================================================================================
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 JUNE 30, 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 small business issuer 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 AUGUST 10, 2001 ISSUER HAD 45,700,172 SHARES OF COMMON STOCK, $.001 PAR
VALUE, OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [ ] No [X]
================================================================================
1
================================================================================
INDEX
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000 3
Consolidated Statements of Operations for the three and six months ended June 30, 2001 4
and 2000 (unaudited)
Consolidated Statements of Cash Flows for six months ended June 30, 2001 and 2000 5
(unaudited)
Condensed Notes to Interim Consolidated Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
PLAN OF OPERATIONS 11-14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K 15
SIGNATURES 16
2
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands)
June 30, December 31,
2001 2000
(Unaudited)
--------------- ----------------
ASSETS
Current assets:
Cash $ 1,360 $ 108
Accounts receivable, net 824 1,097
Other receivables, net 191 188
Inventory 492 496
Other current assets 139 45
--------------- ----------------
Total current assets 3,006 1,934
Property and equipment, net 11,627 12,938
Intangible assets, net 33,969 33,963
Other non-current assets, net 3,516 2,909
--------------- ----------------
Total assets $ 52,118 $ 51,744
=============== ================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 33,584 $ 12,445
Accounts payable and accrued liabilities 5,382 4,552
Unearned revenue 695 876
Other current liabilities 33 33
--------------- ----------------
Total current liabilities 39,694 17,906
Long-term debt 18,501 33,771
--------------- ----------------
Total liabilities 58,195 51,677
Minority interests 1,195 1,171
Commitments and contingencies
Redeemable preferred stock:
Series C, 4% cumulative, 10,119,614 shares issued and
outstanding 2,628 2,201
Shareholders' deficit:
Preferred stock, $.001 par value, authorized 40,000,000 shares - -
Common stock, $.001 par value, authorized 100,000,000 shares,
45,700,172 shares issued and outstanding, 46 46
Additional paid-in capital 69,112 69,539
Accumulated deficit (79,058) (72,890)
--------------- ----------------
Total shareholders' deficit (9,900) (3,305)
--------------- ----------------
Total liabilities, minority interests, redeemable
preferred stock and shareholders' deficit $ 52,118 $ 51,744
=============== ================
See accompanying condensed notes to unaudited interim consolidated financial
statements.
3
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(amounts in thousands, except share and per share data)
For the Three Months ended For the Six Months Ended
-------------------------- ------------------------
June 30 June 30 June 30 June 30
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Service revenue $ 1,243 $ 1,725 $ 2,718 $ 3,316
Equipment sales and maintenance 23 232 43 419
--------------- --------------- ---------------- ---------------
Total revenues 1,266 1,957 2,761 3,735
--------------- --------------- ---------------- ---------------
Cost of sales:
Cost of service revenue 553 482 1,109 892
Cost of equipment sales
and maintenance 9 106 15 224
--------------- --------------- ---------------- ---------------
Total cost of sales 562 588 1,124 1,116
--------------- --------------- ---------------- ---------------
Gross margin 704 1,369 1,637 2,619
--------------- --------------- ---------------- ---------------
Operating expenses
Selling, general and administrative 1,831 2,845 3,795 5,680
Depreciation and amortization 599 554 1,199 1,100
--------------- --------------- ---------------- ---------------
Total operating expenses 2,430 3,399 4,994 6,780
--------------- --------------- ---------------- ---------------
Loss from operations (1,726) (2,030) (3,357) (4,161)
--------------- --------------- ---------------- ---------------
Other expense:
Minority interest in earnings (59) (58) (128) (130)
Interest expense, net (1,353) (1,207) (2,682) (2,446)
Other (8) (16) (1) (25)
--------------- --------------- ---------------- ---------------
Net loss (3,146) (3,311) (6,168) (6,762)
Redeemable preferred stock
dividend and accretion (265) (209) (427) (323)
--------------- --------------- ---------------- ---------------
Loss applicable to common shareholders $ (3,411) $ (3,520) $ (6,596) $ (7,085)
=============== =============== ================ ===============
Basic and diluted loss per share of
Common Stock:
Loss applicable to common shareholders $ (0.06) $ (0.07) $ (0.12) $ (0.14)
=============== =============== ================ ===============
Basic and diluted weighted
average shares outstanding 52,935,157 52,547,217 52,935,157 50,496,525
=============== =============== ================ ===============
See accompanying condensed notes to unaudited interim consolidated financial
statements.
