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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from______________to_______________
Commission File Number: 0-20999
CHADMOORE WIRELESS GROUP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1058165
- ------------------------------- --------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2875 EAST PATRICK LANE SUITE G, LAS VEGAS, NEVADA 89120
-------------------------------------------------------
(Address of principal executive offices)
(702) 740-5633
---------------------------
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
AS OF MAY 15, 2000 ISSUER HAD 45,695,172 SHARES OF COMMON STOCK, $.001 PAR
VALUE, OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [ ] No [X]
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INDEX
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999(unaudited) 4
Consolidated Statements of Cash Flows for three months ended March 31, 2000 and 1999(unaudited) 5
Condensed Notes to Interim Consolidated Financial Statements 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS 10-12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13-14
SIGNATURES 15
2
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
(amounts in thousands)
March 31, December 31,
2000 1999
(Unaudited)
--------------- ----------------
ASSETS
Current assets:
Cash $ 1,420 $ 5,603
Accounts receivable, net 1,308 1,090
Other receivables, net 279 266
Inventory 507 532
Other current assets 244 18
--------------- ----------------
Total current assets 3,758 7,509
Property and equipment, net 14,053 14,188
Intangible assets, net 39,186 38,816
Other non-current assets, net 1,662 1,707
--------------- ----------------
Total assets $ 58,659 $ 62,220
=============== ================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 11,475 $ 11,134
Accounts payable and accrued liabilities 1,554 2,744
Unearned revenue 943 813
Other current liabilities 71 71
--------------- ----------------
Total current liabilities 14,043 14,762
Long-term debt 28,291 29,288
--------------- ----------------
Total liabilities 42,334 44,050
Minority interests 729 716
Commitments and contingencies Redeemable preferred stock:
Series C, 4% cumulative, 10,119,614 shares issued and
outstanding 1,621 1,507
Shareholders' equity:
Preferred stock, $.001 par value, authorized 40,000,000 shares - -
Common stock, $.001 par value, authorized 100,000,000 shares,
45,183,743 and 40,683,118 shares issued and outstanding,
respectively 45 41
Additional paid-in capital 69,866 68,087
Stock subscribed - 304
Deficit (55,936) (52,485)
--------------- ----------------
Total shareholders' equity 13,975 15,947
--------------- ----------------
Total liabilities, minority interests, redeemable
preferred stock and shareholders' equity $ 58,659 $ 62,220
=============== ================
See accompanying condensed notes to unaudited interim consolidated
financial statements.
3
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
For the Three Months Ended March 31, 2000 and 1999
(amounts in thousands, except per share data)
March 31, March 31,
2000 1999
--------------- ----------------
Revenues:
Service revenue $ 1,592 $ 1,028
Equipment sales and maintenance 187 234
--------------- ----------------
Total revenues 1,779 1,262
--------------- ----------------
Cost of sales:
Cost of service revenue 410 283
Cost of equipment sales and maintenance 119 137
--------------- ----------------
Total cost of sales 529 420
--------------- ----------------
Gross margin 1,250 842
--------------- ----------------
Operating expenses
Selling, general and administrative 2,835 2,314
Depreciation and amortization 546 444
--------------- ----------------
Total operating expenses 3,381 2,758
--------------- ----------------
Loss from operations (2,131) (1,916)
--------------- ----------------
Other (expense):
Minority interest in earnings (72) (53)
Interest expense, net (1,239) (605)
Other (9) -
--------------- ----------------
(1,320) (658)
--------------- ----------------
Net loss before extraordinary item (3,451) (2,574)
Extraordinary loss on early extinguishment of debt - (195)
--------------- ----------------
Net loss $ (3,451) $ (2,769)
Series B preferred stock dividend - (18)
Redeemable preferred stock dividend and accretion (113) (80)
--------------- ----------------
Loss applicable to common shareholders $ (3,564) $ (2,867)
=============== ================
Loss per share of Common Stock:
Loss applicable to common shareholders before extraordinary
item $ (0.06) $ (0.06)
Extraordinary item from early extinguishment of debt - (0.00)
--------------- ----------------
Loss applicable to common shareholders $ (0.06) $ (0.06)
=============== ================
Loss per share of Common Stock assuming dilution:
Loss applicable to common shareholders before extraordinary
item $ (0.05) $(0.06)
Extraordinary item from early extinguishment of debt - (0.00)
--------------- ----------------
Loss applicable to common shareholders $ (0.05) $ (0.06)
=============== ================
Basic weighted average shares outstanding 56,552,519 51,484,605
=============== ================
Basic and diluted weighted average shares outstanding 68,727,959 51,484,605
=============== ================
See accompanying condensed notes to unaudited interim consolidated
financial statements.
