|
|
Outstanding
– March 31, 2006
|
|
|
94,932,500 |
|
|
$ |
0.1669 |
|
Granted
|
|
|
57,300,000 |
|
|
$ |
0.1847 |
|
Exercised
|
|
|
(6,521,524
|
) |
|
$ |
0.0182 |
|
Cancelled
|
|
|
(22,805,342
|
) |
|
$ |
0.3018 |
|
Outstanding
– March 31, 2007
|
|
|
122,905,634 |
|
|
$ |
0.1597 |
|
Granted
|
|
|
20,000,000 |
|
|
$ |
0.0089 |
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
Cancelled
|
|
|
(18,966,666
|
) |
|
$ |
0.1526 |
|
Outstanding
– March 31, 2008
|
|
|
123,938,968 |
|
|
$ |
0.1362 |
|
Granted
|
|
|
61,850,000 |
|
|
$ |
0.0212 |
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
Cancelled
|
|
|
(8,500,000
|
) |
|
$ |
0.1534 |
|
Outstanding
– March 31, 2009
|
|
|
177,288,968 |
|
|
$ |
0.0753 |
|
|
|
|
|
|
|
|
|
|
Exercisable
– March 31, 2009
|
|
|
132,876,467 |
|
|
$ |
0.0994 |
|
Options
to purchase common stock that are awarded pursuant to the terms of the 2001 Plan
expire ten years from the date of grant. The options typically vest over two to
three year periods according to a defined schedule set forth in the individual
stock option agreement. Certain portions of the stock options granted
in the fiscal year ended March 31, 2006 were set to vest based on the
achievement of individual and Company objectives during the year. Warrants to
purchase shares of common stock vest over periods that range from twelve to
thirty-six months. The vesting of warrants awarded to certain of the
Company’s officers was set to occur upon the achievement of individual and/or
Company objectives. Warrants typically expire on the ten-year anniversary of the
date of grant.
Most of
the stock options and warrants issued prior to March 31, 2007 relating to the
achievement of Company objectives were cancelled at March 31, 2007.
On April
29, 2009, the Company granted warrants to purchase 37,000,000 shares of common
stock at an exercise price of $0.0003 per share to certain officers, directors
and management personnel. The warrants expire ten years from the date of grant.
The warrants vest on June 30, 2010.
Effective
April 1, 2006, the Company adopted the provisions of SFAS 123R that require
companies to record the compensation cost associated with stock options and
warrants. As required by SFAS 123R, the Company has determined the appropriate
fair value model to be used for valuing share-based payments, the amortization
method for compensation cost and the transition method to be used at date of
adoption. The model used by the Company in order to determine the fair values of
the stock options and warrants awarded after March 31, 2006 and those previously
awarded options and warrants with unvested portions at March 31, 2006 continues
to be the Black-Scholes model. The Company used the prospective method in order
to adopt this accounting standard. Accordingly, compensation expense has been
recorded for the fiscal years ended March 31, 2009, 2008 and 2007 related to new
awards and the unvested stock options and warrants at March 31, 2006 on a
straight-line basis over the applicable vesting periods. The operating results
for the year ended March 31, 2006 were not restated.
