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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 JUNE 30, 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 AUGUST 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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1
INDEX
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2002 (unaudited) and
December 31, 2001 3
Consolidated Statements of Operations for the three and six months
ended June 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for six months ended June 30,
2002 and 2001 (unaudited) 5
Condensed Notes to Interim Consolidated Financial Statements 6-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
PLAN OF OPERATIONS 11-13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2B. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 6.- EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
(amounts in thousands, except share data)
June 30, December 31,
2002 2001
(Unaudited)
--------------- ----------------
ASSETS
Current assets:
Cash $ 59,222 $ 118
Cash-restricted 2,885 -
Accounts receivable, net 280 515
Other receivables, net 1,116 33
Inventory 22 40
Other current assets 317 43
Assets held for sale - 43,821
--------------- ----------------
Total current assets 63,842 44,570
Property and equipment, net 501 815
Intangible assets, net 183 332
Other non-current assets, net 281 2,141
--------------- ----------------
$ 64,807 $ 47,858
=============== ================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,972 $ 53,365
Accounts payable and accrued liabilities 819 6,326
Federal income taxes payable 3,926 -
Unearned revenue 41 290
Other current liabilities 10 9
--------------- ----------------
Total current liabilities 9,768 59,990
Long-term debt 1,320 2,395
--------------- ----------------
Total liabilities 11,088 62,385
Minority interests 737 1,147
Commitments and contingencies Redeemable preferred stock:
Series C, 4% cumulative, 10,119,614 shares issued and
outstanding 3,695 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 67,600 68,658
Deficit (18,359) (87,500)
--------------- ----------------
Total shareholders' equity/(deficit) 49,287 (18,796)
--------------- ----------------
Total liabilities, minority interests, redeemable
preferred stock and shareholders' equity $ 64,807 $ 47,858
=============== ================
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
2002 2001 2002 2001
_________ __________ _________ _________
Revenues:
Service revenue $197 $1.243 $ 665 $ 2,718
Equipment sales and maintenance 1 23 18 43
----------- ------------ ----------- -----------
Total revenues 198 1266 683 2761
----------- ------------ ----------- -----------
Cost of sales:
Cost of service revenue 50 553 310 1.109
Cost of equipment sales and maintenance 1 9 18 15
----------- ------------ ----------- -----------
Total cost of sales 51 562 328 1,124
----------- ------------ ----------- -----------
Gross margin 147 704 355 1,637
----------- ------------ ----------- -----------
Operating expenses:
Selling, general and administrative 1.068 1,831 8,862 3,795
Depreciation and amortization 54 599 409 1,199
----------- ------------ ----------- -----------
Total operating expenses 1,122 2,430 9,271 4,994
----------- ------------ ----------- -----------
Loss from operations ( 975) (1,726) (8,916) (3,357)
----------- ------------ ----------- -----------
Other income (expense):
Minority interest in earnings (27) (59) (59) (128)
Interest expense, net 198 (1,353) ( 327) (2,682)
Gain on sale of licenses and equipment
and other 104 ( 8) 88,833 ( 1)
----------- ------------ ----------- -----------
275 1,140 88,937 (2,811)
----------- ------------ ----------- -----------
Income (loss) before income taxes and extraordinary item (700) (3,146) 79,635 ( 6,168)
Provision for income taxes - - ( 8,931) -
----------- ------------ ----------- -----------
Income (loss) before extraordinary item (700) (3.146) 71,509 (6.168)
Loss on debt extinguishment, net of income tax benefit of $805 - - ( 1,563) -
----------- ------------ ----------- -----------
Net income (loss) (700) (3,146) 69,141 (6,168)
Redeemable preferred stock dividend and accretion (343) ( 265) ( 230) ( 427)
----------- ------------ ----------- -----------
Income (loss) applicable to common shareholders $ (1,043) $ (3,411) $ 69,911 $ (6,595)
=========== ============ =========== ===========
Income (loss) per share of Common Stock:
Income (loss) before extraordinary item $(0.01) $(0.06) $ 1.29 $ (0.12)
Loss on debt extinguishment - - $ (0.03) -
----------- ------------ ----------- -----------
Income (loss) applicable to common shareholders $(0.01) $(0.06) $ 1.26 $ (0.12)
=========== ============ =========== ===========
Income (loss) per share of Common Stock assuming dilution:
Income (loss) before extraordinary item $(0.01) $(0.06) $ 1.19 $ (0.12)
Loss on debt extinguishment: - - (0.03) -
----------- ------------ ----------- -----------
Income (loss) applicable to common shares $(0.01) $(0.06) $ 1.16 $ (0.12)
=========== ============ =========== ===========
Basic weighted average shares outstanding 56,598,408 52,935,157 54,978,738 52,935,157
=========== ============ =========== ===========
Diluted weighted average shares outstanding 59,874,286 52,935,157 59,779,982 52,935,157
=========== ============ =========== ===========
See accompanying condensed notes to unaudited interim consolidated financial
statements.
