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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from______________to_______________
Commission File Number: 0-20999
CHADMOORE WIRELESS GROUP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1058165
------------------------------- --------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2875 EAST PATRICK LANE SUITE G, LAS VEGAS, NEVADA 89120
-------------------------------------------------------
(Address of principal executive offices)
(702) 740-5633
---------------------------
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
AS OF NOVEMBER 10, 2000 ISSUER HAD 45,700,172 SHARES OF COMMON STOCK, $.001 PAR
VALUE, OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [ ] No [X]
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INDEX
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations for the three and
nine months ended September 30, 2000 and 1999 4-5
(unaudited)
Consolidated Statements of Cash Flows for nine months ended September 30, 2000 and 1999 6
(unaudited)
Condensed Notes to Interim Consolidated Financial Statements 7-10
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 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K 15
SIGNATURES 16
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2
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<CAPTION>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands)
September 30, December 31,
2000 1999
(Unaudited)
--------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 239 $ 5,603
Accounts receivable, net 1,256 1,090
Other receivables, net 248 266
Inventory 750 532
Other current assets 128 18
--------------- ----------------
Total current assets 2,621 7,509
Property and equipment, net 13,392 14,188
Intangible assets, net 39,082 38,816
Other non-current assets, net 3,105 1,707
---------------
----------------
Total assets $ 58,200 $ 62,220
=============== ================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 10,895 $ 11,134
Accounts payable and accrued liabilities 4,508 2,744
Unearned revenue 1,034 813
Other current liabilities 33 71
--------------- ----------------
Total current liabilities 16,470 14,762
Long-term debt 31,957 29,288
--------------- ----------------
Total liabilities 48,427 44,050
Minority interests 706 716
Commitments and contingencies Redeemable preferred stock:
Series C, 4% cumulative, 10,119,614 shares issued and
outstanding 1,966 1,507
Shareholders' equity:
Preferred stock, $.001 par value, authorized 40,000,000 shares - -
Common stock, $.001 par value, authorized 100,000,000 shares,
45,695,172 and 40,683,118 shares issued and outstanding,
respectively 46 41
Additional paid-in capital 69,774 68,087
Stock subscribed - 304
Deficit (62,719) (52,485)
--------------- ----------------
Total shareholders' equity 7,101 15,947
--------------- ----------------
Total liabilities, redeemable preferred stock and
shareholders' equity $ 58,200 $ 62,220
=============== ================
</TABLE>
See accompanying condensed notes to unaudited interim consolidated
financial statements.
3
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<CAPTION>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(amounts in thousands, except per share data)
For the Three Months ended For the Nine Months Ended
-------------------------- -------------------------
September 30 September 30 September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Service revenue $ 1,828 $ 1,357 $ 5,145 $ 3,607
Equipment sales and maintenance 116 240 535 775
--------------- --------------- ---------------- ---------------
Total revenues 1,944 1,597 5,680 4,382
--------------- --------------- ---------------- ---------------
Cost of sales:
Cost of service revenue 492 357 1,385 970
Cost of equipment sales
and maintenance 64 124 288 446
--------------- --------------- ---------------- ---------------
Total cost of sales 556 481 1,673 1,416
--------------- --------------- ---------------- ---------------
Gross margin 1,388 1,116 4,007 2,966
--------------- --------------- ---------------- ---------------
Operating expenses:
Selling, general and administrative 3,060 2,500 8,740 7,266
Depreciation and amortization 559 514 1,659 1,454
--------------- --------------- ---------------- ---------------
Total operating expenses 3,619 3,014 10,399 8,720
--------------- --------------- ---------------- ---------------
Loss from operations (2,231) (1,898) (6,392) (5,754)
--------------- --------------- ---------------- ---------------
Other income (expense):
Minority interest in earnings (65) (60) (194) (179)
Interest expense, net (1,263) (970) (3,710) (2,378)
Other 87 - 62 -
