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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, 2002
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 MAY 13, 2002 ISSUER HAD 47,736,006 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, 2002 (unaudited) and December 31, 2001 4
Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 (unaudited) 5
Consolidated Statements of Cash Flows for three months ended March 31, 2002 and 2001 (unaudited) 6
Condensed Notes to Interim Consolidated Financial Statements 7-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS 15-17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2B. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
SIGNATURES 19
2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Management of Chadmoore Wireless Group, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Chadmoore Wireless Group, Inc., a Colorado corporation, as of March 31, 2002,
and the related condensed consolidated statements of operations and cash flows
for the three-month period then ended. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established by American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
May 15, 2002
3
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001
(amounts in thousands, except share data)
March 31, December 31,
2002 2001
(Unaudited)
--------------- ----------------
ASSETS
Current assets:
Cash $ 63,933 $ 118
Cash-restricted 2,885 -
Accounts receivable, net 246 515
Other receivables, net 1,904 33
Inventory 23 40
Other current assets 389 43
Assets held for sale - 43,821
--------------- ----------------
Total current assets 69,380 44,570
Property and equipment, net 564 815
Intangible assets, net 186 332
Other non-current assets, net 305 2,141
--------------- ----------------
$ 70,435 $ 47,858
=============== ================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,945 $ 53,365
Accounts payable and accrued liabilities 1,486 6,326
Federal income taxes payable 8,126 -
Unearned revenue 51 290
Other current liabilities 20 9
--------------- ----------------
Total current liabilities 14,628 59,990
Long-term debt 1,415 2,395
--------------- ----------------
Total liabilities 16,043 62,385
Minority interests 710 1,147
Commitments and contingencies Redeemable preferred stock:
Series C, 4% cumulative, 10,119,614 shares issued and
outstanding 3,352 3,122
Shareholders' equity/(deficit):
Preferred stock, $.001 par value, authorized 40,000,000 shares - -
Common stock, $.001 par value, authorized 100,000,000 shares,
47,736,006 and 45,700,172 shares issued and outstanding,
respectively 46 46
Additional paid-in capital 67,943 68,658
Deficit (17,659) (87,500)
--------------- ----------------
Total shareholders' equity/(deficit) 50,330 (18,796)
--------------- ----------------
Total liabilities, minority interests, redeemable
preferred stock and shareholders' equity (deficit) $ 70,435 $ 47,858
=============== ================
See accompanying condensed notes to unaudited interim consolidated financial
statements.
4
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
For the Three Months Ended March 31, 2002 and 2001
(amounts in thousands, except share and per share data)
March 31, March 31,
2002 2001
--------------- ----------------
Revenues:
Service revenue $ 468 $ 1,475
Equipment sales and maintenance 17 20
--------------- ----------------
Total revenues 485 1,495
--------------- ----------------
Cost of sales:
Cost of service revenue 260 556
Cost of equipment sales and maintenance 17 7
--------------- ----------------
Total cost of sales 277 563
--------------- ----------------
Gross margin 208 932
--------------- ----------------
Operating expenses:
Selling, general and administrative 7,794 1,963
Depreciation and amortization 355 600
--------------- ----------------
Total operating expenses 8,149 2,563
--------------- ----------------
Loss from operations (7,941) (1,631)
--------------- ----------------
Other income (expense):
Minority interest in earnings (32) (70)
Interest expense, net (525) (1,329)
Gain on sale of licenses and equipment and other 88,833 7
--------------- ----------------
88,276 (1,392)
--------------- ----------------
Income (loss) before income taxes and extraordinary item 80,335 ( 3,023)
Provision for income taxes (8,931) -
--------------- ----------------
Income (loss) before extraordinary item 71,404 (3,023)
Loss on debt extinguishment, net of income tax benefit of $805 (1,563) -
--------------- ----------------
Net income (loss) 69,841 (3,023)
Redeemable preferred stock dividend and accretion (230) (162)
--------------- ----------------
Income (loss) applicable to common shareholders $ 69,611 $ (3,185)
=============== ================
Income (loss) per share of Common Stock:
Income (loss) before extraordinary item $ 1.28 $ (0.06)
Loss on debt extinguishment (.03) -
--------------- ----------------
Income (loss) applicable to common shareholders $ 1.25 $ (0.06)
=============== ================
Income (loss) per share of Common Stock assuming dilution:
Income (loss) before extraordinary item $ 1.19 $ (0.06)
Loss on debt extinguishment: (.03) -
--------------- ----------------
Income (loss) applicable to common shares $ 1.16 $ (0.06)
=============== ================
Basic weighted average shares outstanding 55,500,081 52,935,157
=============== ================
Diluted weighted average shares outstanding 59,824,500 52,935,157
=============== ================
See accompanying condensed notes to unaudited interim consolidated financial
statements.