4
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2002 and 2001
(amounts in thousands)
June 30, June 30,
2002 2001
---------------- ----------------
Cash flows from operating activities:
Net income (loss) $ 69,141 $ (6,168)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Minority interest 59 128
Depreciation and amortization 409 1,199
Gain on sale of licenses and equipment (88,623) 30
Amortization of debt discount and issuance cost
364 616
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 (847) 255
Increase in restricted cash (2,885) -
Decrease in inventory 18 4
Increase in deposits and prepaids (255) -
Decrease in unearned revenues (249) (181)
Increase in federal income taxes payable 3.926 -
Decrease (increase) in accounts payable and accrued
liabilities (5,506) (170)
---------------- ----------------
Net cash used in operating activities (21,859) (4,312)
---------------- ----------------
Cash flows from investing activities:
Purchase of license options (31) (240)
Purchases of FF&E (1) (4)
Proceeds from sale of licenses and equipment 130,180 389
Termination of partnerships (518) -
Change in other assets (282) -
---------------- ----------------
Net cash provided by investing activities 129,348 145
---------------- ----------------
Cash flows from financing activities:
Exercise of warrants 59 -
Equity issuance cost (544) -
Payments of minority interests (479) (99)
Payments of long-term debt (52,871) (3,190)
Reimbursement of interest/fees on Barclays facility 2,877 -
Proceeds from issuance of long-term debt 2,573 8,708
---------------- ----------------
Net cash (used in) provided by financing activities (48,385) 5,419
---------------- ----------------
Net increase in cash 59,104 1,252
Cash at beginning of period 118 108
---------------- ----------------
Cash at end of period $ 59,222 $ 1,360
================ ================
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, 2002
NOTE 1 - BASIS OF PRESENTATION
The interim financial statements for the three and six months ended June 30,
2002 and June 30, 2001 have been prepared without review by an independent
public accountant. 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 Securities and
Exchange Commission 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 and six months ended June 30, 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 on its sale of substantially all of its
assets to Nextel Communications, Inc. ("Nextel") for $130 million in cash. The
sale resulted in a gain of about $88.6 million. Net proceeds to Chadmoore from
the sale were approximately $103 million after the payoff of the indebtedness
owing to Barclay's. Chadmoore also was required to satisfy the outstanding
indebtedness of its secured creditor, GATX Capital, in the amount of
approximately $21.6 million.
On February 22, 2002, Chadmoore filed its articles of dissolution under Colorado
law, closed its stock transfer record books, delisted its shares from the Nasdaq
over-the-counter bulletin board, and began an orderly wind-up of its business
operations. The principal initial activity of Chadmoore in the dissolution was
determining, 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. In July 2002, Chadmoore
completed the analysis of all of its liabilities, and on July 12, 2002,
Chadmoore mailed its initial distribution of cash to its shareholders of record
in the aggregate amount of $22.7 million, or about $.3323 per share. Additional
distribution payments to Chadmoore's shareholders will be made if and when
matters for which reserve amounts have been set aside are resolved thereby
allowing any excess in the reserve to be paid to shareholders. Chadmoore's
current reserve for known, contingent, and unknown liabilities is about $29.7
million. Absent any substantial unforeseen additional liabilities, the total
distribution per share over the liquidation period is expected to be at least
$.57 per share as previously disclosed in the Company's proxy statement filed in
connection with the sale of its assets to Nextel. See "Risk Factors" set forth
in 2001 10-KSB.