--------------- --------------- ---------------- ---------------
Net loss before extraordinary item (3,472) (2,928) (10,234) (8,311)
Extraordinary loss on early
extinguishment of debt - - - (195)
--------------- --------------- ---------------- ---------------
Net loss (3,472) (2,928) (10,234) (8,506)
Series B preferred stock dividend - - - (18)
Redeemable preferred stock
dividend and accretion (135) (95) (459) (344)
--------------- --------------- ---------------- ---------------
Loss applicable to common shareholders $ (3,607) $ (3,023) $ (10,693) $ (8,868)
=============== =============== ================ ===============
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4
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<CAPTION>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations (continued)
(amounts in thousands, except per share data)
For the Three Months ended For the Nine Months Ended
-------------------------- -------------------------
September 30 September 30 September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
Basic and diluted loss per share of Common Stock:
<S> <C> <C> <C> <C>
Loss applicable to common
shareholders before extraordinary item $ (0.07) $ (0.07) $ (0.21) $ (0.21)
Extraordinary item from early
extinguishment of debt - - - (0.00)
--------------- --------------- ---------------- ---------------
Loss applicable to common shareholders $ (0.07) $ (0.07) $ (0.21) $ (0.21)
=============== =============== ================ ===============
Basic and diluted weighted
average shares outstanding 52,574,601 45,126,823 51,193,815 42,199,863
=============== =============== ================ ===============
</TABLE>
See accompanying condensed notes to unaudited interim consolidated
financial statements.
5
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<CAPTION>
CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(amounts in thousands)
For the nine months ended
-------------------------
September 30, September 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,234) $ (8,506)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest 194 179
Standstill agreement - 139
Depreciation and amortization 1,659 1,454
Loss on extinguishment of debt - 95
Amortization of debt discount 1,129 1,297
Amortization of debt issuance costs 279 126
Options and common stock issued for services 217 -
Change in operating assets and liabilities:
Increase in accounts receivable
and other receivables (148) (417)
Increase in inventory (138) (47)
Increase in deposits and prepaids (119) (30)
Increase in unearned revenues 221 271
Increase (decrease) in accounts payable and
accrued liabilities 2,239 (2,723)
Increase in other current liabilities - 4
--------------- ---------------
Net cash used in operating activities (4,701) (8,158)
--------------- ---------------
Cash flows from investing activities:
Purchase of license options (201) (134)
Purchases of property and equipment (520) (2,957)
Change in other assets (3) -
--------------- ---------------
Net cash used in investing activities (724) (3,091)
--------------- ---------------
Cash flows from financing activities:
Increase in debt issuance costs (1,674) (1,550)
Exercise of stock options 493 -
Distribution of minority interests (204) (74)
Payments of long-term debt (5,766) (4,946)
Proceeds from issuance of long-term debt 7,212 21,000
--------------- ---------------
Net cash (used in) provided by financing activities 61 14,430
--------------- ---------------
Net increase (decrease) in cash (5,364) 3,181
Cash at beginning of period 5,603 579
--------------- ---------------
Cash at end of period $ 239 $ 3,760
=============== ===============
</TABLE>
See Note 7 for supplemental disclosure on non-cash investing and
financing activities. See accompanying condensed notes to unaudited
interim consolidated financial statements.
6
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CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Condensed Notes to Unaudited Interim Consolidated Financial Statements
September 30, 2000
NOTE 1 - BASIS OF PRESENTATION
The interim financial statements for the three and nine month periods ended
September 30, 2000 and September 30, 1999 have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes contained in our Form
10-KSB filed for the fiscal year ended December 31, 1999.
The financial information included herein reflects all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for the fair presentation of the results of the interim periods. The
results of operations for the three and nine month periods ended September 30,
2000 are not necessarily indicative of the results to be expected for the full
year.