The
following table summarizes information about outstanding warrants to purchase
the Company’s common stock at March 31, 2009:
|
|
Outstanding
Warrants
|
|
|
Exercisable
Warrants
|
|
|
|
|
|
|
Weighted
Average Remaining Term
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
Weighted-
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.00
- $0.01
|
|
|
51,350,000 |
|
|
|
8.9
|
|
|
$ |
0.004 |
|
|
|
7,000,000 |
|
|
$ |
0.008 |
|
$0.01
- $0.04
|
|
|
27,382,500 |
|
|
|
5.5
|
|
|
|
0.02 |
|
|
|
27,382,500 |
|
|
|
0.02 |
|
$0.04
- $0.05
|
|
|
50,000,000 |
|
|
|
3.9
|
|
|
|
0.05 |
|
|
|
50,000,000 |
|
|
|
0.05 |
|
$0.10
- $0.19
|
|
|
19,950,217 |
|
|
|
6.0
|
|
|
|
0.16 |
|
|
|
19,887,716 |
|
|
|
0.16 |
|
$0.20
- $0.20
|
|
|
13,150,000 |
|
|
|
4.2
|
|
|
|
0.20 |
|
|
|
13,150,000 |
|
|
|
0.20 |
|
$0.22
- $0.23
|
|
|
5,956,251 |
|
|
|
6.7
|
|
|
|
0.23 |
|
|
|
5,956,251 |
|
|
|
0.23 |
|
$0.30
- $0.35
|
|
|
9,500,000 |
|
|
|
1.2
|
|
|
|
0.31 |
|
|
|
9,500,000 |
|
|
|
0.31 |
|
Total
Warrants
|
|
|
177,288,968 |
|
|
|
5.8
|
|
|
|
0.08 |
|
|
|
132,876,467 |
|
|
|
0.10 |
|
The
Company also had outstanding stock options to purchase 1,551,000 shares of
common stock with a weighted average exercise price of $0.22 per share and a
weighted average remaining term of 6.6 years. All such stock options were
exercisable at March 31, 2009. Total compensation cost related to nonvested
warrants at March 31, 2009 was $38,912, which, if not forfeited, will be
recognized as expense in the fiscal year ended March 31, 2010.
The fair
value of each option is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants during the
years ended March 31, 2009, 2008 and 2007:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Dividend
yield
|
|
|
-
|
% |
|
|
-
|
% |
|
|
-
|
% |
Expected
volatility
|
|
|
70
|
% |
|
|
60
|
% |
|
|
60
|
% |
Risk-free
interest rate
|
|
|
3.00
|
% |
|
|
4.00
|
% |
|
|
4.00
|
% |
Expected
term (in years)
|
|
|
8.80 |
|
|
|
10.00 |
|
|
|
10.00 |
|
For stock
options and warrants granted during the years ended March 31, 2009, 2008 and
2007, the weighted-average grant-date fair values were $0.001, $0.002 per share
and $0.049 per share, respectively.
In
connection with the issuance of the Convertible Debenture on June 30, 2008, the
Company granted to YA Global a seven-year warrant to purchase 25,000,000 shares
of its common stock at an exercise price of $0.04973 per share which expires on
June 30, 2015. In addition, the outstanding warrants previously granted to YA
Global to purchase 15,000,000 share of common stock at $0.20 per share and
10,000,000 shares of common stock at $0.174 per share were repriced and are now
exercisable at a price of $0.04973 per share.
NOTE
10-BASIC AND DILUTED
INCOME (LOSS) PER SHARE
Basic
income (loss) per share includes no dilution and is computed by dividing net
income (loss) available to common stockholders by the weighted-average number of
common shares outstanding for the year. Diluted income (loss) per share includes
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. The effects of
the assumed exercise of outstanding stock options and warrants and the assumed
conversion of the Debenture and other convertible notes payable for the years
ended March 31, 2009, 2008 and 2007 were anti-dilutive as the Company incurred
net losses in these years.
NOTE
11-OPERATING
LEASES
The
Company leases office space and various types of equipment under non-cancelable
operating leases. Certain leases have renewal options. Rent expense for the
fiscal years ended March 31, 2009, 2008 and 2007 relating to continuing
operations was $723,220, $843,236 and $889,129, respectively. Future
minimum payments under non-cancelable leases with initial terms of one year or
more applicable to continuing operations consisted of the following at March 31,
2009:
Years
Ending
March 31,
|
|
Minimum
Lease Payments
|
|
|
2010
|
|
$ |
552,715 |
|
|
2011
|
|
|
515,053 |
|
|
2012
|
|
|
192,645 |
|
|
2013
|
|
|
153,088 |
|
|
2014
|
|
|
153,391 |
|
|
Thereafter
|
|
|
38,634 |
|
|
Total
Payments
|
|
$ |
1,605,526 |
|
Rent
expense for the fiscal years ended March 31, 2008 and 2007 relating to
discontinued operations was $342,829, and $1,146,190, respectively.