4
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(amounts in thousands)
For the six months ended
June 30, June 30,
2001 2000
--------------- ---------------
Cash flows from operating activities:
Net loss $ (6,168) $ (6,762)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest 128 130
Depreciation and amortization 1,199 1,100
Loss on sale of assets 5 -
Amortization of debt discount 223 813
Amortization of debt issuance costs 393 159
Options and common stock issued for services - 217
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable
and other receivables 255 (323)
Decrease (increase) in inventory 4 (61)
Increase in deposits and prepaids - (219)
Decrease (increase) in unearned revenues (181) 387
Increase (decrease) in accounts payable and
accrued liabilities (170) 922
Increase in other current liabilities - 755
--------------- ---------------
Net cash used in operating activities (4,312) (2,882)
--------------- ---------------
Cash flows from investing activities:
Purchase of license options (240) (108)
Proceeds from sale of assets 389 -
Purchases of property and equipment (4) (434)
Change in other assets - (71)
--------------- ---------------
Net cash provided by (used in) investing activities 145 (613)
--------------- ---------------
Cash flows from financing activities:
Increase in debt issuance costs - (24)
Exercise of stock options - 491
Distribution of minority interests (99) (182)
Payments of long-term debt (3,190) (1,911)
Proceeds from issuance of long-term debt 8,708 404
--------------- ---------------
Net cash provided by (used in) financing activities 5,419 (1,222)
--------------- ---------------
Net increase (decrease) in cash 1,252 (4,717)
Cash at beginning of period 108 5,603
--------------- ---------------
Cash at end of period $ 1,360 $ 866
=============== ===============
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
June 30, 2001
NOTE 1 - BASIS OF PRESENTATION
The interim financial statements for the three and six months ended June 30,
2001 and June 30, 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 and six months ended June 30, 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"), 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. Chadmoore's operating territory covers approximately 55 million
people in 180 markets, primarily in secondary and tertiary cities throughout the
United States ("Operating Territory"). Chadmoore 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
Chadmoore 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
Chadmoore 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. Chadmoore 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 Chadmoore will continue as a going concern. For the six months ended June
30, 2001 and for the years ended December 31, 2000 and 1999, Chadmoore has
suffered recurring losses from operations and has a working capital deficiency
of $36.7 million, $16.0 million and $7.3 million, respectively, that raise
substantial doubt about Chadmoore'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, Chadmoore signed a definitive agreement and plan of
reorganization with Nextel under which Nextel would acquire substantially all of
Chadmoore's assets in a tax-free reorganization for shares of Nextel's Class A
common shares, subject to certain closing adjustments and limitations, including
shareholder approval and receipt of all necessary regulatory approvals.
The reorganization agreement provided for Chadmoore 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 Chadmoore
pending the closing and adjustments depending on which of Chadmoore's assets are
actually delivered at the closing. The actual number of Nextel shares to be
received by Chadmoore was to be determined in accordance with a formula that was
negotiated between Chadmoore and Nextel in August 2000. That formula generally
provides for the number of shares to be determined by dividing the adjusted
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 provided
for additional adjustments to the adjusted purchase price in the event that the
calculated average daily closing price was 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 was more than 35% lower than $57.1656,
then the number of Nextel shares to be received by Chadmoore was calculated as
if the average daily closing price was 35% lower than $57.1656, although in that
event Chadmoore could elect to terminate the reorganization agreement unless
Nextel subsequently elected to deliver additional Nextel shares at the closing
calculated based on the actual average daily closing price. Nextel had no
obligation to increase the number of Nextel shares.