NOTE 2 - DESCRIPTION OF BUSINESS
Chadmoore Wireless Group, Inc., together with its subsidiaries (collectively
"Chadmoore" or the "Company"), is one of the largest holders of frequencies in
the United States in the 800 megahertz ("MHz") band for commercial specialized
mobile radio ("SMR") service. The Company's operating territory covers
approximately 55 million people in 180 markets, primarily in secondary and
tertiary cities throughout the United States ("Operating Territory"). The
Company also holds 16 wide area licenses in the 900 Mhz band, comprised of ten,
twenty and thirty Mhz channels, in seven Metropolitan Trading Areas ("MTA's").
Known as dispatch, one-to-many, or push-to-talk, Chadmoore's commercial SMR
service provides reliable, real-time voice communications for companies with
mobile workforces that have a need to frequently communicate with their entire
fleet or subgroups of their fleet.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
LOSS PER SHARE
The Company has applied the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS 128"), which establishes standards
for computing and presenting earnings per share. Basic earnings per share is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. The calculation of
diluted earnings per share includes the effect of dilutive common stock
equivalents.
Earnings per share for the three and nine months ended September 30, 1999 have
been restated to exclude warrants with nominal exercise prices which were not
exercisable, as follows:
7
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<CAPTION>
Three months ended Nine months ended
September 30, 1999 September 30, 1999
------------------------ --------------------
<S> <C> <C>
Average shares outstanding as previously reported 57,360,994 54,109,313
Loss applicable to common shareholders as
previously reported - basic and diluted $(0.05) $(0.16)
Average shares outstanding as restated 45,126,823 42,199,863
Loss applicable to common shareholders as restated $(0.07) $(0.21)
-basic and diluted
</TABLE>
REVENUE RECOGNITION
The Company recognizes revenue from radio dispatch and telephone interconnect
services based on monthly access charges per radio, plus in the case of
telephone interconnect service, revenue is recognized based on air time charges
as used. Revenue is also recognized from equipment maintenance upon acceptance
by the customer of the work completed as well as from the sale of equipment when
delivered.
INTANGIBLE ASSETS
Intangible assets consist of FCC licenses and rights to acquire FCC licenses,
which are recorded at cost and are authorized by the Federal Communications
Commission ("FCC") and allow the use of certain communications frequencies. FCC
licenses have a primary term of five or ten years and are renewable for
additional five-year or ten-year periods for a nominal FCC processing fee.
Although there can be no assurance that the licenses will be renewed, management
expects that the licenses will be renewed as they expire. FCC licenses are
amortized using the straight-line method over 20 years and FCC renewal fees are
amortized using the straight-line method over 5 years. The Company evaluates the
recoverability of FCC licenses by determining whether the unamortized balance of
this asset is expected to be recovered over its remaining life through projected
undiscounted operating cash flows.
NOTE 4 - MANAGEMENT PLANS
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the nine months ended
September 30, 2000 and for the years ended December 31, 1999 and 1998, the
Company has suffered recurring losses from operations and has a working capital
deficiency of $13.8 million, $7.3 million and $18.1 million as of September 30,
2000, December 31, 1999 and December 31, 1998, respectively, that raise
substantial doubt about the Company's ability to continue as a going concern.
On August 21, 2000, the Company signed a definitive agreement and plan of
reorganization with Nextel Communications, Inc. ("Nextel") under which Nextel
will acquire substantially all of the Company's assets in a tax-free
reorganization for approximately $160 million of Nextel's Class A common shares,
subject to certain closing adjustments and limitations. The agreement and plan
of reorganization is subject to the approval of the Company's stockholders and
the satisfaction of customary closing conditions contained in the acquisition
agreement, including receipt of all necessary regulatory approvals. The
transaction is expected to close in the first half of 2001. Subsequent to the
closing of this transaction, the Company will be dissolved and all of its
remaining assets will be liquidated.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this transaction.