NOTE
12-LITIGATION
In
addition to certain other litigation arising in the normal course of its
business that we believe will not materially affect our financial position or
operating results, we were involved with the following legal proceedings during
the fiscal year ended March 31, 2009.
1) At the
time that we acquired Davel, there was existing litigation brought against Davel
and other defendants regarding a claim associated with certain alleged patent
infringement. Davel was named as a defendant in a civil action captioned Gammino
v. Cellco Partnership d/b/a Verizon Wireless, et al., C.A. No. 04-4303 filed in
the United States District Court for the Eastern District of Pennsylvania. The
plaintiff claimed that Davel and other defendants allegedly infringed its patent
involving the prevention of fraudulent long-distance telephone calls. The
plaintiff was seeking monetary relief of at least $7,500,000. Davel
did not believe that the allegations set forth in the complaint were valid, and
accordingly, Davel filed a Motion for Summary Judgment with the United States
District Court. On October 4, 2007 the United States District Court
granted Davel’s Motion for Summary Judgment and the Court entered final judgment
dismissing Plaintiff John R. Gammino’s claims for patent
infringement. On November 1, 2007, Plaintiff filed his Notice of
Appeal commencing an action in the United States Court of Appeal for the Federal
District. In response, Davel filed its appellate brief on February
26, 2008. Notwithstanding the pending appellate proceeding, in July
2008 the parties entered into a Settlement Agreement terminating the litigation
and providing a mutual release of claims, which ended the pending litigation
between the parties.
2) On
April 17, 2007, the Supreme Court of the United States issued an opinion in the
case captioned Global Crossing Telecommunications, Inc. v. Metrophones
Telecommunications, Inc. on Certiorari from the United States Court of Appeals
for the Ninth Circuit (the "Ninth Circuit" and the "Metrophones Case"), No.
05-705, in which it upheld the Ninth Circuit's decision that independent
payphone providers have a private right of action to pursue recovery in federal
court from telecommunication carriers who fail to pay dial around compensation.
The ruling in the Metrophones Case impacts litigation that has been pending in
federal district court against AT&T, Sprint and Qwest (the "Defendants") for
non-payment of dial around compensation (the “District Court Litigation”). Davel
Communications, Inc. and certain of Davel's subsidiaries (collectively, the
"Davel Entities") are directly or indirectly plaintiffs in the District Court
Litigation. Following the Supreme Court ruling in the Metrophones Case, AT&T
and Sprint filed with the United States Supreme Court a Petition for a Writ of
Certiorari No. 07-552 seeking review of the ruling of the United States Court of
Appeals for the District of Columbia Circuit that the plaintiffs had standing in
the District Court Litigation. On January 4, 2008 the United States
Supreme Court granted the Petition for a Writ of Certiorari. The
parties filed their respective briefs during the first calendar quarter of 2008,
with the United States Supreme Court hearing oral arguments on April 21, 2008.
On June 23, 2008, the United Stated Supreme Court issued a ruling affirming the
decision of the United States Court of Appeals. The recent ruling by
the United States Supreme Court has permitted the District Court Litigation to
move forward.
Although
the District Court Litigation has been pending since 1999, the litigation
remains in its preliminary phases. As a result, we cannot predict the likelihood
of success on the merits, the costs associated with the pursuit of the claims,
the timing of any recovery or the amount of recovery, if any. However, the
industry representing a group of independent payphone providers, including the
Davel Entities, has prevailed in a similar Federal Communications Commission
administrative proceeding against another carrier for non-payment of dial-around
compensation using a similar methodology which was accepted and pursuant to
which the Federal Communications Commission assessed pre-judgment interest (the
"Similar Litigation"). Based upon our methodology in the Similar Litigation, we
estimate that the amount in controversy for the Davel Entities against the
Defendants extends well into the eight figures, but any recovery is conditioned
on, among other things (i) prevailing on the merits at trial; (ii) having the
Davel Entities' damages model and other claims approved in whole or in large
part; (iii) prevailing on any appeals that the Defendants may make; and (iv) the
continued solvency of the Defendants. As evidenced by the more than ten years
that this litigation has been in process, the Defendants have shown an interest
in stretching the duration of the litigation and have the means to do so.