5
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2002 and 2001
(amounts in thousands)
March 31, March 31,
2002 2001
--------------- ---------------
Cash flows from operating activities:
Net income (loss) $ 69,841 $ (3,023)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Minority interest 32 70
Depreciation and amortization 355 600
Gain on sale of licenses and equipment (88,626) 30
Amortization of debt discount and issuance cost 247 315
Gain on settlement of litigation 220 -
Loss on extinguishment of debt 2,369 -
Change in operating assets and liabilities:
Increase (decrease) in accounts receivable
And other receivables (1,601) 52
Increase in restricted cash (2,885) -
Decrease in inventory 16 -
Increase in deposits and prepaids (345) (33)
Decrease in unearned revenues (239) (61)
Increase in federal income taxes payable 8,126 -
Decrease (increase) in accounts payable and
accrued liabilities (4,840) 199
--------------- ---------------
Net cash used in operating activities (17,330) (1,851)
--------------- ---------------
Cash flows from investing activities:
Purchase of license options (31) (162)
Purchases of FF&E (1) (4)
Proceeds from sale of licenses and equipment 130,170 202
Termination of partnerships (508) -
Change in other assets (285) -
--------------- ---------------
Net cash provided by investing activities 129,345 36
--------------- ---------------
Cash flows from financing activities:
Exercise of warrants 59 -
Equity issuance cost (544) -
Payments of minority interests (479) -
Payments of long-term debt (52,686) (2,399)
Reimbursement of interest and fees on Barclays bank facility 2,877 -
Proceeds from issuance of long-term debt 2,573 4,377
--------------- ---------------
Net cash (used in) provided by financing activities (48,200) 1,978
--------------- ---------------
Net increase in cash 63,815 163
Cash at beginning of period 118 108
--------------- ---------------
Cash at end of period $ 63,933 $ 271
=============== ===============
See Note 7 for supplemental disclosure on non-cash investing and financing
activities.
See accompanying condensed notes to unaudited interim consolidated financial
statements.
6
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Condensed Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2002
NOTE 1 - BASIS OF PRESENTATION
The interim financial statements for the three-month periods ended March 31,
2002 and March 31, 2001 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, 2001.
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, 2002 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - DESCRIPTION OF BUSINESS
On February 8, 2002, Chadmoore closed its sale of substantially all of its
assets to Nextel Communications, Inc. ("Nextel") for $130 million in cash,
resulting in a gain on sale of about $88.8 million. Net proceeds to Chadmoore
were approximately $103 million after the payoff of Barclays debt.
On January 28, 2002, holders of Chadmoore common stock approved the asset sale
to Nextel, the dissolution of Chadmoore and a plan of liquidation. On February
22, 2002, Chadmoore filed its articles of dissolution, closed its stock transfer
record books, de-listed its shares from the over-the-counter bulletin board and
has begun an orderly wind-up of its business operations. After making a required
distributuion to GATX Capital of about $21.5 million, Chadmoore will determine,
with assistance of its tax and litigation counsel, the amount of assets
reasonably sufficient under Colorado law to be set aside to cover all known,
contingent, unliquidated and unknown claims of creditors, including the
estimated expenses of the dissolution and liquidation. Chadmoore expects to
immediately make an initial distribution to shareholders of record once it has
completed this analysis. Any payment after that time will occur, if at all, when
the Chadmoore board of directors determines that additional assets may be
distributed in accordance with Colorado law to satisfy claims of creditors
during the five-year liquidation period. Thereafter, remaining assets, if any,
will be distributed to equity holders of Chadmoore.
See "Note 4 - Management Plans" for additional discussion of the current
business status.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
GAIN (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.