4
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999
(amounts in thousands)
March 31, March 31,
2000 1999
--------------- ---------------
Cash flows from operating activities:
Net loss $ (3,451) $ (2,769)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest 72 53
Depreciation and amortization 546 444
Provision (recovery) for losses on accounts receivable - 7
Extinguishment of debt - 95
Amortization of debt discount 434 429
Amortization of debt issuance costs 82 23
Options and common stock issued for services 182 -
Change in operating assets and liabilities:
Increase in accounts receivable
and other receivables (231) (289)
Decrease (increase) in inventory 25 (28)
Increase in deposits and prepaids (154) (71)
Increase in unearned revenues 130 127
Decrease in accounts payable and accrued (766) (1,794)
liabilities
Increase in other current liabilities - 23
--------------- ---------------
Net cash used in operating activities (3,131) (3,750)
--------------- ---------------
Cash flows from investing activities:
Purchase of license options (104) (60)
Purchases of property and equipment (297) (545)
Change in other assets (37) -
--------------- ---------------
Net cash used in investing activities (438) (605)
--------------- ---------------
Cash flows from financing activities:
(Increase) in debt issuance costs - (1,075)
Exercise of stock options 479 -
Distribution of minority interests (59) -
Payments of long-term debt (1,034) (3,446)
Proceeds from issuance of long-term debt - 13,500
--------------- ---------------
Net cash (used in) provided by financing activities (614) 8,979
--------------- ---------------
Net increase (decrease) in cash (4,183) 4,624
Cash at beginning of period 5,603 579
--------------- ---------------
Cash at end of period $ 1,420 $ 5,203
=============== ===============
See Note 6 for supplemental disclosure on non-cash investing and financing
activities. See accompanying condensed notes to unaudited interim consolidated
financial statements.
5
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Condensed Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2000
NOTE 1 - BASIS OF PRESENTATION
The interim financial statements for the three-month period ended March 31, 2000
and March 31, 1999 have been prepared without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosure normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes contained in our Form 10-KSB filed for the fiscal
year ended December 31, 1999.
The financial information included herein reflects all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for the fair presentation of the results of the interim periods. The
results of operations for the three-month period ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - DESCRIPTION OF BUSINESS
Chadmoore Wireless Group, Inc., together with its subsidiaries (collectively
"Chadmoore" or the "Company"), is one of the largest holders of frequencies in
the United States in the 800 megahertz ("MHz") band for commercial specialized
mobile radio ("SMR") service. The Company's operating territory covers
approximately 55 million people in 180 markets, primarily in secondary and
tertiary cities throughout the United States ("Operating Territory"). The
Company also entered into an Asset Acquisition Agreement ("American Agreement")
with American Wireless Network, Inc. ("American") where the Company will acquire
16 900 Mhz wide-area licenses, comprised of ten, twenty and thirty Mhz channels,
in seven Metropolitan Trading Areas ("MTA's"). Also known as dispatch,
one-to-many, or push-to-talk, Chadmoore's commercial SMR service provides
reliable, real-time voice communications for companies with mobile workforces
that have a need to frequently communicate with their entire fleet or subgroups
of their fleet.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
LOSS PER SHARE
The Company has applied the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS 128"), which establishes standards
for computing and presenting earnings per share. Basic earnings per share is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. The calculation of
diluted earnings per share includes the effect of dilutive common stock
equivalents.
REVENUE RECOGNITION
The Company recognizes revenue from radio dispatch and telephone interconnect
services based on monthly access charges per radio, plus in the case of
telephone interconnect service, revenue is recognized based on air time charges
as used. Revenue is also recognized from equipment maintenance upon acceptance
by the customer of the work completed as well as from the sale of equipment when
delivered.
