QUARTERLY REPORT UNDER SECTION 13 0R 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
______________ to _____________
Commission File Numbers 0-23232/1-14248
ARCH WIRELESS, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 31-1358569
(State of incorporation) (I.R.S. Employer Identification No.)
1800 WEST PARK DRIVE, SUITE 250
WESTBOROUGH, MASSACHUSETTS 01581
(address of principal executive offices) (Zip Code)
(508) 870-6700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 181,753,093 shares of the
Company's Common Stock ($.01 par value) and 681,497 shares of the Company's
Class B Common Stock ($.01 par value) were outstanding as of April 18, 2001.
ARCH WIRELESS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
--------------------- ----
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of March 31, 2001
and December 31, 2000 3
Consolidated Condensed Statements of Operations for the
Three Months Ended March 31, 2001 and 2000 4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 2001 and 2000 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARCH WIRELESS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
March 31, December 31,
--------- ------------
2001 2000
---- ----
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 92,268 $ 55,007
Accounts receivable, net 117,815 134,396
Inventories 2,696 2,163
Prepaid expenses and other 28,516 19,877
----------- -----------
Total current assets 241,295 211,443
----------- -----------
Property and equipment, at cost 1,444,148 1,442,072
Less accumulated depreciation and amortization (503,174) (444,650)
----------- -----------
Property and equipment, net 940,974 997,422
----------- -----------
Intangible and other assets, net 936,361 1,100,744
----------- -----------
$ 2,118,630 $ 2,309,609
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 37,640 $ 177,341
Accounts payable 64,607 55,282
Accrued restructuring 38,079 60,424
Accrued interest 39,294 39,140
Accrued expenses and other liabilities 134,543 165,459
----------- -----------
Total current liabilities 314,163 497,646
----------- -----------
Long-term debt, less current maturities 1,624,939 1,679,219
----------- -----------
Other long-term liabilities 335,114 74,509
----------- -----------
Deferred income taxes 86,494 121,994
----------- -----------
Stockholders' equity (deficit):
Preferred stock-- $.01 par value 3 3
Common stock-- $.01 par value 1,723 1,635
Additional paid-in capital 1,134,148 1,126,281
Accumulated other comprehensive income 265 (82)
Accumulated deficit (1,378,219) (1,191,596)
----------- -----------
Total stockholders' equity (deficit) (242,080) (63,759)
----------- -----------
$ 2,118,630 $ 2,309,609
=========== ===========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
ARCH WIRELESS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except share and per share amounts)
Three Months Ended
March 31,
2001 2000
---- ----
Revenues $ 327,429 $ 189,995
Cost of products sold (11,511) (8,880)
------------ ------------
315,918 181,115
------------ ------------
Operating expenses:
Service, rental, and maintenance 81,043 39,115
Selling 36,656 25,045
General and administrative 108,677 53,934
Depreciation and amortization 247,088 90,707
------------ ------------
Total operating expenses 473,464 208,801
------------ ------------
Operating income (loss) (157,546) (27,686)
Interest expense, net (63,927) (41,300)
Other expense (8,210) (1,206)
------------ ------------
Income (loss) before income tax benefit and extraordinary
item and accounting change (229,683) (70,192)
Benefit from income taxes 35,500 --
------------ ------------
Income (loss) before extraordinary item and accounting change (194,183) (70,192)
Extraordinary gain from early extinguishment of debt 14,956 7,615
Cumulative effect of accounting change (6,794) --
------------ ------------
Net income (loss) (186,021) (62,577)
Preferred stock dividend (602) (562)
------------ ------------
Net income (loss) to common stockholders $ (186,623) $ (63,139)
============ ============
Basic/diluted net income (loss) per common share
before extraordinary item and accounting change $ (1.17) $ (1.28)
Extraordinary gain per basic/diluted common share 0.09 0.14
Cumulative effect of accounting change per basic/diluted
common share (0.04) --
------------ ------------
Basic/diluted net income (loss) per common share $ (1.12) $ (1.14)
============ ============
Basic/diluted weighted average number of common shares
outstanding 167,193,881 55,316,698
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
ARCH WIRELESS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Three Months Ended
March 31,
2001 2000
---- ----
Net cash provided by operating activities $ (9,581) $ 31,915
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (25,750) (30,858)
Additions to intangible and other assets (2,757) (1,996)
Acquisition of company, net of cash acquired 174 --
--------- ---------
Net cash used for investing activities (28,333) (32,854)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 1,045 18,000
Issuance of notes payable to Nextel 250,000 --
Repayment of long-term debt (175,836) (16,000)