By late 2000, the Nextel stock price had declined substantially and thereafter
remained at relatively low levels. As a result, Chadmoore believed it unlikely
that its stockholders would approve the transaction because the value of the
Nextel shares to be delivered to Chadmoore was substantially less than
anticipated. As a result, on June 29, 2001, Chadmoore and Nextel amended the
agreement and plan of reorganization to reduce the aggregate consideration to
approximately $130 million of Nextel's Class A common shares, subject to certain
closing adjustments and limitations. If the Nextel closing price is less than or
equal to $10 per share at the closing of the transaction, then at Nextel's
election, they have the option to close the transaction with cash rather than
shares. However, if Nextel makes the election, then Chadmoore has the right to
require Nextel to deliver Nextel shares equal to the closing price less closing
adjustment and limitation divided by $10. The agreement and plan of
reorganization remains subject to the approval of Chadmoore's stockholders and
the satisfaction of customary closing conditions contained in the agreement and
plan of reorganization, including receipt of all necessary
7
regulatory approvals. Subsequent to the closing of this transaction, Chadmoore
will be dissolved and all of its remaining assets will be liquidated.
Chadmoore expects the closing of the proposed Nextel transaction to occur during
the last quarter of 2001. Even though Chadmoore and Nextel have modified 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.
Due in part to the anticipation of closing the transaction with Nextel,
Chadmoore 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. Chadmoore also
began to explore opportunities to dispose of Chadmoore'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 radio
equipment. In the event that the proposed transaction with Nextel is not
completed, Chadmoore 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, Chadmoore arranged to
borrow up to an aggregate of $32.5 million from Barclays Bank PLC in order to
pay amounts due under its existing credit facility and finance its interim
operations. In the event that the Nextel reorganization agreement is terminated,
Barclays' obligation to continue advancing funds to Chadmoore will cease as of
the date of such termination, and the principal balance of the interim financing
will have to be repaid by Chadmoore on or before June 30, 2002. In conjunction
with the amendment of its credit facility with GATX, and as additional
consideration for the payment deferral, (see Note 5 - Debt) Chadmoore purchased
from Barclays Bank PLC an irrevocable standby letter of credit in the face
amount of $2.7 million in favor of GATX. To facilitate this issuance, the
agreement with Barclays was amended on June 29, 2001 to reduce the total
availability to $30.9 million. Accordingly, in the event of the termination of
the Nextel agreement, Chadmoore anticipates that the proceeds from the interim
funding will not be sufficient to satisfy its contemplated cash requirements for
more than 60 days beyond the date of such termination subject to successful
negotiation for temporary arrangements with its lenders. There can be no
assurance that Chadmoore will be able to locate such funding or that additional
financing will be available to Chadmoore when needed, on commercially reasonable
terms, or at all. In addition, given the unique nature of Chadmoore'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 Chadmoore and its
shareholders. If Chadmoore 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 Nextel transaction would have a material
adverse effect on Chadmoore and its operations. Chadmoore 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, Chadmoore
would have to seek additional capital and focus on those markets, about 95,
where full-scale service has been implemented. In addition, Chadmoore'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 Chadmoore's
contingency plans would adequately address the aforementioned risks, or that it
would ultimately attain profitability. Accordingly, Chadmoore 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'), Chadmoore 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 were to commence June 30, 2000.
8
Warrants to purchase up to 1,822,500 shares of Chadmoore'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 Chadmoore.
On June 10, 1999, Chadmoore 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.
Chadmoore also restated the exercise price of the GATX Warrants from $0.39 to
$0.01 per share of Chadmoore's Common Stock. In connection with the Amendment,
Chadmoore 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.
On June 30, 2000, GATX agreed to refrain from exercising remedies under the loan
facility until July 28, 2000 as a result of failure by Chadmoore to make
principal and interest payments due on June 30, 2000. On July 27, 2000, GATX
agreed to continue to refrain from exercising remedies under the loan facility
until August 15, 2000 as a result of Chadmoore's inability to make principal and
interest payments due on June 30, 2000.
In order to facilitate the Nextel transaction, Chadmoore reached an agreement
with GATX to amend the GATX Facility. Chadmoore 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 Chadmoore 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.
Chadmoore is required to maintain certain financial covenants related to the
GATX and Barclays facilities. As of June 30, 2001, Chadmoore 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.