6
INTANGIBLE ASSETS
Intangible assets consist of FCC licenses and rights to acquire FCC licenses,
which are recorded at cost and are authorized by the Federal Communications
Commission ("FCC") and allow the use of certain communications frequencies. FCC
licenses have a primary term of five or ten years and are renewable for
additional five-year or ten-year periods for a nominal FCC processing fee.
Although there can be no assurance that the licenses will be renewed, Management
expects that the licenses will be renewed as they expire. FCC licenses are
amortized using the straight-line method over 20 years and FCC renewal fees are
amortized using the straight-line method over 5 years. The Company evaluates the
recoverability of FCC licenses by determining whether the unamortized balance of
this asset is expected to be recovered over its remaining life through projected
undiscounted operating cash flows.
NOTE 4 - MANAGEMENT PLANS
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the three months ended
March 31, 2000 and for the years ended December 31, 1999 and 1998, the Company
has suffered recurring losses from operations and has a working capital
deficiency of $10.3 million, $7.3 million and $18.1 million, respectively, that
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are described below. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
During fiscal 2000, the Company will require additional funding for continued
full-scale implementation of its SMR services, debt service, purchase
commitments and ongoing operating expenses. To meet such funding requirements,
the Company is currently pursuing additional financing including potential
equity and debt placements. In the interim, the Company anticipates having to
secure a short-term bridge loan to cover its immediate cash needs. There can be
no assurances that the Company will be able to successfully obtain the
additional financings currently being contemplated and now needed for the
Company to consummate its business plan. Moreover, should such financings be
forthcoming, there can be no assurance that the financings would be obtained on
terms as favorable as those of previous Company financings.
The failure to consummate the aforementioned potential financings would have a
material adverse effect on the Company. The Company has developed a contingency
plan, which includes selling selected channels (with the permission of GATX) and
focusing solely on the 85 markets in which full-scale service has already been
implemented. This latter course might entail ceasing further system expansion in
such markets (which in the aggregate are generating positive cash flow) and
reducing corporate staff to the minimal level necessary to administer such
markets. The Company believes that this strategy would provide sufficient time
and resources to raise additional capital in order to resume its current plan.
However, there can be no assurances that this or any of the Company's
contingency plans would adequately address the aforementioned risks, or that the
Company will attain profitability, and accordingly, the Company may not be able
to continue its operations and is subject to the risk of a liquidation of its
assets or bankruptcy.
NOTE 5 - DEBT
During 1999, pursuant to a loan facility with GATX Capital Corporation ("GATX
Facility'), the Company borrowed $26.6 million from GATX Capital Corporation
("GATX") leaving approximately $400,000 available for future borrowings at the
sole and absolute discretion of GATX, subject to substantially the same terms as
the previous borrowings. Loans were made at an interest rate fixed at the time
of the funding based on five-year US Treasury notes plus 5.5% and payable over
five-years following a 16 month interest only period. Quarterly principal
payments of approximately $1.35 million are to commence June 30, 2000. Warrants
to purchase up to
7
1,822,500 shares of the Company's Common Stock at an exercise price of $0.39 per
share were also issued to the Lender ("GATX Warrants"). The loan is secured by
substantially all the assets of the Company.
On June 10, 1999, the Company entered into an Amendment to the GATX Facility
("Amendment"). The Amendment, among other things, delayed required compliance
with certain financial covenants, extended the option period to make available
funds from 120 days to 150 days and amended the collateral value to loan ratio
from 2 to 1 to 1.5 to 1. The Company also restated the exercise price of the
GATX Warrants from $0.39 to $0.01 per share of the Company's Common Stock. In
connection with the Amendment, the Company has recognized a debt discount
related to the GATX Warrants of $608,350, which represents the intrinsic value,
which is not materially different from the fair value, of the GATX Warrants on
the date of the Amendment. This discount is being amortized to interest expense
using the effective interest method over the life of the loan.
