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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 MARCH 31, 2001
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 4, 2001 ISSUER HAD 45,700,172 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, 2001 (unaudited) and December 31, 2000 3
Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 (unaudited) 4
Consolidated Statements of Cash Flows for three months ended March 31, 2001 and 2000 (unaudited) 5
Condensed Notes to Interim Consolidated Financial Statements 6-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS 12-15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16-18
SIGNATURES 19
2
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2001 and December 31, 2000
(amounts in thousands, except share data)
March 31, December 31,
2001 2000
(Unaudited)
--------------- ----------------
ASSETS
Current assets:
Cash $ 271 $ 108
Accounts receivable, net 1,041 1,097
Other receivables, net 354 188
Inventory 496 496
Other current assets 135 45
--------------- ----------------
Total current assets 2,297 1,934
Property and equipment, net 12,104 12,938
Intangible assets, net 33,962 33,963
Other non-current assets, net 2,712 2,909
--------------- ----------------
$ 51,075 $ 51,744
=============== ================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 12,447 $ 12,445
Accounts payable and accrued liabilities 4,751 4,552
Unearned revenue 815 876
Other current liabilities 33 33
--------------- ----------------
Total current liabilities 18,046 17,906
Long-term debt 35,915 33,771
--------------- ----------------
Total liabilities 53,961 51,677
Minority interests 1,241 1,171
Commitments and contingencies Redeemable preferred stock:
Series C, 4% cumulative, 10,119,614 shares issued and
outstanding 2,363 2,201
Shareholders' deficit:
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 46 46
Additional paid-in capital 69,377 69,539
Deficit (75,913) (72,890)
--------------- ----------------
Total shareholders' deficit (6,490) (3,305)
--------------- ----------------
Total liabilities, minority interests, redeemable
preferred stock and shareholders' deficit $ 51,075 $ 51,744
=============== ================
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, 2001 and 2000
(amounts in thousands, except share and per share data)
March 31, March 31,
2001 2000
--------------- ----------------
Revenues:
Service revenue $ 1,475 $ 1,592
Equipment sales and maintenance 20 187
--------------- ----------------
Total revenues 1,495 1,779
--------------- ----------------
Cost of sales:
Cost of service revenue 556 410
Cost of equipment sales and maintenance 7 119
--------------- ----------------
Total cost of sales 563 529
--------------- ----------------
Gross margin 932 1,250
--------------- ----------------
Operating expenses:
Selling, general and administrative 1,963 2,835
Depreciation and amortization 600 546
--------------- ----------------
Total operating expenses 2,563 3,381
--------------- ----------------
Loss from operations (1,631) (2,131)
--------------- ----------------
Other income (expense):
Minority interest in earnings (70) (72)
Interest expense, net (1,329) (1,239)
Other 7 (9)
--------------- ----------------
(1,392) (1,320)
--------------- ----------------
Net loss (3,023) ( 3,451)
Redeemable preferred stock dividend and accretion (162) (113)
--------------- ----------------
Loss applicable to common shareholders $ (3,185) $ (3,564)
=============== ================
Loss per share of Common Stock:
Loss applicable to common shareholders $ (0.06) $ (0.08)
=============== ================
Loss per share of Common Stock assuming dilution:
Loss applicable to common shareholders $ (0.06) $ (0.08)
=============== ================
Basic and diluted weighted average shares outstanding 52,935,157 45,608,346
=============== ================
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, 2001 and 2000
(amounts in thousands)
March 31, March 31,
2001 2000
--------------- ---------------
Cash flows from operating activities:
Net loss $ (3,023) $ (3,451)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest 70 72
Depreciation and amortization 600 546
Loss on sale of asset 30 -
Amortization of debt discount 118 434
Amortization of debt issuance costs 197 82
Options and common stock issued for services - 182
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable
and other receivables 52 (231)
Decrease in inventory - 25
Increase in deposits and prepaids (33) (154)
(Decrease) increase in unearned revenues (61) 130
Increase (Decrease) in accounts payable and
accrued liabilities 199 (766)
--------------- ---------------
Net cash provided by (used in) operating activities (1,851) (3,131)
--------------- ---------------
Cash flows from investing activities:
Purchase of license options (162) (104)
Purchases of property and equipment (4) (297)
Proceeds from sale of assets 202 -
Change in other assets - (37)
--------------- ---------------
Net cash used in investing activities 36 (438)
--------------- ---------------
Cash flows from financing activities:
Exercise of stock options - 479
Distribution of minority interests - (59)
Payments of long-term debt (2,399) (1,034)
Proceeds from issuance of long-term debt 4,377 -
--------------- ---------------
Net cash (used in) provided by financing activities 1,978 (614)
--------------- ---------------
Net increase (decrease) in cash 163 (4,183)
Cash at beginning of period 108 5,603
--------------- ---------------
Cash at end of period $ 271 $ 1,420
=============== ===============
See Note 7 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, 2001
NOTE 1 - BASIS OF PRESENTATION
The interim financial statements for the three-month period ended March 31, 2001
and March 31, 2000 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, 2000.