On June 29, 2001, Chadmoore and GATX agreed to defer the quarterly principal
payments due on or about June 30, 2001 and September 30, 2001, until the
earliest of December 31, 2001 or the closing of the asset sale to Nextel. In
consideration for the payment deferral, Chadmoore agreed to pay to GATX a fee of
$1 million, to be paid on the earliest of December 31, 2001 or the closing of
the asset sale to Nextel. In conjunction with the amendment of its credit
facility with GATX, and as additional consideration for the payment deferral,
Chadmoore purchased from Barclays Bank PLC an irrevocable standby letter of
credit in the face amount of $2.7 million in favor of GATX.
See "Note 4 - Management Plans" regarding the Barclays debt transaction.
NOTE 6 - EQUITY TRANSACTIONS
During the first six months of 2001, Chadmoore did not have any equity
transactions.
During the first and second quarters of 2000, 960,625 and 23,750 shares,
respectively, 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.
9
NOTE 7 - NON CASH ACTIVITIES
During the six months ended June 30, 2001, Chadmoore 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 with
the expense being amortized over twelve months (2) the financing of the general
insurance premium of $36,188 was financed over nine months with the expense
being amortized over twelve months (3) $63,172 of debt being incurred for the
purchase of FCC licenses and/or license options, (4) $5,500 in receivables that
was offset against partnership interests, (5) $10,000 in accounts receivable
that was offset to debt and (6) $1 million in additional fees that were accrued
as a result of the GATX amendment (see Note 5 - Debt).
During the six months ended June 30, 2000, Chadmoore 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 $444,398, (3) issuance of 2,317,679 shares of common
stock in payment of debt in the amount of $711,000 and accrued interest in the
amount of $425,000, (4) issuance of 210,000 shares of stock for services
rendered and (5) issuance of $328,000 in debt to refinance existing debt and
accounts payable.
During the quarters ended June 30, 2001 and 2000, Chadmoore paid no cash for
Federal income taxes. For the three months ended June 30, 2001 and 2000,
Chadmoore paid $1.1 million and $1.5 million, respectively, for interest.
NOTE 8- PURCHASE COMMITMENT
In October 1996, Chadmoore 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, Chadmoore received an extension from 30 months to 42 months from the
effective dates thereof. As of March 6, 2000 Chadmoore has purchased
approximately $6.5 million toward this purchase commitment. On May 4, 2000
Chadmoore negotiated an extension to the agreement to extend it to July 2001.
Chadmoore did not purchase the additional $4.0 million of radio communications
equipment before July 26, 2001, and is obligated to reimburse Motorola for
previous discounts of approximately $331,000.
NOTE 9- RELATED PARTY TRANSACTIONS
During the six months ended June 30, 2001 and 2000, Chadmoore 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 Chadmoore, is an owner and managing partner of PEP.
On March 6, 2000, Chadmoore issued 105,000 shares of Chadmoore's Common Stock to
the Sullivan Family Trust, of which Mark F. Sullivan and his wife are the only
trustees.
On May 1, 1998, Chadmoore 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 Chadmoore as deemed necessary by Recovery. Chadmoore 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 Chadmoore.
10
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"), for the three and six months ended June
30, 2001 compared to the same periods in 2000. This discussion should be read in
conjunction with Chadmoore'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. Although the Chadmoore 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. Chadmoore cautions investors that any forward-looking
statements made by Chadmoore 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
2000 Form 10-KSB.
RESULTS OF OPERATIONS
Total revenues for the second quarter of 2001 were $1.3 million compared to $2.0
million for the same period in 2000, a decrease of $0.7 million or 35.3%.
Year-to-date revenues for 2001 and 2000 were $2.8 million and $3.7 million,
respectively, a decrease of $0.9 million or 26.1%. Service revenues decreased to
$1.2 million compared to $1.7 million, a decrease of $0.5 million or 27.9% for
the quarter ended June 30, 2001 compared to the same period in 2000. For the six
month period ended June 30, 2001, service revenues were $2.7 million, a decrease
of $0.6 million or 18.0% when compared to service revenues of $3.3 million for
the same period in 2000. Equipment sales and maintenance revenue was down for
the second quarter of 2001 to $23,000 compared to $232,000 in 2000, a decrease
of $209,000 or 90.1%. For the first six months of 2001 as compared to the same
period in 2000, equipment sales and maintenance revenue was down $376,000 or
89.7% to $43,000 from $419,000.