7
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.
INTANGIBLE ASSETS
Intangible assets consist of 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.
CASH RESTRICTED
In order to motivate and incentivize some members of Chadmoore's management and
some non-management directors of Chadmoore to work towards the completion of the
asset sale and to manage the subsequent dissolution and liquidation of
Chadmoore, Chadmoore cancelled some outstanding options held by such persons, in
lieu of which Chadmoore determined to make cash payments upon the closing of the
asset sale in the aggregate amount of about $3.0 million. The stay-put cash
payments are being held in escrow until the earlier of a recipient's termination
without cause and six months following the closing, but subject to forfeiture in
the event the recipient voluntarily leaves Chadmoore or is terminated for cause
within six months after the closing date of the asset sale. As of March 31,
2002, $2.9 million remained held in escrow.
NOTE 4 - MANAGEMENT PLANS
Chadmoore shall wind up the Company's affairs as quickly and as efficiently as
possible in order that the interests of all shareholders will be served. The
Company will try to minimize the length of time necessary to satisfy its known
liabilities while also minimizing the risks to shareholders and conserving
corporate assets.
Chadmoore will determine the amount of known claims and creditors and the amount
needed by the Company to ensure payment of any contingent, unliquidated or
unknown claims and establish a reserve in such amount Chadmoore will distribute
the cash in excess of the above amount to shareholders.
In the first year following the closing of the asset sale, Chadmoore will try to
settle or dispute all contingent or unliquidated claims. Such activity will
include, among other things, the settlement of all remaining partner market
claims and, where necessary, the related prosecution of license assignment
applications through the FCC. Additionally, all remaining claims of Goodman/Chan
licensees (approximately 500 license claims) will be settled. Further, any
outstanding tower site claims will be settled during this period. All the
retained FCC related assets will remain in Chadmoore. Every effort will be made
to effectuate the resolution and transfer out of Chadmoore of all FCC related
assets prior to the final dissolution of Chadmoore.
Chadmoore will retain sufficient staff resources to ensure that negotiations for
settlement of all claims occur in a prompt and technically proficient manner.
This will require retention of sufficient legal, financial, technical and
administrative personnel to ensure timely and successful claims settlement. Of
particular concern are partnership market/license disposal issues, settlement of
the remaining tower site contract issues, and the Goodman/Chan claims.
8
On May 14, 2002, with the assistance of its auditors and tax counsel, Chadmoore
completed its analysis of its usable historical net operating losses and its
federal and state tax liabilities as a result of the cash sale of its assets. As
discussed below under "Item 1. Legal Proceedings," Chadmoore is currently
attempting to establish a reasonable reserve amount for the two pending
litigation matters involving ERS and Third Mobile. Once a reserve amount is
established in both matters, either through mutual agreement or by direction of
the arbitrator and/or court, Chadmoore will make an initial liquidating
distribution to its shareholders. Chadmoore is hopeful that reserve amounts will
be established in the ERS and Third Mobile matters in the very near future, but
due to the fact that Chadmoore is not solely in control of the litigation
process, it cannot specify an exact date upon which the reserves will be set.
Chadmoore anticipates that the initial distribution to shareholders will follow
as promptly as possible after the reserve issues are settled.
9
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. The remaining balance was drawn in May 2000. 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. 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 approxiamtely $1.35 million were to
commence June 30, 2000. Chadmoore negotiated with GATX to defer the first
payment until August 25, 2000. All payments were current on the GATX Facility as
of December 31, 2001.
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 the 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.
In order to facilitate the Nextel transaction, Chadmoore reached an agreement
with GATX to amend the GATX Facility during 2000. 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 December 31, 2001, Chadmoore was not in
compliance with all of the covenants, however, as previously noted, GATX 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. GATX drew against
the letter of credit on December 31, 2001 prior to the close of the Nextel
transaciton on February 8, 2002 at which time the balance of the loan was repaid
in full.