Although the Davel Entities could ultimately benefit (in an absolute sense,
although not necessarily on a present value basis) from this delay in the event
that pre-and/or post-judgment interest (awarded at 11.25% per annum in the
Similar Litigation) is assessed against the Defendants and the potential award
of attorneys' fees and/or other remedies (in addition to compensatory damages)
if the Davel Entities prevail, such delay will result in a deferral of the
receipt of any cash to the Davel Entities.
3) Under
the authority granted by the Management Agreement to USA, CloseCall America
filed a complaint in the Circuit Court for Howard County, Maryland, against
Skyrocket Communications, Inc. (“Skyrocket”) Case No. 13-C-07-70296 for breach
of contract and unjust enrichment (the “Skyrocket
Litigation”). CloseCall’s claim arose from an unpaid credit owing to
CloseCall in the amount of $23,914 owed under a terminated technical support
services agreement. In response thereto, Skyrocket filed a
counter-claim alleging breach of contract and asserting damages in the amount of
$1.5 million. In January 2008 Skyrocket filed an amended
counter-complaint asserting an additional claim for intentional
misrepresentation, seeking $5 million in actual damages and $5 million in
punitive damages. Based upon our belief that the counter-claim and
amended counter-claims are without merit, CloseCall filed a motion for summary
judgment. The Court granted CloseCall’s motion on the amended
counter-claim and dismissed Skyrocket’s claim for intentional
misrepresentation. The Skyrocket Litigation was scheduled for trial
on February 9, 2009. During the trial, the court granted CloseCall’s
motion for judgment on the claims alleged in the counter-complaint, leaving
CloseCall’s breach of contract and unjust enrichment claims to be determined by
the jury. After deliberation on the claims against Skyrocket, the
jury returned a verdict in favor of CloseCall. Thereafter, Skyrocket
filed an appeal of the jury verdict. Notwithstanding the favorable
trial court ruling in CloseCall’s favor, in April 2009 the parties entered into
a Settlement Agreement terminating the litigation and providing a mutual release
of claims, which ended the pending litigation between the parties.
4) On or
about March 15, 2008 we were served with a summons and complaint in the Superior
Court of New Jersey in Bergen County captioned Harborside Investments III LLC
vs. MobilePro Corp. and Neoreach, Inc. The plaintiff alleges claims
of breach of agreement and unjust enrichment arising out of an equipment lease
agreement for wireless equipment and seeks damages in the amount of
approximately $1.3 million (the “Harborside Litigation”). On or about April 28,
2008 the Company filed its answer, separate defenses and third party complaint
against JTA Leasing Co., LLC. Although discovery has commenced, the Harborside
Litigation remains in its initial stages. Although we believe MobilePro has
meritorious defenses to the alleged claims and we intend to vigorously defend
ourselves in this matter we cannot predict the likelihood of success in the
Harborside Litigation. The Company has recorded the liability for the estimated
principal balance relating to this capital lease obligation and the related
accrued interest which is included in current liabilities in the consolidated
balance sheets at March 31, 2009 and 2008.
5) On
March 4, 2008 the Company filed a complaint in the Circuit Court of Madison
County, Mississippi against Telava Networks, Inc. d/b/a Telava Wireless/Network,
Inc. (“Telava”) asserting claims against Telava for breach of contract and
tortuous breach of contract in connection with a June 2007 purchase agreement
pursuant to which Telava agreed to purchase MobilePro’s interests in Kite
Networks and the rest of our wireless business. The Company seeks
recovery of all available damages including, but not limited to, actual,
consequential general, expectancy and punitive damages. Telava filed
a motion to remove the case to the United States District Court for the Southern
District of Mississippi, Jackson Division after which it filed an answer denying
the substantive claims made by MobilePro and asserting certain affirmative
defenses to the claims. On or about September 30, 2008 the parties entered into
a joint stipulation of dismissal, without prejudice. The dismissal
agreement ends the existing litigation while preserving the Company’s right to
re-assert the claims at a later date if the Company so elects.