8
<PAGE>
NOTE 5 - DEBT
During 1999, pursuant to a loan facility with GATX Capital Corporation ("GATX
Facility"), the Company borrowed $26.6 million from GATX Capital Corporation
("GATX"). The final draw of approximately $400,000 was funded in May, 2000.
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 $1.35 million were
to commence June 30, 2000. On June 30, 2000 and again on July 27, 2000, GATX
agreed to refrain from exercising remedies under the loan facility as a result
of the Company's inability to make principal and interest payments due on June
30, 2000. On August 25, 2000, the Company paid the June 30, 2000 principal and
interest payment as well as additional interest and fees that accrued during the
deferred payment period.
In order to facilitate the Nextel transaction, the Company reached an agreement
with GATX to amend the GATX Facility. The Company agreed to pay GATX a fee of
$1.35 million for (a) the ability to prepay the loan facility concurrent with
the close of its transaction with Nextel, (b) to receive all consents and
covenant waivers reasonable to facilitate the closing of the Nextel transaction,
(c) to grant Nextel, or a third party induced by Nextel, a second lien on all
assets to secure cash advances to the Company of up to about $32.5 million, and
(d) to have 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.
On August 31, 2000, the Company entered into a subordinated credit agreement
with Barclays Bank PLC (Barclays") to provide working capital during the
pendency of the Nextel transaction. The agreement allows the Company to borrow
up to an aggregate of $32.5 million, of which $5.2 million was provided upon
signing of the agreement. Subsequently, the Company may request no more than the
sum of $1.3 million per month, plus any fees or interest due under the terms of
the agreement. Advances under the Barclays agreement are made at an interest
rate fixed at the time of the funding based on either an adjusted base rate
equal to the greater of (a) the prime rate in effect on such day or (b) the
Federal Funds Effective Rate in effect on such day plus 1/2 of 1%, plus 3.5%, or
an adjusted LIBO Rate equal to the rate appearing in the Telerate Service or any
successor, two business days prior to funding at the rate for U.S. dollar
deposits with a maturity comparable to the interest rate period plus 4.5%.
Interest on each advance is payable in arrears on the Interest Payment Date for
each such advance. Principal and any unpaid interest are due upon completion of
the Nextel transaction or no later than June 30, 2002.
The Company is required to maintain certain financial covenants related to the
GATX and Barclays facilities. As of September 30, 2000, the Company was not in
compliance with all of the covenants, however, as previously noted, GATX has
agreed to waive all financial covenant violations. Barclays per its
subordination agreement with GATX cannot act upon the financial covenant
violations, subject to the waivers agreed to by GATX.
NOTE 6 - EQUITY TRANSACTIONS
During the third quarter of 2000, 5,000 shares of common stock were issued
through the exercise of employee stock options with an option price of $0.51 per
share. Additional equity transactions are discussed in Note 7 - Non Cash
Activities.
NOTE 7 - NON CASH ACTIVITIES
During the nine months ended September 30, 2000, the Company had the following
non-cash investing and financing activities: (1) issuance of 1,500,000 shares of
common stock for common stock subscribed that was outstanding as of December 31,
1999 in the amount of $304,650, (2) purchase of FCC licenses with debt, prior to
discount, in the amount of $444,398, (3) issuance of 2,317,679 shares of common
stock in payment of debt in the amount of $711,000 and accrued interest in the
amount of $425,000, (4) issuance of 210,000 shares of stock for services
rendered, (5) issuance of $328,000 in debt to refinance existing debt and
accounts payable and (6) preferred stock dividends and accretion of $459,000.
9
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During the nine months ended September 30, 1999, the Company had the following
non-cash investing and financing activities: (1) conversion of 20,955 shares of
Series B Preferred into 915,932 shares of common stock, (2) issuance of 76,672
shares of common stock for Series B Preferred dividends, (3) issuance of
1,871,096 shares of the Company's restricted Common Stock which represented
$916,837 of payment towards principal and interest of the New Debenture, (4) the
issuance of $139,857 of notes payable, net of discount, to exercise certain
license options and preferred stock dividends and accretion of $344,000.