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, 2001 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 the 900 MHz market with the completion of its purchase of
16 ten-channel wide-area licenses in seven Metropolitan Trading Areas ("MTA's")
during 2000. Also known as dispatch, one-to-many, or push-to-talk, Chadmoore's
commercial SMR service provides reliable, cost-effective, real-time voice
communications for cost-conscious companies with mobile workforces that have a
need to frequently communicate with their entire fleet, discrete subgroups or
individuals of their fleet. For a flat fee averaging approximately $15 per radio
per month, customers enjoy unlimited air time for communicating instantaneously
with their chosen fleets or subgroups.
See "Note 4 - Management Plans" for additional discussion of the current
business status.
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.
Earnings per share for the three months ended March 31, 2000 have been restated
to exclude warrants with nominal exercise prices which were not exercisable, as
follows:
6
Three months ended
March 31, 2000
------------------
Average shares outstanding as previously reported 56,552,519
Loss applicable to common shareholders as
previously reported $(0.06)
Average shares outstanding as restated 45,608,346
Loss applicable to common shareholders as restated $(0.08)
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.
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, 2001 and for the years ended December 31, 2000 and 1999, the Company
has suffered recurring losses from operations and has a working capital
deficiency of $15.7 million, $16.0 million and $7.3 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.
In August 2000, the Company signed a definitive agreement and plan of
reorganization with Nextel Communications, Inc. ("Nextel") under which Nextel
would acquire substantially all of the Company's assets in a tax-free
reorganization for approximately $160 million of Nextel's Class A common shares,
subject to certain closing adjustments and limitations. The agreement and plan
of reorganization is subject to the approval of the Company's shareholders and
the satisfaction of customary closing conditions contained in the reorganization
agreement, including receipt of all necessary regulatory approvals. The
transaction is expected to close in the second half of 2001. Subsequent to the
closing of this transaction, the Company is expected to be dissolved and all of
its remaining assets, which will consist primarily of accounts receivable,
inventory, office furniture and equipment, and analog equipment are expected to
be liquidated.
The reorganization agreement provides for the Company to receive up to $160
million worth of Nextel's Class A common stock, subject to certain closing
adjustments and limitations. These closing adjustments and limitations include,
among other things, adjustments for interim funding provided to the Company
pending the closing and adjustments depending on which of the Company's assets
are actually delivered at the closing. The actual number
7
of Nextel shares to be received by the Company is determined in accordance with
a formula that was negotiated between the Company and Nextel in August 2000.