See "Note 4 - Management Plans" for additional discussion of the current
business status.
6
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.
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 focus by the Federal Communications Commission ("FCC") and allow the
use of certain communications frequencies. FCC licenses have a primary term of
either five or ten years and are renewable for additional five-year or ten-year
periods for a nominal FCC processing fee. 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 June 30, 2002,
$2.9 million remained held in escrow.
NOTE 4 - MANAGEMENT PLANS
Chadmoore is continuing to wind up its affairs as quickly and as efficiently as
possible in order to maximize the liquidating distributions to all shareholders.
The Company is trying to minimize the length of time necessary to resolve or
satisfy its known liabilities while also minimizing the risks to shareholders
and conserving corporate assets.
7
On May 14, 2002, with the assistance of 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. Shortly thereafter
and as discussed below under "Item 1. Legal Proceedings." Chadmoore, with
assistance of litigation counsel, established a reasonable reserve amount for
the two pending litigation matters involving ERS and Third Mobile. On July 12,
2002, Chadmoore mailed its initial distribution of cash to its shareholders of
record in the aggregate amount of $22.7 million, or about $.3323 per share. The
remaining reserve for known, contingent, and unknown liabilities is about $29.7
million. Reserve amounts remaining after the resolution of particular matters
for which reserve amounts have been established will be distributed to
shareholders as soon as practicable.
Chadmoore has recently completed the sale of two of its remaining seven partner
markets, selling its interest for $125,000 and $148,500, respectively. Chadmoore
is continuing its efforts to liquidate its interest in the other five partner
markets, and all remaining claims of Goodman/Chan licensees (about 500 license
claims) remain to be settled.
In order to reduce liquidation costs, Chadmoore's staff has been reduced to four
remaining officers who will handle all remaining liquidation issues.
NOTE 5 - DEBT
Prior to the asset sale, Chadmoore had a loan facility with GATX Capital
Corporation ("GATX'), secured by all of Chadmoore's assets. On February 8, 2002,
the loan facility was repaid in full in the aggregate amount of $21,643,507.
NOTE 6 - EQUITY TRANSACTIONS
During the first six months of 2002, 2,035,834 shares of common stock were
issued as a result of the exercise of warrants done in contemplation of the
dissolution of Chadmoore and the closing of its stock transfer pool. Warrant
prices ranged between $0.01 and $0.2375 per share.
During the first six months of 2001, Chadmoore did not have any equity
transactions.
8
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 and
the expense was amortized over twelve months, (2) the Memphis land, building and
furniture were sold with $162,000 of the proceeds being reserved into an escrow
account, (3) the general insurance premium of $36,188 was financed over nine
months with the expense being amortized over twelve months, (4) $63,172 of debt
was incurred for the purchase of FCC licenses and/or license options, (5)
$15,000 in receivables was offset against partnership interests, and (6) $1
million in additional fees were accrued as a result of the GATX amendment (see
Note 5 - Debt).
For the quarter ended June 30, 2002 and 2001, Chadmoore paid $4.2 million and
$0, respectively, for federal income taxes. During the three months ended June
30, 2002 and 2001, Chadmoore paid $0 and $1.1 million, respectively, for
interest.
NOTE 8- PURCHASE COMMITMENT
In October 1996, Chadmoore signed a purchase agreement with Motorola to purchase
about $10 million of Motorola radio communications equipment. Chadmoore did not
purchase the required amount of radio equipment and therefore recorded a
liability to reimburse Motorola for previous discounts of about $331,000. In
February 2002, Chadmoore repaid the discounts as part of its liquidation
process.