6) Davel
and certain of its wholly owned subsidiaries have been plaintiffs in a complaint
filed against Qwest Corporation (“Qwest” and the “Qwest Litigation”) in the
United States District Court for the Western District of Washington alleging
various claims concerning Qwest’s billings to the plaintiffs from 1997 to 2003
for certain communication services from Qwest. The proceeding had previously
been stayed through January 2008 to permit the Federal Communications Commission
to issue a ruling that would provide the court guidance concerning the billing
matters at issue in the Qwest Litigation. Despite the failure of the Federal
Communications Commission to timely issue the guidance sought by the district
court, on or about September 30, 2008 the parties entered into a Settlement
Agreement to resolve the Qwest Litigation. The proceeds received as a
result of the Settlement Agreement had previously been assigned to the former
lenders of Davel pursuant to the acquisition and related agreements between the
Company and former secured lenders of Davel. As a result of a
modification to certain agreements between the Company and the former lenders in
December 2007, the Company was permitted to retain $718,314 of the settlement
proceeds.
7) On
January 7, 2009 the Company received notice that it and its subsidiaries, AFN
and CloseCall, had been served with a summons and complaint in the York County
Superior Court in Maine by Nationwide Acquisition Corp. (“Nationwide”) and L.
William Fogg (“Fogg” and the “Complaint”). Fogg is a former executive
officer of USA and allegedly the owner of Nationwide, the company which
allegedly now owns the ISP Business acquired by USA from the Company. Pursuant
to an agreement between USA and Fogg, Fogg allegedly acquired the ISP Business,
agreed to indemnify USA for all of USA’s liabilities under the USA Note and
agreed to indemnify and hold USA harmless against any loss, damage or expense
arising out of the USA Note. Nationwide and its related companies
also agreed to indemnify USA for various USA debts or liabilities outstanding as
of June 4, 2008.
The
Complaint is an action for declaratory relief to resolve certain disputes among
the Company, CloseCall, AFN, USA, Nationwide and Fogg, including, among other
things, the payment of the past due amount under the USA Note. Nationwide and
Fogg allege that the Company made certain misrepresentations in connection with
the USA Agreement for which USA and/or Fogg are entitled to set-off against the
past due amount. The Company believes that the claims alleged in the
Complaint are a tactic to further delay payment of the past due
amount.
On
February 10, 2009 the Company filed its answer to the declaratory relief
complaint, together with cross-claims against USA for (i) the payment default
under the terms of the USA Note, (ii) anticipatory repudiation and breach of the
USA Agreement, (iii) breach of the USA Management Agreement and a related
services agreement, (iii) negligent and intentional misrepresentation in
connection with the USA Agreement, (iv) breach of fiduciary duty, (v)
indemnification under the USA Agreement, (vi) restitution and unjust enrichment
under the USA Management Agreement, (vii) conversion and (viii) securities fraud
under the Maine Uniform Securities Act and Section 10 (b) of the Securities
Exchange Act. In the same pleading, MobilePro also brought
counterclaims against Nationwide and Fogg for (i) the payment default under the
terms of the USA Note, (ii) breach of a non-disclosure agreement executed in
connection with the USA Agreement, (iii) breach of fiduciary duty and duty of
good faith in connection with the USA Management Agreement, (iv) intentional
misrepresentation in connection with the USA Agreement, (v) restitution and
unjust enrichment under the USA Management Agreement, (vi) securities
fraud under the Maine Uniform Securities Act and Section 10 (b) of the
Securities Exchange Act and (vii) injunctive relief. Although MobilePro intends
to vigorously defend itself and its subsidiaries in this matter, and to pursue
USA, Nationwide and Fogg for the claims asserted, we cannot predict the
likelihood of our success on the merits, the costs associated with the pursuit
of the claims, or the timing of recovery, if any.