That formula generally provides for the number of shares to be determined by
dividing the adjusted $160 million purchase price by the average daily closing
price of Nextel's shares as quoted by The Nasdaq National Market for the 20
trading days immediately preceding the closing date of the transaction. The
reorganization agreement further provides for additional adjustments to the
adjusted purchase price in the event that the calculated average daily closing
price is more than 20 percent higher or more than 20 percent lower than
$57.1656, the closing price of Nextel's shares on the date that the
reorganization agreement was signed. In addition, if the calculated average
daily closing price is more than 35% lower than $57.1656, then the number of
Nextel shares to be received by the Company is calculated as if the average
daily closing price was 35% lower than $57.1656, although in that event the
Company may elect to terminate the reorganization agreement unless Nextel
subsequently elects to deliver additional Nextel shares at the closing
calculated based on the actual average daily closing price. Nextel has no
obligation to increase the number of Nextel shares.
On April 30, 2001, the closing price of Nextel's shares was $16.25. If Nextel's
shares continue to trade at that level until the closing of the transaction, the
value to be received by the Company in the transaction would be approximately
$87.8 million less than the anticipated value based on Nextel's share price at
the time that the reorganization agreement was signed. In addition, the
transaction may not be tax-free to the Company if the transaction closes with
Nextel shares trading at their current level. Although the Company's board of
directors and its officers, directors and principal shareholders have signed
agreements with Nextel to support the Nextel transaction, management of the
Company is concerned that there may be a significant chance that the decline in
the anticipated value of the transaction and the increased risk that the
transaction would not be tax free to the Company would make the necessary
approval of the Company's shareholders difficult to obtain.
The Company does not expect the closing of the proposed Nextel transaction to
occur until the second half of 2001. Although there is still a possibility that
Nextel's trading price could recover during the interim period, the Company has
recently begun preliminary discussions with Nextel regarding the possibility of
modifying the terms of the reorganization agreement so as to increase the
likelihood both that the Company would be able to obtain tax-free treatment of
the transaction and that the transaction would be approved by the Company's
shareholders. As of the date of this report, no agreement has been reached
between the Company and Nextel regarding any possible modifications, and the
reorganization agreement remains in effect. Nextel is not required under the
terms of the existing reorganization agreement to consent to any such
modifications, and there can be no assurances that any such agreement will be
reached in the future. Even if the Company and Nextel do agree to modify the
terms of the reorganization agreement, there can be no assurances that the
modified transaction would be completed on a tax-free basis, or at all, as the
closing would still be subject to the approval of the Company's shareholders,
the receipt of all necessary regulatory approvals and the satisfaction of other
customary closing conditions.
Due in part to the anticipation of closing the transaction with Nextel, the
Company made significant changes in its business plan during the second half of
2000 by scaling back its marketing and development activities and eliminating
its direct sales force in an effort to reduce operating expenses. The Company
also began to explore opportunities to dispose of the Company's assets that are
not proposed to be acquired by Nextel which will consist primarily of accounts
receivable, inventory, office furniture and equipment and analog equipment. In
the event that the proposed transaction with Nextel is not completed, the
Company will have to either attempt to obtain additional capital in order to pay
off its debts and resume business operations or locate another purchaser of its
assets or acquisition partner.
In connection with the Nextel reorganization agreement, the Company arranged to
borrow up to an aggregate of $32.5 million from Barclays Bank PLC in order to
pay amounts due under the Company's existing credit facility and finance the
Company's interim operations. In the event that the Nextel reorganization
agreement is terminated, Barclays' obligation to continue advancing funds to the
Company will cease as of the date of such termination, and the principal balance
of the interim financing will have to be repaid by the Company on or before June
30, 2002. Accordingly, in the event of the termination of the Nextel agreement,
the Company anticipates that the proceeds from the interim funding will not be
sufficient to satisfy the Company's contemplated cash requirements for more than
60 days beyond the date of such termination subject to successful negotiation
for temporary arrangements with Company lenders. There can be no assurance that
the Company will be able to
8
locate such funding or that additional financing will be available to the
Company when needed, on commercially reasonable terms, or at all. In addition,
given the unique nature of the Company's assets, there can be no assurance that
another purchaser of its assets or acquisition partner could be located or that
an agreement with any such purchaser or partner could be negotiated on terms
that would be acceptable to the Company and its shareholders. If the Company is
unable to obtain additional financing or enter into an alternative transaction
with another purchaser or acquisition partner, it will likely be required to
cease its operations.