During the three and nine months ended September 30, 2000 and 1999, the Company
paid no Federal income taxes. For the nine months ended September 30, 2000 and
1999, the Company paid approximately $3.3 million and $0.8 million,
respectively, in interest expense.
NOTE 8 - PURCHASE COMMITMENT
In October 1996, the Company signed a purchase agreement with Motorola to
purchase approximately $10 million of Motorola radio communications equipment,
including Motorola Smartnet II trunked radio systems. Such purchase agreement
required that the equipment be purchased within 30 months of its effective date.
On March 10, 1998, the effective period of the Motorola purchase agreement was
extended from 30 months to 42 months. As of June 30, 2000, the Company had
purchased approximately $6.5 million toward this purchase commitment. On May 4,
2000, an amendment to the purchase agreement was executed extending the
expiration date of the agreement to July 26, 2001, while increasing the
remaining amount of purchases to a minimum of $4 million.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2000 and 1999, the Company paid
approximately $53,000 and $1.4 million, respectively to Private Equity Partners
("PEP"), for professional services associated with equity and debt financings.
Mark F. Sullivan, a Director of the Company, is an owner and managing partner of
PEP.
On March 6, 2000, the Company issued 105,000 shares of the Company's Common
Stock to the Sullivan Family Trust, of which Mark F. Sullivan and his wife are
the only trustees.
On May 1, 1998, the Company and Recovery Equity Investors 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 the Company as deemed necessary by Recovery. The Company
shall pay an annual consulting fee of $312,500 beginning on May 1, 1999 which
shall be paid in advance, in equal monthly installments, reduced by the Series C
Preferred dividends paid in the preceding twelve months. Jeffrey A. Lipkin and
Joseph J. Finn-Egan, managing partners for Recovery, are Directors of the
Company.
NOTE 10 - SUBSEQUENT EVENTS
On October 24, 2000, the FCC completed the transfer of 900 MHz licenses to the
Company to complete the purchase agreement with American Wireless.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
OF OPERATION
The following is a discussion of the consolidated financial condition and
results of operations of Chadmoore Wireless Group, Inc., together with its
subsidiaries (collectively "Chadmoore" or the "Company"), for the three and nine
months ended September 30, 2000 compared to the same periods in 1999. This
discussion should be read in conjunction with the Company's annual report on
Form 10-KSB for the year ended December 31, 1999 (the "1999 Form 10-KSB").
Statements contained herein that are not historical facts are forward-looking
statements as that term is defined by the Private Securities Litigation Reform
Act of 1995. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, the forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
from those projected. The Company cautions investors that any forward-looking
statements made by the Company are not guarantees of future performance and that
actual results may differ materially from those in the forward-looking
statements. Such risks and uncertainties include, without limitation,
fluctuations in demand, loss of subscribers, the quality and price of similar or
comparable wireless communications services, well-established competitors who
have substantially greater financial resources and longer operating histories,
regulatory delays or denials, ability to complete intended market roll-out,
access to sources of capital, adverse results in pending or threatened
litigation, consequences of actions by the FCC, and general economics. See the
Company's 1999 Form 10-KSB.
RESULTS OF OPERATIONS
Total revenues for the third quarter were $1.9 million compared to $1.6 million
for the same period in 1999, an increase of $0.3 million or 18.8%. Year-to-date
revenues for 2000 and 1999 were $5.7 million and $4.4 million, respectively, an
increase of $1.3 million or 29.5%. Service revenues increased to $1.8 million
compared to $1.4 million, an increase of $0.4 million or 28.6% for the quarter
ended September 30, 2000 compared to the same period in 1999. For the nine month
period ended September 30, 2000, service revenues were $5.1 million, an increase
of $1.5 million or 41.7% when compared to service revenues of $3.6 million for
the same period in 1999. Equipment sales and maintenance revenue was down for
the third quarter of 2000 to $116,000 compared to $240,000 in 1999, a decrease
of $124,000 or 51.7%. For the first nine months of 2000 as compared to the same
period in 1999, equipment sales and maintenance revenue was down $240,000 or
31.0% to $535,000 from $775,000.