On December 13, 2001, Chadmoore and GATX Capital agreed to defer payment of the
$1 million fee and the $1.35 million principal due on or about December 31, 2001
to the earlier of the closing date of the asset sale or February 15, 2002, and
that GATX Capital would draw on the $2.7 million letter of credit from Barclays
Bank in favor of GATX Capital to satisfy the principal payments due on or about
June 30, 2001 and September 30, 2001. In addition, Chadmoore agreed to pay GATX
Capital, when due, the $606,280 interest payment due on or about December 31,
2001. Chadmoore also agreed to pay GATX Capital an additional fee of $100,000.
10
NOTE 6 - EQUITY TRANSACTIONS
During the first quarter of 2002, 2,035,834 shares of common stock were issued
through the exercise of warrants with warrant prices between $0.01 and $0.2375
per share.
During the first quarter of 2001, Chadmoore did not have any equity
transactions.
NOTE 7 - NON CASH ACTIVITIES
During the three months ended March 31, 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 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 quarters ended March 31, 2002 and 2001, the Company paid no cash for
Federal income taxes. For the three months ended March 31, 2002 and 2001, the
Company paid $0.8 million and $1.1 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, 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.
Chadmoore did not purchase the additional $4.0 million of radio communications
equipment before July 26, 2001 and had recorded a liability to reimburse
Motorola for previous discounts of approximately $331,000. In February, 2002,
Chadmoore repaid the discounts as part of its liquidation process.
NOTE 9- RELATED PARTY TRANSACTIONS
On May 1, 1998, Chadmoore and Recovery Equity Investors II, L.P. ("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 former Directors of
Chadmoore. They resigned their board seats on May 1, 2002.
Letter Agreement with Recovery Equity Investors II
Chadmoore entered into a restated letter agreement, dated as of November 16,
2001, amended as of December 12, 2002, with Recovery, an affiliate of Chadmoore.
Recovery beneficially owns approximately 41.6% of the shares of Chadmoore common
stock on a fully diluted basis. In order to secure Recovery's voting support of
the asset sale and to resolve various issues arising out of the Investment
Agreement, dated as of May 1, 1998, between Chadmoore and Recovery:
o Chadmoore agreed that Recovery, the sole holder of Chadmoore series C
preferred stock, would receive in
11
exchange for its shares of series C preferred stock, all accrued and
unpaid dividends on those shares and one of its two warrants, the number
of shares of Nextel common stock or cash it would have received had it
exercised in full the warrant it is exchanging by using a portion of the
stated value of the series C preferred stock to pay the warrant exercise
price, plus the remaining stated value of the Chadmoore series C preferred
stock and the amount of all accrued and unpaid dividends.
Because the stated value of the shares of Chadmoore series C preferred
stock plus accrued and unpaid dividends as of March 31, 2002 will be
approximately $4.6 million, and the exercise price of the warrant is about
$3.9 million, Recovery will be entitled to approximately $722,000.
o In addition, Chadmoore has agreed to permit Recovery to exchange its
second warrant allowing it to purchase up to approximately 9.8 million
shares of Chadmoore common stock at an exercise price of $0.001 per share
on a deemed net exercise basis directly for cash. The cash will be equal
to the cash that Recovery would have received if it had exercised the
warrant it is exchanging in full on a net exercise basis and received
shares of Chadmoore common stock.
Because the number of shares issuable pursuant to the two warrants
described above, as well as the aggregate exercise price of each of the
warrants, is to be as agreed to by Chadmoore and Recovery prior to the
distribution to shareholders (based on the estimated total proceeds to
distributed to the shareholders), it is impossible to determine
definitively the value that Recovery will receive pursuant to these
warrants.
Because the asset sale does not qualify as a tax-free reorganization, Recovery
was entitled to receive $543,700 in cash from Chadmoore immediately following
the closing as a "make-whole" payment for its consent to the deemed net exercise
of all outstanding options to acquire shares of Chadmoore common stock and the
resulting reduction in shares of Chadmoore common stock issuable under the
warrants to acquire shares of Chadmoore common stock held by Recovery.
Following the closing of the asset sale, Chadmoore paid Recovery all accrued and
unpaid fees due under the Advisory Agreement, dated as of May 1, 1998, between
Chadmoore and Recovery, in the amount of about $338,500. In addition, Chadmoore
has agreed to pay Recovery an additional $364,600 in fees under the advisory
agreement plus $200,000 for legal expenses incurred on the asset sale by
Recovery.