The failure to consummate the proposed transaction with Nextel would have a
material adverse effect on the Company and its operations. The Company would
have to immediately seek another buyer or revert to its original analog business
plan or a similar one based on a digital platform using Motorola's iDEN system
for small markets. Under either scenario, the Company would have to seek
additional capital and focus on those markets, approximately 95, where
full-scale service has been implemented. In addition, the Company's contingency
plan could include the sale of selected channels (with permission of the
creditors, GATX and Barclays) and ceasing further system expansion in such
markets. 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 would ultimately attain profitability. Accordingly, the Company may not
be able to find another buyer or raise additional capital and would be subject
to the risks 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 1,822,500 shares of the Company's Common Stock at an exercise
price of $0.39 per share were also issued to the Lender ("GATX Warrants"). The
loan is secured by substantially all the assets of the Company.
On June 10, 1999, the Company entered into an Amendment to the GATX Facility
("Amendment"). The Amendment, among other things, delayed certain financial
covenants, extended the option period to make available funds from 120 days to
150 days and amended the collateral value to loan ratio from 2 to 1 to 1.5 to 1.
The Company also restated the exercise price of the GATX Warrants from $0.39 to
$0.01 per share of the Company's Common Stock. In connection with the Amendment,
the Company has recognized a debt discount related to the GATX Warrants of
$608,350, which represents the intrinsic value, which is not materially
different from the fair value, of the GATX Warrants on the date of the
Amendment. This discount is being amortized to interest expense using the
effective interest method over the life of the loan.
In order to facilitate the Nextel transaction, the Company reached an agreement
with GATX to amend the GATX Facility. The Company agreed to pay GATX a fee of
$1.35 million for (a) the ability to prepay the loan facility concurrent with
the close of its transaction with Nextel, (b) the receipt of all consents and
covenant waivers reasonable to facilitate the closing of the Nextel transaction,
(c) the grant to Nextel, or a third party induced by Nextel, of a second lien on
all assets to secure cash advances to the Company of up to about $32.5 million,
and (d) the option to pay the fee for the above concessions in cash or stock.
Depending on the performance of Nextel shares, the fee could be adjusted upward
to an amount not to exceed $1.62 million.
The Company is required to maintain certain financial covenants related to the
GATX and Barclays facilities. As of March 31, 2001, the Company was not in
compliance with all of the covenants, however, as previously noted, GATX has
agreed to waive all financial covenant violations. Barclays per its
subordination agreement with GATX cannot act upon the financial covenant
violations, subject to the waivers agreed to by GATX.
See "Note 4 - Management Plans" regarding the Barclays debt transaction.
9
NOTE 6 - EQUITY TRANSACTIONS
During the first quarter of 2001, the Company did not have any 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 for 2000 are discussed in
Note 7 - Non Cash Activities.
NOTE 7 - NON CASH ACTIVITIES
During the three months ended March 31, 2001, the Company had the following
non-cash and investing and financing activities (1) the director's and officer's
insurance policy premium of $57,000 was financed over a three month period and
the expense will be amortized over twelve months and (2) the Memphis land,
building and furniture were sold with $162,000 of the proceeds being reserved
into an escrow account.
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 quarters ended March 31, 2001 and 2000, the Company paid no cash for
Federal income taxes. For the three months ended March 31, 2001 and 2000, the
Company paid $1.1 million and $761,000, 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 Company received an extension from 30 months to 42 months
from the effective dates thereof. As of March 6, 2000 the Company has purchased
approximately $6.5 million toward this purchase commitment. On May 4, 2000 the
Company negotiated an extension to the agreement to extend it to July 2001. If
the Company does not purchase the additional $4.0 million of radio
communications equipment before July 26, 2001, the Company will be obligated to
reimburse Motorola for previous discounts of approximately $331,000.