The Company has certain financial covenants related to the GATX Facility,
consisting of total indebtedness to tangible net worth ratio, current ratio,
average EBITDA for commercialized markets and adjusted tangible net worth. As of
March 31, 2000 the Company was not in compliance with the current ratio and the
adjusted tangible net worth financial covenants. A waiver of these covenants was
obtained from GATX and the Company in May 2000 drew down the remaining $400,000
of the facility under the same terms as the previous borrowing.
NOTE 6 - EQUITY TRANSACTIONS
During the first quarter of 2000, 960,625 shares of common stock were issued
through the exercise of employee stock options with option prices between $0.24
and $0.51 per share. Additional equity transactions are discussed in Note 7 -
Non Cash Activities.
NOTE 7 - NON CASH ACTIVITIES
During the three months ended March 31, 2000, the Company had the following
non-cash investing and financing activities: (1) issuance of 1,500,000 shares of
common stock for common stock subscribed that was outstanding as of December 31,
1999 in the amount of $304,650, (2) purchase of FCC licenses with debt, prior to
discount, in the amount of $379,598, (3) issuance of 1,900,000 shares of common
stock in payment of debt in the amount of $506,000 and accrued interest in the
amount of $425,000 and (4) issuance of 140,000 shares of stock for services
rendered.
During the three months ended March 31, 1999, the Company had the following
non-cash and investing activities: (1) conversion of 20,955 shares of Series B
Preferred into 915,932 shares of common stock and (2) issuance of 76,672 shares
of common stock for Series B Preferred dividends.
During the quarters ended March 31, 2000 and 1999, the Company paid no cash for
Federal income taxes. For the three months ended March 31, 2000 and 1999, the
Company paid $761,000 and $56.000, respectively, for interest.
NOTE 8- PURCHASE COMMITMENT
In October 1996, the Company signed a purchase agreement with Motorola to
purchase approximately $10 million of Motorola radio communications equipment,
including Motorola Smartnet II trunked radio systems. Such purchase agreement
required that the equipment be purchased within 30 months of its effective date.
On March 10, 1998, the effective period of the Motorola purchase agreement was
extended from 30 months to 42 months. As of March 31, 2000, the Company had
purchased approximately $6.5 million toward this purchase commitment. On May 4,
2000, an amendment to the purchase agreement was executed extending the
expiration date of the agreement to July 26, 2001 while increasing the remaining
amount of purchases to a minimum of $4 million.
8
NOTE 9- RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2000 and 1999, the Company paid $28,525
and $878,573, respectively to Private Equity Partners ("PEP"), for professional
services associated with equity and debt financings. Mark F. Sullivan, a
Director of the Company, is an owner and managing partner of PEP.
On March 6, 2000, the Company issued 105,000 shares of the Company's Common
Stock to the Sullivan Family Trust, of which Mark F. Sullivan and his wife are
the only trustees.
On May 1, 1998, the Company and Recovery entered into an advisory agreement
commencing on May 1, 1998 and ending on the fifth anniversary. The advisory
agreement stipulates that Recovery shall devote such time and effort to the
performance of providing consulting and management advisory services for the
Company as deemed necessary by Recovery. The Company shall pay an annual
consulting fee of $312,500 beginning on May 1, 1999 which shall be paid in
advance, in equal monthly installments, reduced by the Series C Preferred
dividends paid in the preceding twelve months. Jeffrey A. Lipkin and Joseph J.
Finn-Egan, managing partners for Recovery, are Directors of the Company.
NOTE 10 - SUBSEQUENT EVENTS
During April 2000, the Company issued 487,678 shares of the Company's restricted
Common Stock, which represented the final payment on a non-interest bearing note
payable which matured in August 1998.
On May 15, 2000, the Company drew down the final $400,000 that was available
under the GATX Facility with the same terms as previous borrowings under the
GATX Facility.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
PLAN OF OPERATION
The following is a discussion of the consolidated financial condition and
results of operations of Chadmoore Wireless Group, Inc., together with its
subsidiaries (collectively "Chadmoore" or the "Company"), for the three months
ended March 31, 2000 compared to the three months ended March 31, 1999. This
discussion should be read in conjunction with the Company's annual report on
Form 10-KSB for the year ended December 31, 1999 (the "1999 Form 10-KSB").