NOTE 10- LEGAL PROCEEDINGS
Pursuant to the FCC's jurisdiction over telecommunications activities, Chadmoore
remains involved in limited pending matters before the FCC, which may ultimately
affect Chadmoore's operations. More specifically, Chadmoore continues to hold a
limited number of licenses for operation in the 800Mhz band; and, the Company
will continue to take all actions before the FCC deemed necessary to ensure the
continuing validity of these licenses.
On October 16, 2001, some holders of licenses cancelled by the Federal
Communications Commission pursuant to the Goodman/Chan decision filed suit
against Chadmoore in the United States District Court for the Southern District
of New York. This group of ten licensees demanded through their complaint
payment from Chadmoore in the amount of $1,430,180 for payment on promissory
notes and punitive damages. On March 13, 2002, the parties reached a full
settlement of claims in this matter wherein Chadmoore paid the licensee group a
lump sum of $180,000 in exchange for dismissal of the suit by the plaintiffs and
a full release from any and all liabilities and claims asserted by the ten
licensees.
In October, 2001, Chadmoore received a demand for arbitration from Emergency
Radio Services, Inc. ("ERS") with respect to a breach of a contract claim. In
its demand for arbitration, ERS argued that an agreement executed between ERS
and Chadmoore in 1997 entitled it to certain radio channels in Fort Wayne,
Indiana. Chadmoore attempted to reach a settlement in this matter. However, no
settlement has been reached and no further settlement discussions are scheduled.
Thus, arbitration is pending on this matter and it is expected that discovery
will
12
commence in the near future. The Company cannot predict the exact timetable for
resolution of this matter at this time, nor can it forecast the actual outcome
of this matter. However based on management's review of the complaint and
conferences with outside counsel regarding this matter, the Company believes
that it is not probable a substantial adverse impact on the Company will result.
A complaint was filed by Third Mobile Ltd., a Texas limited liability company
and shareholder of Chadmoore, naming Chadmoore as defendant, on December 13,
2001 in the United States District Court for the District of Nevada. The
complaint was served on Chadmoore on January 31, 2002. The complaint seeks
monetary damages relating to certain oral misrepresentations Robert Moore or
other Chadmoore representatives allegedly made to Third Mobile around January
1995 that induced Third Mobile to invest $700,000 in Chadmoore Communications,
Inc. Chadmoore believes the complaint is without substantive merit, and is also
likely barred by the applicable statue of limitations since it related to events
that took place seven years ago in January and February of 1995. Chadmoore has
filed its first response in this matter with the District Court; and, no
settlement discussion are in progress. Initial discovery has commenced in this
matter and on May 14, 2002 Chadmoore caused outside counsel to filed a Motion to
Dismiss Third Mobile's complaint. Chadmoore cannot forecast the actual outcome
of this matter, however based on management's review of the complaint and
conferences with outside counsel regarding this item, the Company believes that
it is not probable a substantial adverse impact on the Company will result.
The Company has been advised by Third Mobile that, in the event the Company
attempts to make a distribution to its shareholders without reserving, in the
opinion of Third Mobile, an amount adequate to cover its claim against the
Company, Third Mobile would seek to enjoin any such distribution until an
adequate reserve amount was established. Likewise, ERS has notified the Company
of its demand that an adequate reserve be set. However, the Company's request
that ERS document its suggested reserve amount and its rationale for its
suggested reserve amount has not been answered. The Company is continuing its
efforts to reach agreement with each of ERS and Third Mobile on a reasonable
reserve amount. In the event the Company cannot reach such agreement by no later
than May 20, 2002, it intends to apply to the arbitrator in the ERS matter, and
to participate in an anticipated hearing in the District Court in the Third
Mobile matter, to establish on an expedited basis a reasonable reserve amount so
that Chadmoore can proceed with its initial distribution to shareholders.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
OF OPERATION
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", "planned",
"future", and "believes" and include statements regarding Chadmoore's
dissolution and liquidation. Although 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 cuations 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. See the 2001 Form 10-KSB.
PLAN OF OPERATIONS FOR DISSOLUTION
Chadmoore shall wind up the Company's affairs as quickly and as efficiently as
possible in order that the interests of all shareholders will be served. The
Company will try to minimize the length of time necessary to satisfy its known
liabilities while also minimizing the risks to shareholders and conserving
corporate assets.