As a result of the announced asset sale transaction with Nextel Communications,
Inc., ("Nextel") subscriber units have decreased from about 41,700 units at
December 31, 2000 to 32,600 units as of June 30, 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 June 30, 2001 was $553,000
compared to $482,000 for the same period in 2000, an increase of $71,000 or
14.7%. These costs were $1.1 million for the six months ended June 30, 2001 and
$892,000 for the six months ended June 30, 2000, an increase of 24.3%. These
increases are primarily attributable to increased site rent costs and increased
utility costs. Cost of equipment sales and maintenance revenue was $9,000 for
the three months of ended June 30, 2001 compared to $106,000 for the same period
in 2000. These costs were $15,000 for the six months ended June 30. 2001 and
$224,000 for the six months ended June 30, 2000, a decrease of $209,000 or
93.3%.
Gross margin for the second quarter of 2001 was 55.63% as compared to 70.0% for
the second quarter of 2000, primarily reflecting the decrease in revenue as well
as increased cost of sales. For the six months ended June 30, 2001, the gross
margin was 59.3% compared to 70.1% for the same period in the prior year.
Selling, general and administrative expenses decreased to $1.8 million for the
three months ended June 30, 2001 compared to $2.8 million for the same period in
2000, a decrease of $1.0 million or 35.6%. Salaries, wages and benefits expense
(a component of selling, general and administrative expenses) decreased to
$597,000 for the three months ended June 30, 2001, compared to $1.2 million for
the three months ended June 30, 2000, a decrease of $588,000 or 49.6%. Much of
this decrease is related to personnel reductions in operational areas and direct
sales
11
due in part to the proposed Nextel transaction and expected subsequent
liquidation of Chadmoore. Excluding salaries, wages and benefits, other selling,
general and administrative expenses decreased by $427,000 or 25.7% compared to
the prior year. For the six months ended June 30, 2001, these costs were $3.8
million compared to $5.7 million for the same period in 2000, a decrease of $1.9
million or 33.2%. Salaries, wages and benefits expense decreased to $1.2 million
for the six months ended June 30, 2001, compared to $2.3 million for the six
months ended June 30, 2000, a decrease of $1.1 million or 48.9%. These decreases
are 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 $599,000 for the second
quarter of 2001 compared to $554,000 in the second quarter of 2000, an increase
of $45,000 or 8.1%, reflecting additional licenses and infrastructure equipment
placed in service during the last twelve months of operations. For the six
months ended June 30, 2001, these costs were $1.2 million compared to $1.1
million for the six months ended June 30, 2000, an increase of $99,000 or 9.0%
Interest expense, net of interest income, increased $146,000 or 12.1%, to $1.4
million for the second 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. For the six months ended June 30,
2001, these costs were $2.7 million compared to $2.4 million for the same period
in the prior year, an increase of $236,000 or 9.6%
The net loss decreased to $3.1 million for the three months ended June 30, 2001
compared to $3.3 million for the same period in 2000, a decrease of $165,000 or
5.0% reflecting primarily a reduction in personnel costs as a result of changes
to Chadmoore's business plan, due in part to the Nextel transaction. For the six
months ended June 30, 2001, the net loss decreased to $6.2 million compared to
$6.8 million for the six months ended June 30, 2000, a decrease of $594,000 or
8.8%.