NOTE 9- RELATED PARTY TRANSACTIONS
Recovery Equity Investors II, L.P. ("Recovery") beneficially owns about 41.6% of
the shares of Chadmoore common stock on a fully diluted basis. Jeffery A. Lipkin
and Joseph J. Finn-Egan, managing partners for Recovery, served as directors of
Chadmoore until May 1, 2002 when they resigned.
On May 1, 1998, Chadmoore and Recovery had entered into a five-year advisory
agreement under which Chadmoore was required to pay an annual consulting fee of
$312,500 to Recovery, subject to certain adjustments Following the close of the
asset sale, Chadmoore paid Recovery all accrued and unpaid fees due under the
advisory agreement in the amount of about $338,500. In addition, Chadmoore
agreed to pay Recovery an additional $364,600 in fees under the advisory
agreement, plus $200,000 for legal expenses incurred by Recovery in connection
with the asset sale for work which benefited the estate.
Chadmoore also entered into a restated letter agreement with Recovery, dated as
of November 16, 2001, and amended as of December 12, 2001, 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, and two warrants held by Recovery. The warrants are
subject to complex adjustment provisions with respect to the number of shares
obtainable under the warrants and the exercise price for such shares. Pursuant
to the restated letter agreement, Chadmoore agreed that Recovery would receive
the amount of cash it would have received had it exercised one of its two
warrants by using the stated value of its shares of Series C preferred stock,
plus accrued dividends, to pay the warrant exercise price. Because the stated
value of the Series C preferred stock plus accrued and unpaid dividends was
about $4.7 million as of May 31, 2002, and the warrant exercise price as
adjusted was about $3.9 million. Recovery was paid $753,000 on July 12, 2002. In
9
addition, Chadmoore agreed to permit Recovery to exchange for cash its second
warrant for about 8.9 million shares of Chadmoore common stock at an exercise
price of $0.001 per share on a deemed net exercise basis. The cash will be equal
to the cash that Recovery would have received if it had exercised the warrant it
is exchanging on a net exercise basis and received shares of Chadmoore common
stock.
Because the asset sale did not qualify as a tax-free reorganization, Chadmoore
also agreed to pay Recovery $543,700 in cash 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 two
warrants held 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.
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. Arbitration is now pending on this matter. 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. In the interim, based upon the size
of ERS's demand, the Chadmoore's board of directors has reserved $5.65 million
for this matter. However, management currently is involved in negotiations
whereby this matter would be settled. Management remains hopeful that a
favorable settlement of this matter will be reached in the immediate future, as
the parties tentatively have agreed to settlement terms which are, at present,
being finalized in a written settlement agreement proposal. Should a settlement
be finalized and required FCC approval be obtained, Chadmoore expects to follow
up with an additional shareholder distribution of cash remaining from the
reserve held back in connection with this matter.
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 representations 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 discussions are in progress. Initial discovery has commenced in this
matter and on May 14, 2002 Chadmoore caused outside counsel to file a Motion to
Dismiss Third Mobile's complaint. At this time, the Motion remains pending
before the Court. 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. Pending the
outcome of this proceeding and based on written demands from Third Mobile,
Chadmoore has reserved $3.75 million in cash in connection with this matter.
10
NOTE 11-SUBSEQUENT EVENTS
On August 8, 2002, six months subsequent to the closing of the asset sale with
Nextel and as described in the Company's proxy statement, Chadmoore paid
stay-put cash payments to members of management and the three non-management
directors of Chadmoore. The stay-put cash payments totaled $2.9 million less
amounts withheld for tax purposes.
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 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. See the 2001 Form 10-KSB.
PLAN OF OPERATIONS FOR DISSOLUTION
Chadmoore is continuing to wind up its affairs as quickly and as efficiently as
possible in order to maximize the liquidating distributions to all shareholders.
The Company will try to minimize the length of time necessary to resolve or
satisfy its known liabilities while also minimizing the risks to shareholders
conserving corporate assets.