Chadmoore is in the process of determining the amount of known claims and
creditors and the amount needed by the Company to ensure payment of any
contingent, unliquidated or unknown claims and establish a reserve in such
amount. Chadmoore will distribute the cash in excess of the above amount to
shareholders.
In the first year following the closing of the asset sale, Chadmoore will try to
settle or dispute all contingent or unliquidated claims. Such activity will
include, among other things, the settlement of all remaining partner market
claims and, where necessary, the related prosecution of license assignment
applications through the FCC. Additionally, all remaining claims of Goodman/Chan
licensees (approximately 600 license claims) will be settled. Further, any
outstanding tower site claims will be settled during this period. All the
retained FCC related assets will remain in Chadmoore. Every effort will be made
to effectuate the resolution and transfer out of Chadmoore of all FCC related
assets prior to the final dissolution of Chadmoore.
Chadmoore will retain sufficient staff resources to ensure that negotiations for
settlement of all claims occur in a prompt and technically proficient manner.
This will require retention of sufficient legal, financial, technical and
administrative personnel to ensure timely and successful claims settlements. Of
particular concern are partnership market/license disposal issues, settlement of
the remaining tower site contract site issues, and the Goodman/Chan claims.
On May 14, 2002, with the assistance of its auditors and tax counsel, Chadmoore
completed its analysis of its usable historical net operating losses and its
federal and state tax liabilities as a result of the cash sale of its assets. As
discussed below under "Item 1. Legal Proceedings," Chadmoore is currently
attempting to establish a reasonable reserve amount for the two pending
litigation matters involving ERS and Third Mobile. Once a reserve amount is
established in both matters, either through mutual agreement or by direction of
the arbitrator and/or court, Chadmoore will make an initial liquidating
distribution to its shareholders. Chadmoore is hopeful that reserve amounts will
be established in the ERS and Third Mobile matters in the very near future, but
due to the fact that Chadmoore is not solely in control of the litigation
process, it cannot specify an exact date upon which the reserves will be set.
Chadmoore anticipates that the initial distribution to shareholders will follow
as promptly as possible after the reserve issues are settled.
14
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2001
On February 8, 2002, Chadmoore closed its sale of substantially all of its
assets to Nextel Communications, Inc. ("Nextel") for $130 million in cash,
resulting in a gain of about $88.6 million. As a result, Chadmoore ceased
operations, except for those limited markets where it has partnership agreements
still in effect, and has moved forward on the plan of dissolution. Operations
for the first quarter of 2002 were significantly affected by the asset sale to
Nextel as evidenced by the following discussion of operational results.
Total revenues for the first quarter of 2002 were $485,000 compared to $1.5
million for the same period in 2001, a decrease of $1.0 million or 67.6%.
Service revenues decreased to $468,000 compared to $1.5 million, a decrease of
$1.0 million or 68.3% for the quarter ended March 31, 2002 compared to the same
period of 2001. Equipment sales and maintenance was $17,000 for the first
quarter of 2002 as compared to $20,000 for the comparable period of 2001, a
decrease of $3,000 or 15%.
Cost of service revenue for the three months ended March 31, 2002 was $260,000
compared to $556,000 for the same period in 2001, a decrease of $296,000, or
53.2%. Cost of equipment sales and maintenance revenue was $17,000 for the three
months ended March 31, 2002 compared to $7,000 for the same period in 2001, an
increase of $10,000 or 142.9%.
Gross margin for the first quarter of 2002 was 42.9% as compared to 62.3% for
the comparable period of 2001.
Selling, general and administrative expenses increased to $7.8 million for the
three months ended March 31, 2002 compared to $2.0 million for the same period
in 2001, an increase of $5.8 million or 297.0%. Salaries, wages and benefits
expense (a component of selling, general and administrative expenses) increased
to $5.4 million for the three months ended March 31, 2002, compared to $616,000
for the three months ended March 31, 2001, an increase of $4.8 million or
771.4%. This increase is directly attributable to payment of employee severance
and termination of employment agreements pursuant to provisions in the
agreements, as a result of the sale of assets to Nextel. Excluding salaries,
wages and benefits, other selling, general and administrative expenses for the
three months ended March 31, 2002 increased by $1.1 million or 80.2% as compared
to the same period of 2001. The increase is directly related to expenses,
primarily accounting and legal fees, associated with the closing of the Nextel
transaction.