Statements contained herein that are not historical facts are forward-looking
statements as that term is defined by the Private Securities Litigation Reform
Act of 1995. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, the forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
from those projected. The Company cautions investors that any forward-looking
statements made by the Company are not guarantees of future performance and that
actual results may differ materially from those in the forward-looking
statements. Such risks and uncertainties include, without limitation,
fluctuations in demand, loss of subscribers, the quality and price of similar or
comparable wireless communications services, well-established competitors who
have substantially greater financial resources and longer operating histories,
regulatory delays or denials, ability to complete intended market roll-out,
access to sources of capital, adverse results in pending or threatened
litigation, consequences of actions by the FCC, and general economics. See the
Company's 1999 Form 10-KSB.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1999
Total revenues increased 38.5% to $1.8 million during the first quarter of 2000,
from $1.3 million in the same period in 1999. Service revenues increased 60.0%,
to $1.6 million during the first quarter of 2000 as compared to $1.0 million for
the comparable period in 1999. Equipment sales and maintenance remained stable
at $200,000 for the three months ended March 31, 2000 and 1999, respectively.
Consistent with the Company's business plan to focus on recurring revenues by
selling its services through independent dealers supplemented by its own direct
sales force, subscribers generating revenue increased to over 41,000 units as of
March 31, 2000 as compared to approximately 31,600 subscriber units at March 31,
1999, an increase of approximately 9,400 units or 29.8%. The increase is
primarily due to full-scale implementation of service in new markets as well as
continued growth in existing markets. Average pricing per subscriber unit
remained comparable during both periods.
Cost of service revenue for the three months ended March 31, 2000 was $400,000
compared to $300,000 for the same period in 1999, an increase of $100,000 or
33.3 percent. The increase is primarily attributable to additional commercial
markets being operational during the first quarter of 2000 as compared to the
comparable period in 1999, as well as the marginal costs associated with
increased capacity in the Company's existing markets. Cost of equipment sales
and maintenance revenue was $100,000 for the first three months of 2000 and
1999, respectively.
Gross margin for the first quarter of 2000 was 70.3% as compared to 66.7% for
the first quarter of 1999, primarily reflecting period over period subscriber
growth in markets established during the first quarter of 1999.
Selling, general and administrative expenses increased to $2.8 million for the
three months ended March 31, 2000 compared to $2.3 million for the same period
in 1999, an increase of $500,000 or 21.7%. Salaries, wages and benefits expense
(a component of selling, general and administrative expenses) increased to $1.2
million for the three months ended March 31, 2000, compared to $900,000 for the
three months ended March 31, 1999, an
10
increase of $300,000 or 33.3%. Much of this increase is related to personnel
additions in operational areas and direct sales, made in connection with the
Company's transition from aggregating SMR spectrum to constructing, marketing
and rolling out commercial SMR service. Excluding salaries, wages and benefits,
other selling, general and administrative expenses increased by $200,000 or
16.1% compared to the prior year, primarily due to increases in advertising and
marketing expenses, which corresponds to period over period revenue growth, and
travel, entertainment and communications expenses as a result of the Company
establishing its own direct sales force during the latter part of 1999.
Depreciation and amortization expense increased to $500,000 for the first
quarter of 2000 compared to $400,000 in the first quarter of 1999, an increase
of $100,000 or 25.0%, reflecting additional licenses and infrastructure
equipment placed in service during the last twelve months of operations.
Interest expense, net of interest income, increased $634,000 or 105%, to $1.2
million for the first quarter of 2000 as compared to $605,000 for the same
period in 1999, reflecting higher debt balances associated with the GATX
Facility.
During the three months ended March 31, 1999 the Company had an extraordinary
loss of $0.2 million. This charge was due to the write off of debt issuance
costs and prepayment penalties associated with the prepayment and termination of
the MarCap and Motorola facilities.
The Company's net loss increased to $3.4 million for the three months ended
March 31, 2000 compared to $2.8 million for the same period in 1999, an increase
of $600,000 or 21.4%, as expenses increased in all categories reflecting
increased subscriber system usage, additional personnel, increased marketing and
sales activities in new and existing markets and higher interest costs
associated with the GATX Facility.
Loss per share for the three months ended March 31, 2000 was $0.05, on a fully
diluted basis, compared to a loss of $0.06 for the three months ended March 31,
1999. The extraordinary item in 1999 did not have an impact on the loss per
share.