As a result of the announced merger with Nextel, subscriber units for the third
quarter have decreased from approximately 47,000 units at June 30, 2000 to
45,000 units as of September 30, 2000. Though management expects the announced
merger to result in some churn of current customers, it cannot assess at this
time what the financial impact of this change in the business plan will be with
regards to revenues.
Cost of service revenue for the three months ended September 30, 2000 was
$492,000 compared to $357,000 for the same period in 1999, an increase of
$135,000 or 37.8%. For the nine months ended September 30, 2000, the cost of
service was $1.4 million, an increase of $0.4 million or 40.0% when compared to
the same period in 1999. The increase is primarily attributable to additional
commercial markets being operational during the first nine months of 2000 as
compared to the comparable period in 1999, as well as the marginal costs
associated with increased capacity in the Company's existing markets. Cost of
equipment sales and maintenance revenue was $64,000 and $288,000, respectively,
for the three and nine months ended September 30, 2000 compared to $124,000 and
$446,000, respectively, for the same periods in 1999.
Gross margin for the three months ended September 30, 2000 was 71.4% as compared
to 69.9% for same period in 1999. For the nine month periods ended September 30,
2000 and 1999, the gross margins were 70.5% and 67.7%, respectively. The
improvement in margins for 2000 primarily reflects period over period subscriber
growth in markets established during the first quarter of 1999.
11
<PAGE>
Selling, general and administrative expenses increased to $3.1 million for the
three months ended September 30, 2000 compared to $2.5 million for the same
period in 1999, an increase of $0.6 million or 24.0%. For the nine months ended
September 30, 2000, these expenses were $8.7 million compared to $7.3 million in
the prior year, an increase of $1.4 million or 19.2%. Salaries, wages and
benefits expense (a component of selling, general and administrative expenses)
increased to $1.1 million for the three months ended September 30, 2000,
compared to $1.0 million for the three months ended September 30, 1999, an
increase of $0.1 million or 10.0%. For the nine months ended September 30, 2000,
salaries, wages and benefits were $3.5 million compared to $2.9 million for the
same period in 1999, an increase of $0.6 million or 20.7%. For the quarter,
approximately $250,000 of the increase related to additional expenses related to
the Nextel transaction. Also in anticipation of the Nextel transaction, staffing
was reduced by approximately half as of August 25th, primarily in the sales and
marketing areas. Starting September 1, 2000, those former employees will be
receiving severance over the next one- two- or three months depending on their
term of service. Much of the year to date increase was related to personnel
additions in operational areas and direct sales made in connection with the
Company's commercial SMR service. Excluding salaries, wages and benefits, other
selling, general and administrative expenses increased to $2.0 million for the
quarter ended September 30, 2000 compared to $1.5 million for the same quarter
in 1999, an increase of $0.5 million or 33.3%. For the nine months ended
September 30, 2000, these same expenses increased to $5.2 million compared to
$4.4 million for the same period in 1999, an increase of $0.8 million or 18.2%
compared to the prior year. Both increases are primarily due to increases in
advertising and marketing expenses, which corresponds to period over period
revenue growth, and travel, entertainment and communications expenses as a
result of the Company establishing its own direct sales force during the latter
part of 1999.
Depreciation and amortization expense increased to $559,000 and $1.7 million,
respectively, for the three and nine months ended September 30, 2000 compared to
$514,000 and $1.5 million for the three and nine months ended September 30,
1999. The increase of $45,000 or 8.8% for the three month period and $0.2
million or 13.3% for the nine month period, reflects additional licenses and
infrastructure equipment placed in service during the last twelve months of
operations.