NOTE 9- RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2001 and 2000, the Company paid $0 and
$28,525, 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 Equity Investors ("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
10
$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.
11
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, 2001 compared to the three months ended March 31, 2000. This
discussion should be read in conjunction with the Company's annual report on
Form 10-KSB for the year ended December 31, 2000 (the "2000 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. These statements contain words such as "intends", "objectives",
"planned", "future", "attainable", "opportunities", "growth" and "believes" and
include statements regarding the Company's strategy, expectations with respect
to the proposed Nextel transaction, efforts to obtain funding and equipment
purchase commitments. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, the forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ from those projected. The Company cautions investors that any
forward-looking statements made by the Company are not guarantees of future
performance and that actual results may differ materially from those in the
forward-looking statements. Such risks and uncertainties include, without
limitation, the risk that the proposed transaction with Nextel will not be
completed or that it will not be completed on terms that are as favorable to the
Company and its shareholders as the transaction that is currently proposed,
regulatory delays or denials both in connection with the proposed transaction
with Nextel and in connection with the Company's business generally, the lack of
availability of sources of capital to fund the Company's operations and the
repayment of the Company's significant outstanding debt in the event that the
proposed transaction with Nextel is not completed, the lack of any presently
established alternate purchaser of the Company's assets or other acquisition
partner in the event that the transaction with Nextel is not completed,
fluctuations in demand, loss of subscribers, the quality and price of similar or
comparable wireless communications services, the existence of well-established
competitors who have substantially greater financial resources and longer
operating histories, adverse results in pending or threatened litigation,
consequences of actions by the FCC, and general economic conditions and the
risks discussed under "Business -Risk Factors" in the 2000 Form 10-KSB.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2000
Total revenues decreased 16.0% to $1.5 million during the first quarter of 2001,
compared to $1.8 million in the same period in 2000. Service revenues decreased
7.3%, to $1.5 million during the first quarter of 2001 as compared to $1.6
million for the comparable period in 2000. Equipment sales and maintenance
decreased 89.3% to $20,000 for the three months ended March 31, 2001 compared to
$0.2 million in 2000.
As a result of the announced asset sale transaction with Nextel, subscriber
units have decreased from approximately 41,700 units at December 31, 2000 to
37,000 units as of March 31, 2001. Though management expects the proposed
transaction with Nextel to result in some loss of current customers, it cannot
assess at this time what the financial impact of this loss will be with regards
to future revenues.
Cost of service revenue for the three months ended March 31, 2001 was $556,000
compared to $410,000 for the same period in 2000, an increase of $146,000 or
35.6%. The increase is primarily attributable to increased site rent costs and
increased utility costs. Cost of equipment sales and maintenance revenue was
$7,000 for the first three months of 2001 compared to $119,000 for the first
quarter of 2000.
Gross margin for the first quarter of 2001 was 62.3% as compared to 70.3% for
the first quarter of 2000, primarily reflecting the decrease in revenue as well
as increased cost of sales.
12
Selling, general and administrative expenses decreased to $2.0 million for the
three months ended March 31, 2001 compared to $2.8 million for the same period
in 2000, a decrease of $872,000 or 30.8%. Salaries, wages and benefits expense
(a component of selling, general and administrative expenses) decreased to
$616,000 for the three months ended March 31, 2001, compared to $1.2 million for
the three months ended March 31, 2000, a decrease of $584,000 or 48.7%. Much of
this decrease is related to personnel reductions in operational areas and direct
sales due in part to the proposed Nextel transaction and expected subsequent
liquidation of the Company. Excluding salaries, wages and benefits, other
selling, general and administrative expenses decreased by $326,000 or 19.5%
compared to the prior year, primarily due to decreases in advertising and
marketing expenses, and expenses related to the direct sales force which were
partially offset by increased legal and accounting costs associated with the
proposed Nextel transaction.