LIQUIDITY AND CAPITAL RESOURCES
Historically, operating expenses and capital expenditures associated with the
development and enhancement of the Company's SMR network have more than offset
operating revenues. Operating expenses, debt service obligations and anticipated
capital expenditures are expected to continue to exceed operating revenues for
the next several years. The Company's auditors have included an explanatory
paragraph in their opinion which expresses substantial doubt about the Company's
ability to continue as a going concern for the years ended December 31, 1999 and
1998. The Company has consistently used external sources of funds, primarily
from equity issuances and debt financings, to fund operations, capital
expenditures and other non-operating needs. The Company intends to continue
using external sources of funds, as its existing cash and earnings before
interest, taxes, depreciation and amortization are not sufficient to cover
existing and currently anticipated future needs.
Net cash used in operating activities during the first quarter of 2000 was $3.1
million as compared to $3.7 million for the comparable period in 1999, a
decrease of $600,000 or 16.3%. The decrease in net cash used in operating
activities consisted primarily of a $800,000 reduction in accounts payable and
accrued liabilities during the first quarter of 1999 as compared to the first
quarter of 2000, which was partially offset by an increase of $652,000 in the
Company's net loss for the first quarter of 2000 as compared to the comparable
period in 1999. The decrease in net cash used in operating activities primarily
reflects the payment of vendor payables subsequent to the initial drawdown of
$13.5 million under the GATX Facility in March 1999.
Net cash used in investing activities decreased to $438,000 during the first
quarter of 2000 as compared to $605,000 for the first quarter of 1999. Capital
expenditures to fund the Company's expansion of its SMR network declined by
$248,000 for the first three months of 2000 as compared to the same period in
1999, reflecting the launching of new markets during the first quarter of 1999
and the availability of funds under the newly completed GATX Facility. The level
of capital expenditures for the first quarter of 2000 is not expected to be
indicative of
11
capital spending for the remainder of the fiscal year. Subject to the completion
of new financing, the Company expects to increase its rate of capital
expenditures for infrastructure equipment.
Net cash used in financing activities was $614,000 for the quarter ended March
31, 2000, as compared to $9.0 million in net cash provided by financing
activities for the quarter ended March 31, 1999. During the first quarter of
1999, the Company received proceeds of $13.5 million under the GATX Facility,
which was offset in part by the repayment of $3.4 million in long term debt and
$1.1 million in debt issuance costs.
It is anticipated that over the next several years, the Company will utilize
significant amounts of available cash flow for capital expenditures to develop
and enhance its SMR network, operating expenses relating to its SMR network,
debt service requirements, and other general corporate expenditures, including
potential acquisition of spectrum from third parties. The Company anticipates
that its cash needs for capital expenditures and operations through 2000 will
substantially exceed its service revenues.
Net cash from operating activities will not be sufficient to fund the Company's
continued development and enhancement of its SMR network, service its long-term
debt or fund its ongoing operations. To meet these cash requirements, the
Company is currently pursuing a potential equity or debt placement. There can be
no assurances that the Company will be successful in its endeavors to complete
the financing currently being considered. At present, the Company has no legally
binding commitments or understandings with any third parties to fund any amount
of equity or debt financing. The Company's ability to incur additional
indebtedness is and will be limited by the terms of its existing GATX Facility.
The failure to complete the aforementioned potential financings would have a
material adverse effect on the Company. The Company has developed a contingency
plan, which includes selling selected channels (with the permission of GATX) and
focusing solely on the 85 markets in which full-scale service has already been
implemented. This latter course might entail ceasing further system expansion in
such markets (which in the aggregate are generating positive cash flow) and
reducing corporate staff to the minimal level necessary to administer such
markets. The Company believes that this strategy would provide sufficient time
and resources to raise additional capital in order to resume its current plan.
However, there can be no assurances that this or any of the Company's
contingency plans would adequately address the aforementioned risks, or that the
Company will attain profitability. Accordingly, the Company may not be able to
continue its operations and is subject to the risk of a liquidation of its
assets or bankruptcy.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2000 all the Company's long term debt bears fixed interest
rates, however, the fair market value of this debt is sensitive to changes in
prevailing interest rates. The Company runs the risk that market rates will
decline and the required payments will exceed those based on the current market
rate. The Company does not use interest rate derivative instruments to manage
its exposure to interest rate changes.