On June
8, 2009 the parties participated in a mediation of the claims raised in the
declaratory relief proceeding and the cross-claims alleged by the Company
against USA. As a result of the mediation efforts, the parties agreed
to settle their claims. The settlement agreement is subject to
further documentation which is expected to be finalized by the parties on or
before June 30, 2009.
8) On or
about March 24, 2009 we were served with a summons and complaint in the District
Court of Arizona the Phoenix Division captioned Commonwealth Capital Corp. vs.
City of Tempe, MobilePro Corp. and Neoreach, Inc. The plaintiff
alleges claims of breach of agreement arising out of an equipment lease
agreement for wireless equipment and seeks damages in an amount in excess of
$904,620 (the “Commonwealth Litigation”). In response thereto, the
Company filed counterclaims against the plaintiff for tortious interference with
business expectancy and breach of the duty of good faith and fair
dealing. The Commonwealth Litigation remains in its initial stages.
Although we believe MobilePro has meritorious defenses to the alleged claims and
we intend to vigorously defend ourselves in this matter we cannot predict the
likelihood of success in the Commonwealth Litigation. The Company has recorded
the liability for the estimated principal balance relating to this capital lease
obligation and the related accrued interest which is included in current
liabilities in the consolidated balance sheets at March 31, 2009 and
2008.
9) On or
about June 1, 2009 we were served with a summons and complaint in the Circuit
Court for Montgomery County, Maryland captioned Thomas E. Mazerski vs. MobilePro
Corp and CloseCall America, Inc. The plaintiff alleges claims of
breach of an employment agreement and seeks the payment of certain wages,
bonuses and legal fees totaling $270,414. The plaintiff further
alleges that he is entitled to seek treble damages for his wage claim under the
provisions of the Maryland Labor and Employment Section 3-507(b)
(1). The Company is currently evaluating the defenses and
counterclaims which it intends to assert against the
Plaintiff. Although we believe MobilePro and CloseCall have
meritorious defenses to the alleged claims and we intend to vigorously defend
ourselves in this matter we cannot predict the likelihood of success in this
matter.
10) On
or about June 5, 2009 we were served with a summons and complaint in the Circuit
Court for Montgomery County, Maryland captioned Richard Ramlall vs. MobilePro
Corp. and CloseCall America, Inc. The plaintiff alleges that he is
owed a bonus in the amount of $48,333. The plaintiff further alleges
that he is entitled to seek treble dames for his wage claim under the provisions
of the Maryland Labor and Employment Section 3-507(b) (1). The
Company is currently evaluating the defenses which it intends to assert against
the Plaintiff. Although we believe MobilePro and CloseCall have
meritorious defenses to the alleged claims and we intend to vigorously defend
ourselves in this matter we cannot predict the likelihood of success in this
matter.
11) Other
Ongoing and Threatened Litigation
The
Company is involved in other claims and litigation arising in the ordinary
course of business, which it does not expect to materially affect its financial
position or results of operations. The Company has been threatened by several
former employees with litigation; however, to date, no litigation or other
action other than described above has commenced which is material to the
Company. The Company and its subsidiaries are involved from time to
time in disputes with industry providers which are typically resolved through
negotiations. One such industry provider has asserted certain amounts
are owed by AFN. Although AFN has disputed such amounts and does not
believe the amount owed to the industry provider is material, if the dispute is
not resolved through negotiations and is adversely determined against AFN, such
amount could be material.