Depreciation and amortization expense increased to $600,000 for the first
quarter of 2001 compared to $546,000 in the first quarter of 2000, an increase
of $54,000 or 9.9%, reflecting additional licenses and infrastructure equipment
placed in service during the last twelve months of operations.
Interest expense, net of interest income, increased $90,000 or 7.3%, to $1.3
million for the first quarter of 2001 compared to $1.2 million for the same
period in 2000, reflecting higher debt balances associated with the GATX
Facility and the Barclays debt transaction.
The Company's net loss decreased to $3.0 million for the three months ended
March 31, 2001 compared to $3.5 million for the same period in 2000, a decrease
of $428,000 or 12.4% reflecting primarily a reduction in personnel costs as a
result of changes to the Company's business plan, due in part to the Nextel
transaction.
Loss per share for the three months ended March 31, 2001 was $0.06 compared to a
loss of $0.08 for the three months ended March 31, 2000.
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, 2000 and
1999. 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 2001 was $1.9
million as compared to $3.1 million for the comparable period in 2000, a
decrease of $1.2 million or 40.9%. The decrease in net cash used in operating
activities consisted primarily of a $1.2 million increase in accounts payable
and accrued liabilities during the first quarter of 2001 as compared to the
first quarter of 2000, primarily as a result of expenses incurred but not paid
related to the Nextel transaction.
Net cash provided by investing activities was $36,000 in the first quarter of
2001 compared to net cash used of $438,000 during the first quarter of 2000.
Capital expenditures in 2001 have been minimal compared to $297,000 for the
first quarter of 2000. The sale of the Memphis facility provided a net increase
in investment cash for the 2001 quarter as net proceeds of $202,000 offset
$162,000 in purchases of license options.
Net cash provided by financing activities was $2.0 million for the first quarter
of 2001 compared to a use of funds of $614,000 for the quarter ended March 31,
2000. Proceeds of $4.4 million were drawn in the first quarter of 2001 on the
Barclay's debt transaction with $2.4 million being used to pay debt.
13
In August 2000, the Company signed a definitive agreement and plan of
reorganization with Nextel Communications, Inc. ("Nextel") under which Nextel
would acquire substantially all of the Company's assets in a tax-free
reorganization for approximately $160 million of Nextel's Class A common shares,
subject to certain closing adjustments and limitations. The actual number of
Nextel shares to be received by the Company is to be determined in accordance
with a formula based on the trading price of Nextel's shares immediately prior
to the closing that was negotiated between the Company and Nextel in August
2000. Due to the recent decline in the trading price of Nextel's shares, if
Nextel's shares continue to trade at that level until the closing of the
transaction, the value to be received by the Company in the transaction would be
approximately $87.8 million less than the anticipated value based on Nextel's
share price at the time that the reorganization agreement was signed. In
addition, the transaction may not be tax-free to the Company if the transaction
closes with Nextel's shares trading at their current level. Although the
Company's board of directors and its officers, directors and principal
shareholders have signed agreements with Nextel to support the Nextel trans-
action, management of the Company is concerned that there may be a significant
chance that the decline in the anticipated value of the transaction and the
increased risk that the transaction would not be tax free to the Company would
make the necessary approval of the Company's shareholders difficult to obtain.
The Company does not expect the closing of the proposed Nextel transaction to
occur until the second half of 2001. Although there is still a possibility that
Nextel's trading price could recover during the interim period, the Company has
recently begun preliminary discussions with Nextel regarding the possibility of
modifying the terms of the reorganization agreement so as to increase the
likelihood both that the Company would be able to obtain tax-free treatment of
the transaction and that the transaction would be approved by the Company's
shareholders. As of the date of this report, no agreement has been reached
between the Company and Nextel regarding any possible modifications, and the
reorganization agreement remains in effect. Nextel is not required under the
terms of the existing reorganization agreement to consent to any such
modifications, and there can be no assurances that any such agreement will be
reached in the future. Even if the Company and Nextel do agree to modify the
terms of the reorganization agreement, there can be no assurances that the
modified transaction would be completed on a tax-free basis, or at all, as the
closing would still be subject to the approval of the Company's shareholders,
the receipt of all necessary regulatory approvals and the satisfaction of other
customary closing conditions.