12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A - GOODMAN CHAN PROCEEDINGS
Nationwide Digital Data Corp. and Metropolitan Communications Corp. among others
(collectively, "NDD/Metropolitan"), traded in the selling of SMR application
preparation and filing services, and in some instances, construction services to
the general public. Most of the purchasers in these services had minimal or no
experience in the wireless communications industry. Based on evidence that
NDD/Metropolitan had not fulfilled their construction and operation obligations
to over 4,000 applicants who had received FCC licenses through NDD/Metropolitan,
the Federal Trade Commission ("FTC") filed suit against NDD/Metropolitan in
January, 1993, in the Federal District Court for the Southern District of New
York ("District Court"). The District Court appointed Daniel R. Goodman (the
"Receiver") to preserve the assets of NDD/Metropolitan. In the course of the
Receiver's duties, he together with a licensee, Dr. Robert Chan, who had
received several FCC licenses through NDD/Metropolitan's services, filed a rule
waiver request seeking extension of the construction period for each of
approximately 4,000 SMR stations. At that time, licensees of most of the
stations included in the waiver request ("Receivership Stations") were subject
to an eight-month construction period. On May 24, 1995, the FCC granted the
request for extension. The FCC reasoned that the Receivership Stations were
subject to regulation as commercial mobile radio services stations, but had not
been granted the extended construction period previously awarded by the FCC to
all commercial mobile radio services licensees. Thus, in an effort to be
consistent in its treatment of similarly situated licensees, the FCC granted the
licensee petitioners an additional four months in which to construct and place
the Receivership Stations in operation (the "Goodman/Chan Waiver"). The
Goodman/Chan Waiver became effective upon publication in the Federal Register on
August 27, 1998. Moreover, the FCC released a list on October 9, 1998 which
purported to clarify the status of relief eligibility for licenses subject to
the August 27, 1998 decision. Subsequently the FCC also released a purported
final list of the Receivership Stations.
On the basis of a previous request for assistance to the FCC's Licensing
Division by the Company, the FCC examined and marked a list provided by the
Company. The FCC's markup indicated those stations held by the Company or
subject to management and option agreements with the Company, which the FCC
considered to be, at that time, Receivership Stations and/or stations considered
"similarly situated" and thus eligible for an extension of construction waiver.
From this communication, the Company believes that approximately 800 of the
licenses that it owns or manages are Receivership Stations or otherwise entitled
to relief as "similarly situated" licensees. For its own licenses and under the
direction of each licensee for managed stations, the Company proceeded with
timely construction of those stations which the Company reasonably believes to
be Receivership Stations or otherwise entitled to relief. The Company received
relief on approximately 150 licenses under the Goodman/Chan proceedings and from
the official communication from the FCC, the Company believes that approximately
650 licenses should be eligible for relief as "similarly situated". Initial
review of the Commission's Goodman/Chan Order indicated a potentially favorable
outcome for the Company as it pointed to a grant of relief for a significant
number of the Company's owned and/or managed licenses which were subject to the
outcome of the Goodman/Chan decision. However, on October 9, 1998 a release from
the offices of the Commercial Wireless Division of the FCC's Wireless
Telecommunication Bureau announced that because of a technicality relating to
the actual filing dates of the construction deadline waiver requests by certain
of the subject licensees, some licenses which the FCC staff earlier had stated
would be eligible for construction extension waivers due to the similarity of
circumstances between those licensees and the Goodman/Chan licensees, would not
actually be granted final construction waivers. The Commission has subsequently
begun a process of deleting certain of the Company's licenses in this category
from its official licensing database. Prior to the release of the October 9,
1998, Public Notice, the Company constructed and placed into operation certain
licenses from this category based on information received from the FCC and the
Receiver. The Company is in the process of determining which licenses have in
fact been deleted; however, due to the continuing disparity between the FCC's
lists and its subsequent treatment of such lists as well as continuing
modification of the FCC's license database, the Company is uncertain as to
which, if any, will remain deleted under the FCC's current procedures.