Loss per share for the three months ended June 30, 2001 was $0.06 compared to a
loss of $0.07 for the three months ended June 30, 2000. For the six months ended
June 30, 2001, loss per share was $0.12 compared to a loss of $0.14 for the six
months ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Historically, operating expenses and capital expenditures associated with the
development and enhancement of Chadmoore'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. Chadmoore's auditors have included an explanatory
paragraph in their opinion which expresses substantial doubt about Chadmoore's
ability to continue as a going concern for the years ended December 31, 2000 and
1999. Chadmoore has consistently used external sources of funds, primarily from
equity issuances and debt financings, to fund operations, capital expenditures
and other non-operating needs. Chadmoore 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 six months of 2001 was
$4.3 million as compared to $2.9 million for the comparable period in 2000, an
increase of $1.4 million or 49.6%. The increase in net cash used in operating
activities consisted primarily of a $1.1 million decrease in accounts payable
and accrued liabilities during the first six months of 2001 as compared to the
first six months of 2000, a $755,000 decrease in other current liabilities in
2001 compared to 2000 and a smaller operating loss for 2001 compared to 2000.
This is primarily a result of payment of expenses that were deferred during the
first six months of 2000 that are current as of 2001.
Net cash provided by investing activities was $145,000 in the six months ended
June 30, 2001 compared to net cash used of $613,000 during the first six months
of 2000. Capital expenditures in 2001 have been minimal compared to $434,000 for
the first quarter of 2000. The sale of the Memphis facility provided a net
increase in
12
investment cash for the 2001 quarter as net proceeds of $364,000 offset by
$240,000 in purchases of license options.
Net cash provided by financing activities was $5.4 million for the first six
months of 2001 compared to a use of funds of $1.2 million for the six months
ended June 30, 2000. Proceeds of $8.7 million were drawn in the first six months
of 2001 under the Barclay's facility with $3.2 million being used to pay debt
compared to borrowings in the first six months of 2000 of $404,000 and payments
on debt of $1.9 million.
In August 2000, Chadmoore signed a definitive agreement and plan of
reorganization with Nextel under which Nextel would acquire substantially all of
Chadmoore's assets in a tax-free reorganization for shares of Nextel's Class A
common shares, subject to certain closing adjustments and limitations, including
shareholder approval and receipt of all necessary regulatory approvals.
The reorganization agreement provided for Chadmoore 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 Chadmoore
pending the closing and adjustments depending on which of Chadmoore's assets are
actually delivered at the closing. The actual number of Nextel shares to be
received by Chadmoore was to be determined in accordance with a formula that was
negotiated between Chadmoore and Nextel in August 2000. That formula generally
provides for the number of shares to be determined by dividing the adjusted
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 provided
for additional adjustments to the adjusted purchase price in the event that the
calculated average daily closing price was 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 was more than 35% lower than $57.1656,
then the number of Nextel shares to be received by Chadmoore was calculated as
if the average daily closing price was 35% lower than $57.1656, although in that
event Chadmoore could elect to terminate the reorganization agreement unless
Nextel subsequently elected to deliver additional Nextel shares at the closing
calculated based on the actual average daily closing price. Nextel had no
obligation to increase the number of Nextel shares.
By late 2000, the Nextel stock price had declined substantially and thereafter
remained at relatively low levels. As a result, Chadmoore believed it unlikely
that its stockholders would approve the transaction because the value of the
Nextel shares to be delivered to Chadmoore was substantially less than
anticipated. As a result, on June 29, 2001, Chadmoore and Nextel amended the
agreement and plan of reorganization to reduce the aggregate consideration to
approximately $130 million of Nextel's Class A common shares, subject to certain
closing adjustments and limitations. If the Nextel closing price is less than or
equal to $10 per share at the closing of the transaction, then at Nextel's
election, they have the option to close the transaction with cash rather than
shares. However, if Nextel makes the election, then Chadmoore has the right to
require Nextel to deliver Nextel shares equal to the closing price less closing
adjustment and limitation divided by $10. The agreement and plan of
reorganization remains subject to the approval of Chadmoore's stockholders and
the satisfaction of customary closing conditions contained in the agreement and
plan of reorganization, including receipt of all necessary regulatory approvals.
Subsequent to the closing of this transaction, Chadmoore will be dissolved and
all of its remaining assets will be liquidated.
Chadmoore expects the closing of the proposed Nextel transaction to occur during
the last quarter of 2001. Even though Chadmoore and Nextel have modified the
terms of the reorganization agreement, there can be no assurances that the
modified transaction would be completed on a tax-free basis.