NOTE
13-QUARTERLY RESULTS
(unaudited)
Certain
unaudited quarterly financial information for the fiscal years ended March 31,
2009 and 2008 was as follows:
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
March 31
|
|
|
Full Year
|
|
Total
revenues
|
|
$ |
7,729,614 |
|
|
$ |
8,914,976 |
|
|
$ |
6,604,538 |
|
|
$ |
7,608,853 |
|
|
$ |
30,857,981 |
|
Operating
income (loss)
|
|
|
(137,929 |
) |
|
|
306,178 |
|
|
|
(492,440 |
) |
|
|
(10,279,659 |
) |
|
|
(10,603,850 |
) |
Loss
from continuing operations
|
|
|
(448,367 |
) |
|
|
(170,678 |
) |
|
|
(905,380 |
) |
|
|
(10,736,734 |
) |
|
|
(12,261,159 |
) |
Income
(loss) from discontinued operations
|
|
|
- |
|
|
|
901,138 |
|
|
|
- |
|
|
|
- |
|
|
|
901,138 |
|
Net
income (loss)
|
|
$ |
(448,367 |
) |
|
$ |
730,460 |
|
|
$ |
(905,380 |
) |
|
$ |
(10,736,734 |
) |
|
$ |
(11,360,021 |
) |
Net
income (loss) per share, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.0006 |
) |
|
$ |
(0.0002 |
) |
|
$ |
(0.0009 |
) |
|
$ |
(0.0088 |
) |
|
$ |
(0.0131 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
0.0011 |
|
|
|
- |
|
|
|
- |
|
|
|
0.0010 |
|
Net
income (loss) per share
|
|
$ |
(0.0006 |
) |
|
$ |
0.0009
|
|
|
$ |
(0.0009 |
) |
|
$ |
(0.0088 |
) |
|
$ |
(0.0121 |
) |
Three
Months Ended
2008
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
March 31
|
|
|
Full Year
|
|
Total
revenues
|
|
$ |
15,078,450 |
|
|
$ |
13,145,377 |
|
|
$ |
8,697,418 |
|
|
$ |
8,849,444 |
|
|
$ |
45,770,689 |
|
Operating
loss
|
|
|
(2,050,292 |
) |
|
|
(1,879,883 |
) |
|
|
(668,831 |
) |
|
|
(749,654 |
) |
|
|
(5,348,660 |
) |
Loss
from continuing operations
|
|
|
(2,679,721 |
) |
|
|
(4,847,804 |
) |
|
|
(605,924 |
) |
|
|
(1,815,141 |
) |
|
|
(9,948,590 |
) |
Income
(loss) from discontinued operations
|
|
|
(2,308,944 |
) |
|
|
(7,762,956 |
) |
|
|
- |
|
|
|
1,658,888 |
|
|
|
(8,413,012 |
) |
Net
loss
|
|
$ |
(4,988,665 |
) |
|
$ |
(12,610,760 |
) |
|
$ |
(605,924 |
) |
|
$ |
(156,253 |
) |
|
$ |
(18,361,602 |
) |
Net
income (loss) per share, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.0035 |
) |
|
$ |
(0.0063 |
) |
|
$ |
(0.0008 |
) |
|
$ |
(0.0023 |
) |
|
$ |
(0.0129 |
) |
Discontinued
operations
|
|
|
(0.0031 |
) |
|
|
(0.0100 |
) |
|
|
- |
|
|
|
0.0021 |
|
|
|
(0.0109 |
) |
Net
loss per share
|
|
$ |
(0.0066 |
) |
|
$ |
(0.0163 |
) |
|
$ |
(0.0008 |
) |
|
$ |
(0.0002 |
) |
|
$ |
(0.0238 |
) |
Net
income (loss) per share amounts for each quarter are required to be computed
independently. The sum of such amounts do not necessarily equal the amount
computed on an annual basis.
Revenues
for the quarter ended September 30, 2008 include $794,383 of Regulatory Receipts
received from certain telecommunication carriers, including $718,314 relating to
a settlement made with Qwest. The second quarter of fiscal 2009 also
includes a $901,138 gain applicable to discontinued operations relating to the
settlement of a capital lease obligation with Data Sales (see Note 3, “Sale of
the Wireless Networks Business”). The operating loss amount in the quarter ended
March 31, 2009 includes asset impairment charges of $8,764,065 (see Note 5). The
operating loss amount also includes $470,662 of additional depreciation and
amortization that was recognized in the fourth quarter of fiscal 2009 when the
Integrate Telecom Business was reclassified from discontinued to continuing
operations.