Depreciation and amortization expenses decreased to $355,000 for the first
quarter of 2002, as compared to $600,000 in the first quarter of 2001, a
decrease of $245,000 or 40.8%, as a result of the sale of substantially all of
Chadmoore's assets to Nextel in early February, 2002.
Interest expense, net of interest income, decreased $804,000 or 60.5% to
$525,000 for the first quarter of 2002, as compared to $1.3 million for the same
period in 2001, reflecting the payoff of the GATX and Barclays Bank facilities
upon the close of the Nextel transaction in early February, 2002.
Primarily, as a result of completing the Nextel transaction, Chadmoore recorded
a gain of $88.6 million and a provision for federal income taxes of $8.9 million
during the first quarter of 2002. In addition, Chadmoore recorded an
extraordinary loss of $2.4 million resulting from the early extinguishment of
the GATX facility during the first quarter of 2002.
Based on the foregoing, Chadmoore recorded net income of $69.8 million for the
first quarter of 2002, as compared to a net loss of $3 million for the same
period of 2001. Chadmoore has provided a valuation allowance to reserve against
the applicable deferred tax assets.
15
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. 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. For the year ended December 31,
2001, Chadmoore's auditors have included an explanatory paragraph in their
opinion which notes that Chadmoore sold substantially all of its assets, filed
articles of dissolution, and commenced an orderly liquidation of the business in
2002.
Available cash as of March 31, 2002 was $63.9 million as compared to $118,000
for the comparable period in 2001, as a result of the sale of licenses and
assets to Nextel.
Net cash used in operating activities during the first quarter of 2002 was $17.3
million as compared to $1.9 million for the comparable period in 2001, an
increase of $15.4 million or 836.3%. The increase in net cash used in operating
activities is primarily attributable to the gain of $88.7 million recognized on
the sale of licenses and equipment to Nextel, which was partially offset by $2.4
million in losses associated with the extinguishment of debt and the $8.1
million in federal income taxes payable as compared to the comparable period in
2001.
Net cash provided by investing activities was $129.3 million for the three
months ended March 31, 2002 as compared to $36,000 during the first three months
of 2001. The sale of licenses and equipment to Nextel provided proceeds to
Chadmoore of $130 million, accounting for the increase in net cash provided by
in investing activities.
Net cash used in financing activities was $48.2 million for the first quarter of
2002 as compared to net cash provided by financing activities of $2.0 million
during the first quarter of 2001. Using proceeds from the Nextel transaction,
Chadmoore paid down its long-term debt during the first quarter of 2002 in the
amount of $52.7 million as compared to $2.4 million in debt payments during the
first quarter of 2001. Prior to the paydown of debt, proceeds of $2.6 million
were drawn under the Barclay's facility during the first quarter of 2002 as
compared to $4.4 million for the comparable period in 2001.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2002, none of Chadmoore's long-term debt bears interest.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pursuant to the FCC's jurisdiction over telecommunications activities, Chadmoore
remains involved in limited pending matters before the FCC, which may ultimately
affect Chadmoore's operations. More specifically, Chadmoore continues to hold a
limited number of licenses for operation in the 800Mhz band; and, the Company
will continue to take all actions before the FCC deemed necessary to ensure the
continuing validity of these licenses.
On October 16, 2001, some holders of licenses cancelled by the Federal
Communications Commission pursuant to the Goodman/Chan decision filed suit
against Chadmoore in the United States District Court for the Southern District
of New York. This group of ten licensees demanded through their complaint
payment from Chadmoore in the amount of $1,430,180 for payment on promissory
notes and punitive damages. On March 13, 2002, the parties reached a full
settlement of claims in this matter wherein Chadmoore paid the licensee group a
lump sum of $180,000 in exchange for dismissal of the suit by the plaintiffs and
a full release from any and all liabilities and claims asserted by the ten
licensees.
