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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, 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 AUGUST 8, 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
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PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations for the three and six months ended June 30, 2000 and 1999 (unaudited) 4-5
Consolidated Statements of Cash Flows for six months ended June 30, 2000 and 1999 (unaudited) 6
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 14-15
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K 16
SIGNATURES 17
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2
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CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands)
June 30, December 31,
2000 1999
(Unaudited)
--------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 886 $ 5,603
Accounts receivable, net 1,430 1,090
Other receivables, net 249 266
Inventory 673 532
Other current assets 228 18
--------------- ----------------
Total current assets 3,466 7,509
Property and equipment, net 13,750 14,188
Intangible assets, net 39,141 38,816
Other non-current assets, net 1,643 1,707
--------------- ----------------
Total assets $ 58,000 $ 62,220
=============== ================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 32,595 $ 11,134
Accounts payable and accrued liabilities 3,191 2,744
Unearned revenue 1,200 813
Other current liabilities 822 71
--------------- ----------------
Total current liabilities 37,808 14,762
Long-term debt 6,992 29,288
--------------- ----------------
Total liabilities 44,800 44,050
Minority interests 665 716
Commitments and contingencies Redeemable preferred stock:
Series C, 4% cumulative, 10,119,614 shares issued and
outstanding 1,830 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 69,906 68,087
Stock subscribed - 304
Deficit (59,247) (52,485)
--------------- ----------------
Total shareholders' equity 10,705 15,947
--------------- ----------------
Total liabilities, minority interests, redeemable
preferred stock and shareholders' equity $ 58,000 $ 62,220
=============== ================
</TABLE>
See accompanying condensed notes to unaudited interim consolidated
financial statements.
3
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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 Six Months Ended
-------------------------- ------------------------
June 30 June 30 June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Service revenue $ 1,725 $ 1,222 $ 3,316 $ 2,250
Equipment sales and maintenance 232 301 419 535
--------------- --------------- ---------------- ---------------
Total revenues 1,957 1,523 3,735 2,785
--------------- --------------- ---------------- ---------------
Cost of sales:
Cost of service revenue 482 330 892 613
Cost of equipment sales
and maintenance 106 185 224 322
--------------- --------------- ---------------- ---------------
Total cost of sales 588 515 1,116 935
--------------- --------------- ---------------- ---------------
Gross margin 1,369 1,008 2,619 1,850
--------------- --------------- ---------------- ---------------
Operating expenses
Selling, general and administrative 2,845 2,452 5,680 4,766
Depreciation and amortization 554 496 1,100 940
--------------- --------------- ---------------- ---------------
Total operating expenses 3,399 2,948 6,780 5,706
--------------- --------------- ---------------- ---------------
Loss from operations (2,030) (1,940) (4,161) (3,856)
--------------- --------------- ---------------- ---------------
Other (expense):
Minority interest in earnings (58) (66) (130) (119)
Interest expense, net (1,207) (803) (2,446) (1,408)
Other (16) - (25) -
--------------- --------------- ---------------- ---------------
Net loss before extraordinary item (3,311) (2,809) (6,762) (5,383)
Extraordinary loss on early
extinguishment of debt - - - (195)
--------------- --------------- ---------------- ---------------
Net loss $ (3,311) (2,809) $ (6,762) $ (5,578)
Series B preferred stock dividend - - - (18)
Redeemable preferred stock
dividend and accretion (209) (170) (323) (249)
--------------- --------------- ---------------- ---------------
Loss applicable to common shareholders $ (3,520) $ (2,979) $ (7,085) $ (5,845)
=============== =============== ================ ===============
</TABLE>
See accompanying condensed notes to unaudited interim consolidated
financial statements.
4
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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 Six Months Ended
-------------------------- ------------------------
June 30 June 30 June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
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Basic and diluted loss per share of
Common Stock:
Loss applicable to common
shareholders before extraordinary item $ (0.07) $ (0.07) $ (0.14) $ (0.14)
Extraordinary item from early
extinguishment of debt - - - (0.00)
--------------- --------------- ---------------- ---------------
Loss applicable to common shareholders $ (0.07) $ (0.07) $ (0.14) $ (0.14)
=============== =============== ================ ===============
Basic and diluted weighted
average shares outstanding 52,547,217 44,268,397 50,496,525 42,004,759
=============== =============== ================ ===============
</TABLE>
See accompanying condensed notes to unaudited interim consolidated
financial statements.