On May 14, 2002, with the assistance of 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. Shortly thereafter
and as discussed below under "Item 1. Legal Proceedings", Chadmoore, with
assistance of litigation counsel, established a reasonable reserve amount for
the two pending litigation matters involving ERS and Third Mobile. On July 12,
2002, Chadmoore mailed its initial distribution of cash to its shareholders of
record in the aggregate amount of $22.7 million, or about $.3323 per share. The
remaining reserve for known, contingent, and unknown liabilities is about $29.7
million. Reserve amounts remaining after the resolution of particular matters
for which reserve amounts have been established will be distributed to
shareholders as soon as practicable. See "Risk Factors" set forth in 2001
10-KSB.
Chadmoore has recently completed the sale of two of its remaining seven partner
markets, selling its interest for $125,000 and $148,500, respectively. Chadmoore
is continuing in its efforts to liquidate its interest in the other five partner
markets, and all remaining claims of Goodman/Chan licensees ( about 500 license
claims) remain to be settled.
In order to reduce liquidation costs, Chadmoore's staff has been reduced to four
remaining officers who will handle all remaining liquidation issues.
11
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 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 six months of 2002 were significantly affected by the asset sale
to Nextel as evidenced by the following discussion of operational results.
Total revenues for the second quarter of 2002 were $198,000 compared to $1.3
million for the same period in 2001, a decrease of $1.1 million or 84.6%.
Year-to-date revenues for 2002 and 2001 were $683,000 and $2.8 million,
respectively, a decrease of $2.1 million or $75.3%. Service revenues decreased
to $197,000 compared to $1.2 million, a decrease of $1 million or 83.3% for the
quarter ended June 30, 2002 compared to the same period in 2001. For the
six-month period ended June 30, 2002, service revenues were $665,000, a decrease
of $2.1 million or 75.5% when compared to service revenues of $2.7 million for
the same period in 2001. Equipment sales and maintenance revenues for the second
quarter of 2001 were $1,000 compared to $23,000 in 2001, a decrease of $22,000
or 95.7%. For the first six months of 2002 as compared to the same period in
2001, equipment sales and maintenance revenues were down $25,000 or 58.1% to
$18,000 from $43,000.
Cost of service revenues for the three months ended June 30, 2002 was $50,000
compared to $553,000 for the same period in 2001, a decrease of $503,000 or 91%.
For the six months ended June 30, 2002, these costs were $310,000 and $1.1
million, respectively, a decrease of $799,000 or 72%. Cost of equipment sales
and maintenance revenue was $1,000 for the three months ended June 30, 2002
compared to $23,000 for the same period in 2001. For the six months ended June
30, 2002 and 2001, their costs were $18,000 and $15,000, respectively, an
increase of $3,000 or 20%.
Gross margin for the second quarter of 2002 was 74.6% as compared to 55.6% for
the second quarter of 2001. For the six months ended June 30, 2002, the gross
margin was 52% compared to 59.3% for the same period in the prior year.
Selling general and administrative expenses decreased to $1.1 million for the
three months ended June 30, 2002 compared to $1.8 million for the same period in
2001, a decrease of $763,000 or 41.7%. Salaries, wages, and benefit expenses (a
component of selling, general, and administrative expenses) decreased to
$266,000 for the three months ended June 30, 2002, compared to $597,000 for the
three month ended June 30, 2001, a decrease of $331,000 or 55.4%. Excluding
salaries, wages, and benefits, other selling, general, and administrative
expenses decreased $432,000 or 65% compared to the prior year. For the six
months ended June 30, 2002, selling, general, and administrative expenses were
$8.9 million compared to $3.8 million for the same period in 2001, an increase
of $5.1 million or 134.2%. Salaries, wages and benefit expenses increased to
$5.6 million for the six months ended June 30, 2002, compared to $1.2 million
for the six months ended June 20, 2001, an increase of $4.4 million or $366.7%.