Interest expense, net of interest income, increased $0.3 million or 30.0%, to
$1.3 million for the third quarter of 2000 as compared to $1.0 million for the
same period in 1999. For the nine month period ended September 30, 2000, net
interest expense was $3.7 million compared to $2.4 million for the same period
in 1999, an increase of $1.3 million or 54.2%. These increases reflect the
higher debt balances associated with the GATX Facility.
During the nine months ended September 30, 1999, the Company had an
extraordinary loss of $0.2 million, which reflected the write off of debt
issuance costs and prepayment penalties associated with the prepayment and
termination of the MarCap and Motorola debt facilities.
The Company's net loss increased to $3.6 million for the three months ended
September 30, 2000 compared to $3.0 million for the same period in 1999, an
increase of $0.6 million or 20.0%. For the nine months ended September 30, 2000,
the net loss was $10.7 million compared to $8.9 million for the same period in
the prior year, an increase of $1.8 million or 20.2%. The net loss before
extraordinary item for the nine months ended September 30, 1999, which related
to the extinguishment of debt, was $8.7 million. The increased losses were a
result of an increased subscriber system usage, additional personnel, increased
marketing and sales activities in new and existing markets and higher interest
costs associated with the GATX Facility.
Loss per share for the three months ended September 30, 2000 and 1999 was $0.07.
For the nine month periods ended September 30, 2000 and 1999, the loss per share
was $0.21. The extraordinary item in 1999 did not have an impact on the loss per
share.
LIQUIDITY AND CAPITAL RESOURCES
Historically, operating expenses and capital expenditures associated with the
development and enhancement of the Company's SMR network have more than offset
operating revenues. Operating expenses, debt service obligations and anticipated
capital expenditures continue to exceed operating revenues, and are expected to
continue to do so
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for the next several years. Accordingly, the Company's auditors have included an
explanatory paragraph in their opinion which expresses substantial doubt about
the Company's ability to continue as a going concern for the years ended
December 31, 1999 and 1998. The Company has consistently used external sources
of funds, primarily from equity issuances and debt financings, to fund
operations, capital expenditures and other non-operating needs.
Net cash used in operating activities during the first nine months of 2000 was
$4.7 million as compared to $8.2 million for the comparable period in 1999, a
decrease of $3.5 million or 42.7%. The decrease in net cash used in operating
activities consisted primarily of a $5.0 million change in accounts payable and
accrued liabilities when comparing the first nine months of 2000 to the first
nine months of 1999, partially offset by an increased loss of $1.7 million in
2000.
Net cash used in investing activities decreased to $724,000 during the first
nine months of 2000 as compared to $3.1 million for the first nine months of
1999. Capital expenditures to fund the Company's expansion of its SMR network
declined by $2.3 million when comparing the first nine months of 1999 to 2000.
This was primarily a result of the heavy capital expenditures to build SMR
infrastructure in 1999.
Net cash provided by financing activities was $61,000 for the nine months ended
September 30, 2000, as compared to $14.4 million in net cash provided by
financing activities for the nine months ended September 30, 1999. The primary
difference is $21.0 million in borrowing in 1999 compared to $7.2 million in
borrowing for 2000
As a result of the planned transaction with Nextel, the Company made significant
changes in its business plan, whereby business activities of the Company are
being scaled back and the direct sales force has been eliminated in an effort to
reduce expenses. Though management expects this change in its business plan to
result in some churn of current customers, it cannot assess at this time what
the financial impact of this change in the business plan will be with regards to
revenues. During the pendency of this transaction, Barclays will be providing
the Company with interim funding. The agreement allows the Company to borrow up
to an aggregate of $32.5 million, of which $5.2 million was provided upon
signing of the agreement. Subsequently, the Company may request no more than the
sum of $1.3 million per month, plus any fees or interest due under the terms of
the agreement. Advances under the Barclays agreement are made at an interest
rate fixed at the time of the funding based on either an adjusted base rate
equal to the greater of (a) the prime rate in effect on such day or (b) the
Federal Funds Effective Rate in effect on such day plus 1/2 of 1%, plus 3.5%, or
an adjusted LIBO Rate equal to the rate appearing in the Telerate Service or any
successor, two business days prior to funding at the rate for U.S. dollar
deposits with a maturity comparable to the interest rate period plus 4.5%.