3
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CHADMOORE WIRELESS GROUP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(amounts in thousands)
For the six months ended
------------------------
June 30, June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,762) $ (5,578)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest 130 119
Depreciation and amortization 1,100 940
Loss on extinguishment of debt - 95
Amortization of debt discount 813 851
Amortization of debt issuance costs 159 67
Options and common stock issued for services 217 -
Change in operating assets and liabilities:
Increase in accounts receivable
and other receivables (323) (324)
Increase in inventory (61) (59)
Increase in deposits and prepaids (219) (83)
Increase in unearned revenues 387 274
Increase (decrease) in accounts payable and 922 (1,357)
accrued liabilities
Increase in other current liabilities 755 4
--------------- ---------------
Net cash used in operating activities (2,882) (5,051)
--------------- ---------------
Cash flows from investing activities:
Purchase of license options (108) (114)
Purchases of property and equipment (434) (2,505)
Change in other assets (71) -
--------------- ---------------
Net cash used in investing activities (613) (2,619)
--------------- ---------------
Cash flows from financing activities:
Increase in debt issuance costs (24) (1,074)
Exercise of stock options 491 -
Distribution of minority interests (182) (41)
Payments of long-term debt (1,911) (4,067)
Proceeds from issuance of long-term debt 404 13,500
--------------- ---------------
Net cash (used in) provided by financing activities (1,222) 8,318
--------------- ---------------
Net increase (decrease) in cash (4,717) 648
Cash at beginning of period 5,603 579
--------------- ---------------
Cash at end of period $ 886 $ 1,227
=============== ===============
</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
June 30, 2000
NOTE 1 - BASIS OF PRESENTATION
The interim financial statements for the three and six month periods ended June
30, 2000 and June 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 six month periods ended June 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 entered into an Asset Acquisition Agreement ("American Agreement")
with American Wireless Network, Inc. ("American") where the Company will acquire
16 900 Mhz wide-area licenses, comprised of ten, twenty and thirty Mhz channels,
in seven Metropolitan Trading Areas ("MTA's"). Also 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 six months ended June 30, 1999 have been
restated to exclude warrants with nominal exercise prices which were not
exercisable, as follows:
7
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Three months ended Six months ended
June 30, 1999 June 30, 1999
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<S> <C> <C>
Average shares outstanding as previously reported 54,098,532 52,798,790
Loss applicable to common shareholders as
previously reported $(0.06) $(0.11)
Average shares outstanding as restated 44,268,397 42,004,759
Loss applicable to common shareholders as restated $(0.07) $(0.14)
</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 six months ended June
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 $34.3 million, $7.3 million and $18.1 million, respectively, that raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are in Note 10. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
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 taken 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 approximately $1.35
million were to commence June 30, 2000. On June 30, 2000, GATX agreed to refrain
from exercising remedies under the loan facility until July 28, 2000 as a result
of failure by the Company to make principal and interest payments due on June
30, 2000. On July 27, 2000, GATX agreed to continue to refrain from exercising
remedies under the loan facility until August 15, 2000 as a result of the
Company's inability to make principal and interest payments due on June 30,
2000.
8
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Warrants to purchase up to 1,822,500 shares of the Company's Common Stock at an
exercise price of $0.39 per share were also issued to the Lender ("GATX
Warrants"). The loan is secured by substantially all the assets of the Company.
On June 10, 1999, the Company entered into an Amendment to the GATX Facility
("Amendment"). The Amendment, among other things, delayed certain financial
covenants, extended the option period to make available funds from 120 days to
150 days and amended the collateral value to loan ratio from 2 to 1 to 1.5 to 1.
The Company also restated the exercise price of the GATX Warrants from $0.39 to
$0.01 per share of the Company's Common Stock. In connection with the Amendment,
the Company has recognized a debt discount related to the GATX Warrants of
$608,350, which represents the intrinsic value, which is not materially
different from the fair value, of the GATX Warrants on the date of the
Amendment. This discount is being amortized to interest expense using the
effective interest method over the life of the loan.
The Company has certain financial covenants related to the GATX Facility,
consisting of total indebtedness to tangible net worth ratio, current ratio,
average EBITDA for commercialized markets and adjusted tangible net worth. As of
June 30, 2000 the Company was not in compliance.