Due in part to the anticipation of closing the asset sale transaction with
Nextel, Chadmoore 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.
Chadmoore also began to explore opportunities to dispose of its 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, Chadmoore
will have to either attempt to obtain
13
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, Chadmoore arranged to
borrow up to an aggregate of $32.5 million from Barclays Bank PLC in order to
pay amounts due under its existing credit facility and finance its interim
operations. In the event that the Nextel reorganization agreement is terminated,
Barclays' obligation to continue advancing funds to Chadmoore will cease as of
the date of such termination, and the principal balance of the interim financing
will have to be repaid by Chadmoore on or before June 30, 2002. In conjunction
with the amendment of its credit facility with GATX, and as additional
consideration for the payment deferral, (see Note 5 - Debt) Chadmoore purchased
from Barclays Bank PLC an irrevocable standby letter of credit in the face
amount of $2.7 million in favor of GATX. To facilitate this issuance, the
agreement with Barclays was amended on June 29, 2001 to reduce the total
availability to $30.9 million. Accordingly, in the event of the termination of
the Nextel agreement, Chadmoore anticipates that the proceeds from the interim
funding will not be sufficient to satisfy its contemplated cash requirements for
more than 60 days beyond the date of such termination subject to successful
negotiation for temporary arrangements with its lenders. There can be no
assurance that Chadmoore will be able to locate such funding or that additional
financing will be available to Chadmoore when needed, on commercially reasonable
terms, or at all. In addition, given the unique nature of Chadmoore'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 Chadmoore and its
shareholders. If Chadmoore 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 Nextel transaction would have a material
adverse effect on Chadmoore and its operations. Chadmoore 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, Chadmoore
would have to seek additional capital and focus on those markets, about 95,
where full-scale service has been implemented. In addition, Chadmoore'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 Chadmoore's
contingency plans would adequately address the aforementioned risks, or that it
would ultimately attain profitability. Accordingly, Chadmoore 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets." SFAS No. 142 will be effective for
fiscal years beginning after December 15, 2001 (effective on January 1, 2002 for
Chadmoore). SFAS No. 142 requires that indefinite-lived intangible assets will
no longer be amortized but instead will be subject to periodic impairment
testing by comparing the fair values of those assets with their recorded
amounts. Chadmoore is still in the process of evaluating any financial statement
impact of the adoption of SFAS No. 142.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2001, all the Chadmoore's long term debt bears fixed interest
rates, however, the fair market value of this debt is sensitive to changes in
prevailing interest rates. Chadmoore runs the risk that market rates will
decline and the required payments will exceed those based on the current market
rate. Chadmoore does not use interest rate derivative instruments to manage its
exposure to interest rate changes.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pursuant to the Federal Communication Commission's ("FCC") general jurisdiction
over telecommunications activities, Chadmoore is involved in pending matters
before the FCC, which could result in rule changes of general applicability and
which may ultimately affect Chadmoore's operations.
Chadmoore 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
Chadmoore's consolidated financial position, results of operations or liquidity.
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
EXHIBIT
NUMBER EXHIBIT
10.1 Third Amendment to the Agreement and Plan of Reorganization by and
among Nextel Communications, Inc., Nextel Finance Company, and
Chadmoore Wireless Group, Inc. dated June 29, 2001 (incorporated by
reference to Chadmoore's Form 8-K filed on July 11, 2001).
A Form 8-K was filed by Chadmoore on July 11, 2001 regarding the agreements
listed below. No financial statements were included in the filing.
2.1 Third Amendment to the Agreement and Plan of Reorganization by and
among Nextel Communications, Inc., Nextel Finance Chadmoore, and
Chadmoore Wireless Group, Inc.
10.1 Fifth Amendment to Senior Secured Loan Agreement by and among GATX
Capital Corporation and Chadmoore Wireless Group, Inc.
10.2 First Amendment to Subordinated Credit Agreement by and among Chadmoore
Wireless Group, Inc. and Barclays Bank PLC
15
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: August 10, 2001
16