The loss
from continuing operations includes a loss on the sale of payphone assets of
$2,800,206 in the quarter ended September 30, 2007. The decrease in the revenues
and operating loss during the last two quarters of that year reflect the effects
of the reduction in the number of payphones owned. The loss from continuing
operations in the quarter ended March 31, 2008 includes the reversal of $616,985
of interest from USA accrued in prior quarters that was canceled upon the
termination of the sale of the Integrated Telecom Business. The loss from
discontinued operations includes a $7,517,516 loss on the sale of the ISP and
Wireless Businesses in the quarter ended September 30, 2007 offset by a
reduction of the loss of $1,658,888 in the quarter ended March 31, 2008,
relating primarily to the proceeds received by the Company in connection with
the sale of the Longmont, Colorado wireless network by Gobility (see Note
3).
NOTE
14- FAIR VALUE
MEASUREMENTS
Effective
January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements”
for all financial assets and liabilities accounted for at fair
value. SFAS No. 157 establishes a new framework for measuring
fair value and expands related disclosures. Broadly, the SFAS No. 157
framework requires fair value to be determined based on the exchange price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants. SFAS No. 157 establishes a
three-level valuation hierarchy based upon observable and non-observable
inputs.
For
financial assets and liabilities, fair value is the price we would receive to
sell an asset or pay to transfer a liability in an orderly transaction with a
market participant at the measurement date. In the absence of active markets for
the identical assets or liabilities, such measurements involve developing
assumptions based on market observable data and, in the absence of such data,
internal information that is consistent with what market participants would use
in a hypothetical transaction that occurs at the measurement date.
Observable
inputs reflect market data obtained from independent sources, while unobservable
inputs reflect our market assumptions. Preference is given to observable inputs.
These two types of inputs create the following fair value
hierarchy:
Level I
Inputs – Quoted prices for identical instruments in active markets.
Level II
Inputs – Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.
Level III
Inputs – Instruments with primarily unobservable value drivers.
The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a non-recurring basis as of March 31,
2009.
Assets
|
|
Level
I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,419,130
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,419,130
|
|
Restricted
cash
|
|
|
1,072,054
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,072,054
|
|
Notes
receivable - current
|
|
|
-
|
|
|
|
-
|
|
|
|
513,594
|
|
|
|
513,594
|
|
Notes
receivable – long-term
|
|
|
-
|
|
|
|
-
|
|
|
|
974,817
|
|
|
|
974,817
|
|
Investments
in and amounts due from Microlog Corporation
|
|
|
|
|
|
|
|
|
|
|
491,447
|
|
|
|
491,447
|
|
Total
assets
|
|
$
|
2,491,184
|
|
|
$
|
-
|
|
|
$
|
1,979,858
|
|
|
$
|
4,471,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
For a
description of factors consider in establishing valuations and changes in
valuation amounts for assets valued using level III inputs, see Notes 4 and
6.
NOTE
15-SUBSEQUENT
EVENTS
On May 5,
2009, the Company obtained a 30 day forbearance on the principal payment in the
amount of $13,029,125 due on the YA Global debenture that matured on May 1,
2009. The forbearance period was extended by YA Global until
June 5, 2009; however, YA Global has not agreed to further extend the
forbearance period or restructure the payment terms of the obligations owing
under the Convertible Debenture. As a result, Mobilepro is in default
of its obligations under the Convertible Debenture owed to YA Global and, given
current market conditions and Mobilepro’s financial condition, obtaining the
required financing to retire the Convertible Debenture is unlikely to occur in
the immediate future. YA Global has informed the Company that it
intends to exercise its rights as the Company’s senior secured
creditor. Such rights include, but are not limited to, foreclosing on
the assets of the Company. In such event the Company will not have the ability
to continue as a going concern. Such a result would likely make the
Company’s common stock worthless. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
F-38