NOTE 6 - EQUITY TRANSACTIONS
During the second quarter of 2000, 23,750 shares of common stock were issued
through the exercise of employee stock options with option prices between $0.50
and $0.51 per share. Additional equity transactions are discussed in Note 7 -
Non Cash Activities.
NOTE 7 - NON CASH ACTIVITIES
During the six months ended June 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 and (5) issuance of $328,000 in debt to refinance existing debt and
accounts payable.
During the six months ended June 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 and (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.
During the three and six months ended June 30, 2000 and 1999, the Company paid
no cash for Federal income taxes. For the six months ended June 30, 2000 and
1999, the Company paid approximately $1.5 million and $174,000, respectively,
for interest.
NOTE 8 - PURCHASE COMMITMENT
In October 1996, the Company signed a purchase agreement with Motorola to
purchase approximately $10 million of Motorola radio communications equipment,
including Motorola Smartnet II trunked radio systems. Such purchase agreement
required that the equipment be purchased within 30 months of its effective date.
On March 10, 1998, the 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
9
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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 six months ended June 30, 2000 and 1999, the Company paid $52,740 and
$878,573, 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 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 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.
In order to facilitate the Nextel transaction, the Company expects to reach an
agreement with GATX to amend the GATX Facility. The Company has 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 reasonably 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 $27
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.
10
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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 six
months ended June 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 second quarter were $2.0 million compared to $1.5 million
for the same period in 1999, an increase of $0.5 million or 33.3%. Year-to-date
revenues for 2000 and 1999 were $3.7 million and $2.8 million, respectively, an
increase of $0.9 million or 32.1%. Service revenues increased to $1.7 million
compared to $1.2 million, an increase of $0.5 million or 41.7% for the quarter
ended June 30, 2000 compared to the same period in 1999. For the six month
period ended June 30, 2000, service revenues were $3.3 million, an increase of
$1.0 million or 43.5% when compared to service revenues of $2.3 million for the
same period in 1999. Equipment sales and maintenance revenue was down for the
second quarter of 2000 to $232,000 compared to $301,000 in 1999, a decrease of
$69,000 or 22.9%. For the first six months of 2000 as compared to the same
period in 1999, equipment sales and maintenance revenue was down $116,000 or
21.7% to $419,000 from $535,000.
Consistent with the Company's business plan to focus on recurring revenues by
selling its services through independent dealers supplemented by its own direct
sales force, subscribers generating revenue increased to over 47,000 units as of
June 30, 2000 as compared to approximately 34,000 subscriber units at June 30,
1999, an increase of approximately 13,000 units or 38.2%. The increase is
primarily due to full-scale implementation of service in new markets,
implementation of a direct sales force, and continued growth in existing
markets. Average pricing per subscriber unit remained comparable during both
periods.
Cost of service revenue for the three months ended June 30, 2000 was $482,000
compared to $330,000 for the same period in 1999, an increase of $152,000 or
46.1%. For the six months ended June 30, 2000, the cost of service was $892,000,
an increase of $279,000 or 45.5% when compared to the same period in 1999. The
increase is primarily attributable to additional commercial markets being
operational during the first six 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 $106,000 and $224,000, respectively, for the three and six months
ended June 30, 2000 compared to $185,000 and $322,000, respectively for the same
periods in 1999.
Gross margin for the three months ended June 30, 2000 was 70.0% as compared to
66.2% for same period in 1999. For the six month periods ended June 30, 2000 and
1999, the gross margins were 70.1% and 66.4%, respectively. The improvement in
margins for 2000 primarily reflect period over period subscriber growth in
markets established during the first quarter of 1999.