Due in part to the anticipation of closing the transaction with Nextel, the
Company made significant changes in its business plan during the second half of
2000 by scaling back its marketing and development activities and eliminating
its direct sales force in an effort to reduce operating expenses. The Company
also began to explore opportunities to dispose of the Company's assets that are
not proposed to be acquired by Nextel which will consist primarily of accounts
receivable, inventory, office furniture and equipment and analog equipment. In
the event that the proposed transaction with Nextel is not completed, the
Company will have to either attempt to obtain additional capital in order to pay
off its debts and resume business operations or locate another purchaser of its
assets or acquisition partner.
In connection with the Nextel reorganization agreement, the Company arranged to
borrow up to an aggregate of $32.5 million from Barclays Bank PLC in order to
pay amounts due under the Company's existing credit facility and finance the
Company's interim operations. In the event that the Nextel reorganization
agreement is terminated, Barclays' obligation to continue advancing funds to the
Company will cease as of the date of such termination, and the principal balance
of the interim financing will have to be repaid by the Company on or before June
30, 2002. As of March 31, 2001, the Company had drawn $ 15.3 million on the
Barclay's facility. Accordingly, in the event of the termination of the Nextel
agreement, the Company anticipates that the proceeds from the interim funding
will not be sufficient to satisfy the Company's contemplated cash requirements
for more than 60 days beyond the date of such termination subject to successful
negotiation for temporary arrangements with company lenders. There can be no
assurance that the Company would be able to locate such funding or that
additional financing will be available to the Company when needed, on
commercially reasonable terms, or at all. In addition, given the unique nature
of the Company's assets, there can be no assurance that another purchaser of its
assets or acquisition partner could be located or that an agreement with any
such purchaser or partner could be negotiated on terms that would be acceptable
to the Company and its shareholders. If the Company is unable to obtain
additional financing or enter into an alternative transaction with another
purchaser or acquisition partner, it will likely be required to cease its
operations. 14
The failure to consummate the proposed Nextel transaction would have a material
adverse effect on the Company and its operations. The Company would have to
immediately seek another buyer or revert to its original analog business plan or
a similar one based on a digital platform. Under either scenario, the Company
would have to seek additional capital and focus on those markets, approximately
95, where full-scale service has been implemented. In addition, the Company's
contingency plan could include the sale of selected channels (with permission of
the creditors, GATX and Barclays) and ceasing further system expansion in such
markets. 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 would ultimately attain profitability. Accordingly, the Company may not
be able to find another buyer or raise additional capital and would be subject
to the risks of a liquidation of its assets or bankruptcy.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2001, 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.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A - GOODMAN CHAN PROCEEDINGS
Goodman/Chan Waiver. Nationwide Digital Data Corp. and Metropolitan
Communications Corp. among others (collectively, "NDD/Metropolitan"), traded in
the selling of SMR application preparation and filing services, and in some
instances construction services to the general public. Most of the purchasers in
these activities had little or no experience in the wireless communications
industry. Based on evidence that NDD/Metropolitan had not fulfilled their
construction and operation obligations to over 4,000 applicants who had received
FCC licenses through NDD/Metropolitan, the Federal Trade Commission ("FTC")
filed suit against NDD/Metropolitan in January, 1993, in the Federal District
Court for the Southern District of New York ("District Court"). The District
Court appointed Daniel R. Goodman (the "Receiver") to preserve the assets of
NDD/Metropolitan. In the course of the Receiver's duties, he together with a
licensee, Dr. Robert Chan, who had received several FCC licenses through
NDD/Metropolitan's services, filed a request to extend the construction period
for each of approximately 4,000 SMR stations. At that time, licensees of most of
the stations included in the waiver request ("Receivership Stations") were
subject to an eight-month construction period. On May 24, 1995, the FCC granted
the request for extension. The FCC reasoned that the Receivership Stations were
subject to regulation as commercial mobile radio services stations, but had not
been granted the extended construction period awarded, by the FCC, to all
commercial mobile radio services licensees. Thus, in an effort to be consistent
in its treatment of similarly situated licensees, the FCC granted the licensee
petitioners an additional four months in which to construct and place the
Receivership Stations in operation (the "Goodman/Chan Waiver"). The Goodman/Chan
Waiver became effective upon publication in the Federal Register on August 27,
1998. Moreover, the FCC released a list on October 9, 1998 which purported to
clarify the status of relief eligibility for licenses subject to the August 27,
1998 decision. Subsequently the FCC also released a purported final list of the
Receivership Stations.