In October, 2001, Chadmoore received a demand for arbitration from Emergency
Radio Services, Inc. ("ERS") with respect to a breach of a contract claim. In
its demand for arbitration, ERS argued that an agreement executed between ERS
and Chadmoore in 1997 entitled it to certain radio channels in Fort Wayne,
Indiana. Chadmoore attempted to reach a settlement in this matter. However, no
settlement has been reached and no further settlement discussions are scheduled.
Thus, arbitration is pending on this matter and it is expected that discovery
will commence in the near future. The Company cannot predict the exact timetable
for resolution of this matter at this time, nor can it forecast the actual
outcome of this matter. However based on management's review of the complaint
and conferences with outside counsel regarding this matter, the Company believes
that it is not probable a substantial adverse impact on the Company will result.
A complaint was filed by Third Mobile Ltd., a Texas limited liability company
and shareholder of Chadmoore, naming Chadmoore as defendant, on December 13,
2001 in the United States District Court for the District of Nevada. The
complaint was served on Chadmoore on January 31, 2002. The complaint seeks
monetary damages relating to certain oral misrepresentations Robert Moore or
other Chadmoore representatives allegedly made to Third Mobile around January
1995 that induced Third Mobile to invest $700,000 in Chadmoore Communications,
Inc. Chadmoore believes the complaint is without substantive merit, and is also
likely barred by the applicable statue of limitations since it related to events
that took place seven years ago in January and February of 1995. Chadmoore has
filed its first response in this matter with the District Court; and, no
settlement discussion are in progress. Initial discovery has commenced in this
matter and on May 14, 2002 Chadmoore caused outside counsel to filed a Motion to
Dismiss Third Mobile's complaint. Chadmoore cannot forecast the actual outcome
of this matter, however based on management's review of the complaint and
conferences with outside counsel regarding this item, the Company believes that
it is not probable a substantial adverse impact on the Company will result.
The Company has been advised by Third Mobile that, in the event the Company
attempts to make a distribution to its shareholders without reserving, in the
opinion of Third Mobile, an amount adequate to cover its claim against the
Company, Third Mobile would seek to enjoin any such distribution until an
adequate reserve amount was established. Likewise, ERS has notified the Company
of its demand that an adequate reserve be set. However, the Company's request
that ERS document its suggested reserve amount and its rationale for its
suggested reserve amount has not been answered. The Company is continuing its
efforts to reach agreement with each of ERS and Third Mobile on a reasonable
reserve amount. In the event the Company cannot reach such agreement by no later
than May 20, 2002, it intends to apply to the arbitrator in the ERS matter, and
to participate in an anticipated hearing in the District Court in the Third
Mobile matter, to establish on an expedited basis a reasonable reserve amount so
that Chadmoore can proceed with its initial distribution to shareholders.
17
ITEM 2B. CHANGES IN SECURITES AND USE OF PROCEEDS
In connection with the filing of its Articles of Dissolution on February 22,
2002, Chadmoore instructed its transfer agent to close Chadmoore's share
transfer records and to no longer recognize or record any transfers of shares of
Chadmoore's common stock. In addition, Chadmoore delisted its share from the
Over-the-Counter Bulletin Board.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
At a Special Meeting of Shareholders held on January 28, 2002, the following
proposals were adopted by the margins indicated below. There were 45,700,172
shares of common stock entitled to vote at the meeting and a total of 27,259,516
shares were present in person or by proxy.
1. Approval of the Agreement and Plan of Reorganization among
Nextel Communications, Inc., Nextel Finance Company, and Chadmoore.
Shares
In Favor Withheld Abstained
------- ------- --------
26,253,377 841,644 164,495
2. Approval of Chadmoore's dissolution and Plan of Liquidation.
Shares
In Favor Withheld Abstained
------- ------- --------
25,997,491 994,534 266,991
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) None
(b) Reports on Form 8-K.
Chadmoore filed a Current Report on Form 8-K on February 25, 2002, to report the
closing of its asset sale to Nextel and the filing of its Articles of
Dissolution.
Chadmoore also filed a Current Report on Form 8-K on April 11, 2002, setting
forth in Item 5 a press release dated April 9, 2002, announcing that Chadmoore
was continuing with its analysis of the appropriate reserve amounts required
under Colorado law for all claims and liabilities against Chadmoore.
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, 2002
19