11
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Selling, general and administrative expenses increased to $2.8 million for the
three months ended June 30, 2000 compared to $2.5 million for the same period in
1999, an increase of $300,000 or 12.0%. For the six months ended June 30, 2000
these expenses were $5.7 million compared to $4.8 million in the prior year, an
increase of $0.9 million or 18.8%. Salaries, wages and benefits expense (a
component of selling, general and administrative expenses) increased to $1.2
million for the three months ended June 30, 2000, compared to $1.0 million for
the three months ended June 30, 1999, an increase of $0.2 million or 20.0%. For
the six months ended June 30, 2000, salaries, wages and benefits were $2.3
million compared to $1.9 million for the same period in 1999, an increase of
$0.4 million or 21.1%. Much of this increase is related to personnel additions
in operational areas and direct sales, made in connection with the Company's
transition from aggregating SMR spectrum to constructing, marketing and rolling
out commercial SMR service. Excluding salaries, wages and benefits, other
selling, general and administrative expenses increased to $1.6 million for the
quarter ended June 30, 2000 compared to $1.5 million for the same quarter in
1999, an increase of $0.1 million or 6.7%. For the six months ended June 30,
2000, these same expenses increased to $3.4 million compared to $2.9 million for
the same period in 1999, an increase of $0.5 million or 20.7% 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 $554,000 and $1.1 million
respectively for the three and six months ended June 30, 2000 compared to
$496,000 and $940,000, for the three and six months ended June 30, 1999. The
increase of $58,000 or 11.7% for the three months period and $160,000 or 17.0%
for the six 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 $404,000 or 50.3%, to $1.2
million for the second quarter of 2000 as compared to $803,000 for the same
period in 1999. For the six month period ended June 30, 2000 net interest
expense was $2.5 million compared to $1.4 million for the same period in 1999,
an increase of $1.1 million or 78.6%. These increases reflect the higher debt
balances associated with the GATX Facility.
During the six months ended June 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 $3.3 million for the three months ended June
30, 2000 compared to $2.8 million for the same period in 1999, an increase of
$500,000 or 17.9%. For the six months ended June 30, 2000, the net loss was $6.8
million compared to $5.6 million for the same period in the prior year, an
increase of $1.2 million or 21.4%. The 1999 net loss before extraordinary item,
which related to the extinguishment of debt, was $5.4 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 June 30, 2000 and 1999 was $0.07. For
the six month periods ended June 30, 2000 and 1999, the loss per share was
$0.14. 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 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
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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 six months of 2000 was
$2.9 million as compared to $5.1 million for the comparable period in 1999, a
decrease of $2.2 million or 43.1%. The decrease in net cash used in operating
activities consisted primarily of a $2.3 million increase accounts payable and
accrued liabilities and $0.8 million in additional current liabilities during
the first six months of 2000 as compared to the first six months of 1999,
partially offset by an increased loss of $1.2 million in 2000.
Net cash used in investing activities decreased to $613,000 during the first six
months of 2000 as compared to $2.6 million for the first six months of 1999.
Capital expenditures to fund the Company's expansion of its SMR network declined
by $2.1 million when comparing the first six months of 1999 to 2000. This was
primarily a result of the heavy capital expenditures to build SMR infrastructure
in 1999.
Net cash used in financing activities was $1.2 million for the six months ended
June 30, 2000, as compared to $8.3 million in net cash provided by financing
activities for the six months ended June 30, 1999. The 1999 activity includes
the drawdown of $13.5 million on the GATX Facility compared to $0.4 million in
2000 as well as a $2.2 million decrease in debt payments in 2000 compared to
1999 and $1.1 million in debt costs in 1999 related to GATX.
As a result of the planned transaction with Nextel, the Company anticipates
making significant changes in its business plan, whereby business activities of
the Company will be scaled back and the direct sales force 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
regard to revenues. During the pendency of this transaction, Nextel, or an
agreed upon third party, will be providing the Company with interim funding to
meet all current obligations through the closing of the transaction.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 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
Nationwide Digital Data Corp. and Metropolitan Communications Corp. among others
(collectively, "NDD/Metropolitan"), traded in the selling of SMR application
preparation and filing services, and in some instances, construction services to
the general public. Most of the purchasers in these services had minimal or no
experience in the wireless communications industry. Based on evidence that
NDD/Metropolitan had not fulfilled their construction and operation obligations
to over 4,000 applicants who had received FCC licenses through NDD/Metropolitan,
the Federal Trade Commission ("FTC") filed suit against NDD/Metropolitan in
January, 1993, in the Federal District Court for the Southern District of New
York ("District Court"). The District Court appointed Daniel R. Goodman (the
"Receiver") to preserve the assets of NDD/Metropolitan. In the course of the
Receiver's duties, he together with a licensee, Dr. Robert Chan, who had
received several FCC licenses through NDD/Metropolitan's services, filed a rule
waiver request seeking extension of the construction period for each of
approximately 4,000 SMR stations. At that time, licensees of most of the
stations included in the waiver request ("Receivership Stations") were subject
to an eight-month construction period. On May 24, 1995, the FCC granted the
request for extension. The FCC reasoned that the Receivership Stations were
subject to regulation as commercial mobile radio services stations, but had not
been granted the extended construction period previously awarded by the FCC to
all commercial mobile radio services licensees. Thus, in an effort to be
consistent in its treatment of similarly situated licensees, the FCC granted the
licensee petitioners an additional four months in which to construct and place
the Receivership Stations in operation (the "Goodman/Chan Waiver"). The
Goodman/Chan Waiver became effective upon publication in the Federal Register on
August 27, 1998. Moreover, the FCC released a list on October 9, 1998 which
purported to clarify the status of relief eligibility for licenses subject to
the August 27, 1998 decision. Subsequently the FCC also released a purported
final list of the Receivership Stations.