On the basis of a previous request for assistance to the FCC's Licensing
Division by the Company, the FCC examined and marked a list provided by the
Company. The FCC's markup indicated those stations held by the Company or
subject to management and option agreements, which the FCC considered to be, at
that time, Receivership Stations and/or stations considered "similarly situated"
and thus eligible for relief. From this communication, the Company believes that
approximately 800 of the licenses that it owns or manages are Receivership
Stations or otherwise entitled to relief as "similarly situated" licensees. For
its own licenses and under the direction of each licensee for managed stations,
the Company proceeded with timely construction of those stations which the
Company reasonably believes to be Receivership Stations or otherwise entitled to
relief. The Company received relief on approximately 150 licenses under the
Goodman/Chan proceedings and from the official communication from the FCC, the
Company believes that approximately 650 licenses should be eligible for relief
as "similarly situated". Initial review of the Commission's Goodman/Chan Order
indicated a potentially favorable outcome for the Company as it pointed to a
grant of relief for a significant number of the Company's owned and/or 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 remains somewhat uncertain as to all
licenses which will be permanently deleted under the FCC's current procedures.
16
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 upon
FCC failure to act affirmatively on the Company's appeal. 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. Approximately 650 of those licenses purchased by
or under option and management agreements with the Company are among those which
the FCC refused to afford relief pursuant to the Commercial Wireless Division's
October 9, 1998, Public Notice.
On November 9, 1999 the FCC's Commercial Wireless Division Chief issued a
decision denying Chadmoore's Petition for Reconsideration. Such a staff level
opinion is not binding upon the Commission, and the Company exercised its legal
right to seek an internal FCC review through application to the Commission. The
Company also holds 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.
On March 26, 2001, the Federal Communications Commission released an Order
denying Chadmoore's Application for Review; and, the Company has now exhausted
the appeal process in this matter at the Commission. Accordingly, the only
avenue of appeal remaining to the Company was the filing of a petition at the
United States Court of Appeals for the District of Columbia Circuit. The Company
had a statutorily-provided thirty (30) day period from the FCC's decision
release in which to consider its position and file a court appeal. Company
Management has diligently reviewed this matter and has consulted with outside
Litigation and FCC Counsel to review the decision in detail. Company management
has completed an analysis as to whether the Company should pursue a further
appeal. Among numerous other considerations, Management and Counsel have
considered and weighed the possibility of various factual and legal approaches
to be employed in such an appeal, as well the potential prospects of success for
an appeal and the legal costs involved. Management's decision-making process
also considered the relative harshness of the tone of the Commission's dismissal
indicating continued likely vigorous opposition on the part of the Commission to
any further attempts by the Company to retrieve these licenses through the
appellate court process. Based on its analysis and substantial input from
outside counsel, Management has chosen not to further appeal this decision; and
thus, the underlying licenses which were the subject matter of the appeal have
now been cancelled permanently by the Commission and will remain in that status,
as the Company plans no further appeal efforts.
B. OTHER LEGAL PROCEEDINGS
Pursuant to the Federal Communication Commission's ("FCC") 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.
17
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.
18
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 14, 2001
19