13
In response, on November 9, 1998, Chadmoore filed a Petition for Reconsideration
at the FCC seeking reversal of the action announced in the Commercial Wireless
Division Public Notice. The Company asked that the relief be reinstated for its
impacted licenses. Moreover, on February 1, 1999, the Company, in conjunction
with other aggrieved parties, filed a petition with the United States Court of
Appeals for the District of Columbia Circuit seeking reversal of the FCC's
decision and a remand of the decision to the FCC with instructions from the
court to reinstate the licenses for which relief had been denied. Argument
before the court was held on May 4, 1999. The petitions of the Receiver and all
"similarly situated" parties were consolidated into a single briefing and
argument before the court. In an opinion issued July 15, 1999, the court
dismissed all the petitions filed by the Goodman/Chan licensees. The court noted
in its opinion that the receiver did not have standing to seek relief on behalf
of the licensees and the similarly situated parties had filed their appeal at
the FCC in an untimely manner. Thus, rather than hearing the merits underlying
the case, the judges dismissed the petitions on procedural grounds.
The dismissal of the Petitions, while a problem for the other parties before the
court, appears not to be a bar to the Company's efforts to seek relief in this
instance, but simply requires that the Company await the FCC's final action in
this matter. In reviewing the Court's opinion, the Company's Management believes
that the court has left open the possibility of a rehearing on the merits should
the FCC fail to ultimately grant relief to the Company. Thus, as Chadmoore was
the only party before the court which had timely filed such a petition,
Management believes the potential for a rehearing on the merits would be
applicable only to Chadmoore should the FCC not act affirmatively in this
matter.
On November 9, 1999 the FCC's Commercial Wireless Division Chief entered a
decision denying Chadmoore's Petition for Reconsideration. This staff level
opinion is not binding upon the Commission, and the Company has a legal right to
seek an internal FCC review through application to the Commission, as well as an
ultimate right to seek redress in the United States Court of Appeals for the
District of Columbia Circuit. Thus, on December 9, 1999 the Company filed, with
the full commission, an application for review of the staff decision. This
application remains pending at the Commission, and the Company is taking steps
with decision makers in Washington D.C. in an effort to obtain affirmative
relief. However, should such efforts not prove fruitful, Management believes the
way is clear for a hearing on the merits of the case in the United States Court
of Appeals for the District of Columbia Circuit. Due to the uncertainty
surrounding both the FCC's administrative process in managing review of this
matter and the docket calendar of the court, it is not possible, at this time,
for Management to predict, with any reasonable level of reliability, a timetable
for when action on these pending matters will be concluded. Approximately 650 of
those licenses purchased by or under option and management agreements with the
Company are among those which the FCC initially has refused to afford relief
pursuant to the Commercial Wireless Division's October 9, 1998, Public Notice.
Thus, it is reasonably possible (as defined by Financial Accounting Standard
Board No.5) that the Company's owned and/or managed licenses which are
encompassed within the denial of relief pursuant to the October 9, 1998 Public
Notice, could be permanently canceled by the FCC for failure to comply with its
construction requirements. If these licenses are in fact cancelled by the FCC,
it would result in the loss of licenses with a book value of approximately
$6,200,000 and the loss of certain subscribers to the Company's services, which
could result in a material adverse effect on the Company's financial condition,
results of operations and liquidity and could result in possible fines and/or
forfeitures levied by the FCC. The Company has prepared these estimates based on
the best information available at the time of this filing. Once again, there has
been no list published by the FCC in this matter which the Company feels it may
rely upon. Therefore, the Company has pursued the above-described litigation to
clarify this matter. Based on the preceding, no provision has been made in the
accompanying consolidated financial statements.
Pursuant to the FCC's general jurisdiction over telecommunications activities,
the Company is involved in pending matters before the FCC, which could result in
rule changes of general applicability and which may ultimately affect the
Company's operations.
B. OTHER LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of Management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
14
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Chadmoore Wireless Group, Inc.
By: /s/ Stephen K. Radusch
----------------------
Stephen K. Radusch
Chief Financial and Accounting Officer
Date: May 22, 2000