Interest on each advance is payable in arrears on the Interest Payment Date for
each such advance. Principal and any unpaid interest are due upon completion of
the Nextel transaction or no later than June 30, 2002.
The Company believes that the funding provided by Barclays plus cash generated
by its ongoing operations will be sufficient to carry it through the completion
of the Nextel transaction.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000, all the Company's long term debt bears fixed interest
rates, however, the fair market value of this debt is sensitive to changes in
prevailing interest rates. The Company runs the risk that market rates will
decline and the required payments will exceed those based on the current market
rate. The Company does not use interest rate derivative instruments to manage
its exposure to interest rate changes.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A - GOODMAN CHAN PROCEEDINGS
As described in the Company's most recent 10-KSB filing, the Company has pending
before the Federal communications commission an application for Review of the
Commission's decision in the Goodman/Chan proceeding. Management has continued
its discussions with FCC decision makers in an effort to ascertain the
Commission's projected timetable for final action on the company's Application
for Review. However, to date, the Company has been unable to obtain from the
Commission a reliable estimate of when the commission intends to finalize action
on the Application for Review. The item remains pending at this time.
Prior to release of the FCC Goodman/Chan decision and as discussed extensively
in the company's most recent Form 10-KSB filing, the Company entered into
purchase agreements for, among others, numerous licenses held by the
"similarly-situated" entities who ultimately did not obtain construction relief
from the commission. The Company's application for Review of the Commission
decision with respect to the "similarly-situated" entities remains pending; and,
Management has been unable to obtain any firm commitment from the FCC regarding
its timetable projections with regard to finalizing a decision on the matter.
Thus, there is a possibility that should the proposed Nextel purchase of
substantially all of the Company's assets (as discussed elsewhere herein) move
forward as anticipated, the Commission may not act on the pending Application
for Review prior to the planned dissolution of the Company. Accordingly, it is
possible that the Company could face litigation or enter into settlement
discussions with some or all of the "similarly-situated" parties with whom the
Company contracted in order to dispose of potential claims by those parties. At
this time, it is not possible for Management to predict with any reasonable
degree of accuracy the ultimate outcome of this matter or to predict whether
agreements would have to be entered into with every subject licensee. It is also
not possible for the company to accurately forecast the total liability which
could arise from this matter.
Pursuant to the FCC's general jurisdiction over telecommunications activities,
the Company is involved in pending matters before the FCC, which could result in
rule changes of general applicability and which may ultimately affect the
Company's operations.
B. OTHER LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of Management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
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ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
EXHIBIT
NUMBER EXHIBIT
10.1 First Amendment to the Agreement and Plan of Reorganization by and
among Nextel Communications, Inc., Nextel Finance Company, and
Chadmoore Wireless Group, Inc. dated August 31, 2000
10.2 Subordination Agreement by and between GATX Capital Corporation, and
Barclays Bank PLC, dated September 1, 2000
10.3 Security Agreement by and among Barclays Bank PLC and Chadmoore
Wireless Group, Inc. dated August 31, 2000
10.4 Subordinated Credit Agreement by and among Barclays Bank PLC and
Chadmoore Wireless Group, Inc. dated August 31, 2000
10.5 Fourth Amendment and Waiver to Senior Secured Loan Agreement by and
among GATX Capital Corporation, Chadmoore Wireless Group, Inc.
("Chadmoore"), and the Subsidiaries of Chadmoore dated August 25, 2000
27.1 Financial Data Schedule. (Filed herewith)
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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: November 13, 2000
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