The increase in selling, general and administrative expenses and salaries,
wages, and benefit expenses are directly related to expenses, primarily
accounting and legal fees, and payment of employee revenue and termination of
employment agreements pursuant to provisions in the agreements, as a result of
the sale of assets to Nextel.
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Deprecation and amortization expenses decreased to $54,000 for the first quarter
of 2002 as compared to $599,000 or 90.1%. For the six months ended June 30,
2002, depreciation and amortization expense was $409,000 compared to $1.2
million for the same period of 2001, a decrease of $790,000 or 65.9%. The
decreases reflect the sale of substantially all of Chadmoore's assets to Nextel
in early February 2002.
For the quarter ended June 30, 2002, Chadmoore recorded interest income of
$198,000 compared to interest expense, net of interest income, of $1.4 million
for the same period in 2001, a change of $1.6 million or 114.6%. For the six
month period ended June 30, 2002, interest expense, not of interest income, was
$327,000 as compared to $2.7 million for the first six months of 2001, a
decrease of $2.4 million or 87.7%, 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 federal income tax expense of $8.9 million. 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.
For the second quarter of 2002, Chadmoore recorded a net loss of $700,000 as
compared to a net loss of $3.1 million for the same period in 2001, a decrease
of $2.4 million or 77.7%. For the six months ended June 30, 2002, net income was
$69.1 million compared to a net loss of $6.2 million for the comparable period
of 2001. Chadmoore has provided a valuation allowance to reserve against the
applicable deferred tax assets.
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 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 June 30, 2002 was $59.2 million as compared to $1.4 million
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 six months of 2002 was
$21.9 million as compared to $4.3 million for the comparable period in 2001, an
increase of $17.6 million or 409.3%. The increase in net cash used in operating
activities is primarily attributable to the gain of $88.6 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 $3.9
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 six months
ended June 30, 2002 as compared to $145,800 during the first six 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 investing
activities.
Net cash used in financing activities was $48.4 million for the first six months
of 2002 as compared to net cash provided by financing activities of $5.4 million
during the comparable period of 2001. Using proceeds from the Nextel
transaction, Chadmoore paid down its long-term debt during the first six months
of 2002 in the amount of $52.9 million as compared to $3.2 million in debt
payments during the first six months of 2001. Prior to the pay down of debt,
proceeds of $2.6 million were drawn under the Barclay's facility during the
first six months of 2002 as compared to $8.7 million for the comparable period
in 2001.
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ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2002, none of Chadmoore's long-term debt bears interest.
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.
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. Arbitration is now pending on this matter. 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. In the interim, based upon the size
of ERS's demand, the Company has reserved $5.65 million in cash for this matter.
However, management currently is involved in negotiations whereby this matter
would be settled. Management remains hopeful that a favorable settlement of this
matter will be reached in the immediate future, as the parties tentatively have
agreed to settlement terms which are, at present, being finalized in a written
settlement agreement proposal. Should settlement be finalized and required FCC
approval be obtained, Chadmoore expects to follow up the settlement with an
additional shareholder distribution of cash remaining after settlement from the
reserve held back in connection with this mater.
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 discussions are in progress. Initial discovery has commenced in this
matter and on May 14, 2002 Chadmoore caused outside counsel to file a Motion to
Dismiss Third Mobile's complaint. At this time, the Motion remains pending
before the Court. 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. Pending the
outcome of this proceeding and based on written demands from Third Mobile,
Chadmoore has reserved $3.75 million in cash in connection with this matter.
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ITEM 2. 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
NASDAQ.
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 July 17, 2002 to report that
Chadmoore has completed its initial distribution of cash to its shareholders in
the aggregate amount of $22.7 million, or $.3323 per share.
Chadmoore also filed a Current Report on Form 8-K on August 8, 2002, announcing
the effective resignation of Arthur Andersen LLP as its independent auditors as
a result of the winding-down of Andersen's business and its resultant inability
to perform audit services. The Company has yet not retained replacement
auditors.
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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
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