On the basis of a previous request for assistance to the FCC's Licensing
Division by the Company, the FCC examined and marked a list provided by the
Company. The FCC's markup indicated those stations held by the Company or
subject to management and option agreements with the Company, which the FCC
considered to be, at that time, Receivership Stations and/or stations considered
"similarly situated" and thus eligible for an extension of construction waiver.
From this communication, the Company believes that approximately 800 of the
licenses that it owns or manages are Receivership Stations or otherwise entitled
to relief as "similarly situated" licensees. For its own licenses and under the
direction of each licensee for managed stations, the Company proceeded with
timely construction of those stations which the Company reasonably believes to
be Receivership Stations or otherwise entitled to relief. The Company received
relief on approximately 150 licenses under the Goodman/Chan proceedings and from
the official communication from the FCC, the Company believes that approximately
650 licenses should be eligible for relief as "similarly situated". Initial
review of the Commission's Goodman/Chan Order indicated a potentially favorable
outcome for the Company as it pointed to a grant of relief for a significant
number of the Company's owned and/or managed licenses which were subject to the
outcome of the Goodman/Chan decision. However, on October 9, 1998 a release from
the offices of the Commercial Wireless Division of the FCC's Wireless
Telecommunication Bureau announced that because of a technicality relating to
the actual filing dates of the construction deadline waiver requests by certain
of the subject licensees, some licenses which the FCC staff earlier had stated
would be eligible for construction extension waivers due to the similarity of
circumstances between those licensees and the Goodman/Chan licensees, would not
actually be granted final construction waivers. The Commission has subsequently
begun a process of deleting certain of the Company's licenses in this category
from its official licensing database. Prior to the release of the October 9,
1998, Public Notice, the Company constructed and placed into operation certain
licenses from this category based on information received from the FCC and the
Receiver. The Company is in the process of determining which licenses have in
fact been deleted; however, due to the continuing disparity between the FCC's
lists and its subsequent treatment of such lists as well as continuing
modification of the FCC's license database, the Company is uncertain as to
which, if any, will remain deleted under the FCC's current procedures.
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In response, on November 9, 1998, Chadmoore filed a Petition for Reconsideration
at the FCC seeking reversal of the action announced in the Commercial Wireless
Division Public Notice. The Company asked that the relief be reinstated for its
impacted licenses. Moreover, on February 1, 1999, the Company, in conjunction
with other aggrieved parties, filed a petition with the United States Court of
Appeals for the District of Columbia Circuit seeking reversal of the FCC's
decision and a remand of the decision to the FCC with instructions from the
court to reinstate the licenses for which relief had been denied. Argument
before the court was held on May 4, 1999. The petitions of the Receiver and all
"similarly situated" parties were consolidated into a single briefing and
argument before the court. In an opinion issued July 15, 1999, the court
dismissed all the petitions filed by the Goodman/Chan licensees. The court noted
in its opinion that the receiver did not have standing to seek relief on behalf
of the licensees and the similarly situated parties had filed their appeal at
the FCC in an untimely manner. Thus, rather than hearing the merits underlying
the case, the judges dismissed the petitions on procedural grounds.
The dismissal of the Petitions, while a problem for the other parties before the
court, appears not to be a bar to the Company's efforts to seek relief in this
instance, but simply requires that the Company await the FCC's final action in
this matter. In reviewing the Court's opinion, the Company's Management believes
that the court has left open the possibility of a rehearing on the merits should
the FCC fail to ultimately grant relief to the Company. Thus, as Chadmoore was
the only party before the court which had timely filed such a petition,
Management believes the potential for a rehearing on the merits would be
applicable only to Chadmoore should the FCC not act affirmatively in this
matter.
On November 9, 1999 the FCC's Commercial Wireless Division Chief entered a
decision denying Chadmoore's Petition for Reconsideration. This staff level
opinion is not binding upon the Commission, and the Company has a legal right to
seek an internal FCC review through application to the Commission, as well as an
ultimate right to seek redress in the United States Court of Appeals for the
District of Columbia Circuit. Thus, on December 9, 1999 the Company filed, with
the full commission, an application for review of the staff decision. This
application remains pending at the Commission, and the Company has been seeking
assistance from decision makers in Washington D.C. in an effort to obtain
affirmative relief. However, should such efforts not prove fruitful, Management
believes the way is clear for a hearing on the merits of the case in the United
States Court of Appeals for the District of Columbia Circuit. Due to the
uncertainty surrounding both the FCC's administrative process in managing review
of this matter and the docket calendar of the court, it is not possible, at this
time, for Management to predict, with any reasonable level of reliability, a
timetable for when action on these pending matters will be concluded.
Approximately 650 of those licenses purchased by or under option and management
agreements with the Company are among those which the FCC initially has refused
to afford relief pursuant to the Commercial Wireless Division's October 9, 1998,
Public Notice. Thus, it is reasonably possible (as defined by Financial
Accounting Standard Board No.5) that the Company's owned and/or managed licenses
which are encompassed within the denial of relief pursuant to the October 9,
1998 Public Notice, could be permanently canceled by the FCC for failure to
comply with its construction requirements. If these licenses are in fact
cancelled by the FCC, it would result in the loss of licenses with a book value
of approximately $6,200,000 and the loss of certain subscribers to the Company's
services, which could result in a material adverse effect on the Company's
financial condition, results of operations and liquidity and could result in
possible fines and/or forfeitures levied by the FCC. The Company has prepared
these estimates based on the best information available at the time of this
filing. Once again, there has been no comprehensive list published by the FCC in
this matter which the Company feels it may rely upon. Therefore, the Company has
pursued the above-described litigation to clarify this matter. Based on the
preceding, no provision has been made in the accompanying consolidated financial
statements.
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 5. OTHER INFORMATION
On August 21, 2000, the Company announced that it had signed a definitive
agreement with Nextel Communications, Inc. ("Nextel") under which Nextel will
acquire, in a tax-free reorganization, substantially all of the assets used by
the Company in its wireless business. The purchase price for the assets is
expected to be approximately $160,000,000 worth of shares of Nextel stock,
subject to certain closing adjustments and limitations. The Company will retain
all assets not directly used in the operation of its wireless business,
including cash, cash equivalents, accounts receivable, inventory, testing and
other equipment, as well as certain 450 megahertz licenses and real property
located in Memphis, Tennessee. The Company will also retain all of its
liabilities other than post-closing obligations under certain site leases and
system contracts being acquired by Nextel in the transaction. Following the
completion of the sale of assets, the Company's remaining assets will be
liquidated, the Company's remaining liabilities will be paid or otherwise
provided for, and the Company will be dissolved.
The closing of the asset sale is subject to a number of conditions, including
approval of the Company's shareholders, approval by the Federal Communications
Commission, approval under the Hard-Scott-Rodino Antitrust Improvements Act and
other standard closing conditions. The closing conditions. The closing of the
sale of assets is expected to occur in the first quarter of 2001.
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
EXHIBIT
NUMBER EXHIBIT
10.1 Employment Agreement between the Company and Stephen K. Radusch
effective as of April 1, 2000. (Filed herewith)
10.2 Amended and Restated Employment Agreement between the Company and
Robert W. Moore effective July 1, 2000. (Filed herewith)
10.3 Amended and Restated Employment Agreement between the Company and Rick
D. Rhodes effective July 1, 2000. (Filed herewith)
10.4 Amended and Restated Employment Agreement between the Company and
Vincent F. Hedrick effective July 1, 2000. ( Filed herewith)
10.5 Amended and Restated Employment Agreement between the Company and
Stephen K. Radusch effective July 1, 2000. (Filed herewith)
10.6 Agreement and Plan of Reorganization by and among the Company, Nextel
Communications, Inc., and Nextel Finance Company dated August 21,
2000. (Filed herewith)
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: August 21, 2000
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