--------- ---------
Net cash provided by financing activities 75,209 2,000
--------- ---------
Effect of exchange rate changes on cash (34) --
--------- ---------
Net increase in cash and cash equivalents 37,261 1,061
Cash and cash equivalents, beginning of period 55,007 3,161
--------- ---------
Cash and cash equivalents, end of period $ 92,268 $ 4,222
========= =========
Supplemental disclosure:
Interest paid $ 52,922 $ 29,057
========= =========
Accretion of discount on senior notes and assumed bank debt $ 12,188 $ 9,428
========= =========
Issuance of common stock in exchange for debt $ 7,353 $ 155,623
========= =========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
5
ARCH WIRELESS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(a) Preparation of Interim Financial Statements - The consolidated
condensed financial statements of Arch Wireless, Inc. have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. The financial information included herein, other than the
consolidated condensed balance sheet as of December 31, 2000, has been prepared
by management without audit by independent accountants who do not express an
opinion thereon. The consolidated condensed balance sheet at December 31, 2000
has been derived from, but does not include all the disclosures contained in,
the audited consolidated financial statements for the year ended December 31,
2000. In the opinion of management, all of these unaudited statements include
all adjustments and accruals consisting only of normal recurring accrual
adjustments which are necessary for a fair presentation of the results of all
interim periods reported herein. These consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and accompanying notes included in Arch's Annual Report on Form 10-K
for the year ended December 31, 2000. The results of operations for the periods
presented are not necessarily indicative of the results that may be expected for
a full year.
(b) Intangible and Other Assets - Intangible and other assets, net of
accumulated amortization, are comprised of the following (in thousands):
March 31, December 31,
2001 2000
---- ----
(unaudited)
Purchased Federal Communications Commission licenses $ 414,018 $ 451,431
Purchased subscriber lists ......................... 341,181 412,015
Goodwill ........................................... 108,649 163,027
Restricted cash .................................... 39,451 35,280
Deferred financing costs ........................... 18,937 24,905
Other .............................................. 14,125 14,086
---------- ----------
$ 936,361 $1,100,744
========== ==========
(c) Divisional Reorganization - As of March 31, 2001, 1,081 former Arch and
MobileMedia employees had been terminated due to the divisional reorganization,
and the MobileMedia and PageNet integrations. The Company's restructuring
activity as of March 31, 2001 is as follows (in thousands):
Reserve Balance Utilization of
at December 31, Reserve in Remaining
2000 2001 Reserve
---- ---- -------
Severance costs .............. $ 2,957 $ 1,904 $ 1,053
Lease obligation costs ....... 10,776 1,902 8,874
Other costs .................. 162 26 136
------- ------- -------
Total ..................... $13,895 $ 3,832 $10,063
======= ======= =======
6
(d) PageNet Acquisition Reserve - As of March 31, 2001, 842 former PageNet
employees had been terminated. The Company's restructuring activity as of March
31, 2001 is as follows (in thousands):
Reserve Balance Utilization of
at December 31, Reserve in Remaining
2000 2001 Reserve
---- ---- -------
Severance costs .............. $36,767 $16,738 $20,029
Lease obligation costs ....... 9,264 1,694 7,570
Other costs .................. 500 83 417
------- ------- -------
Total ..................... $46,531 $18,515 $28,016
======= ======= =======
(e) Nextel Agreement - In January 2001, Arch agreed to sell its 900 MHz SMR
(Specialized Mobile Radio) licenses to Nextel Communications, Inc. Nextel will
acquire the licenses for an aggregate purchase price of $175 million and invest
$75 million in a new equity issue, Arch Series F 12% Redeemable Cumulative
Junior Preferred Stock. In February 2001, Nextel advanced $250 million in the
form of loans to a newly created, stand-alone Arch subsidiary that holds the
spectrum licenses until the transfers are approved. The new Arch subsidiary is
not permitted to engage in any business other than ownership and maintenance
of the spectrum licenses and will not have any liability or obligation with
respect to any of the debt obligations of Arch and its subsidiaries. Upon
transfer of the spectrum licenses to Nextel, the loan obligations will be
satisfied and $75 million of the loans will be converted into Arch series F 12%
Redeemable Cumulative Junior Preferred Stock. Arch acquired the SMR licenses as
part of its acquisition of PageNet in November 2000. In purchase accounting the
licenses were recorded at their fair value of $175.0 million and are included
the purchased Federal Communications Commission licenses balance in Note (b)
above. No gains or losses resulting from changes in the carrying amounts of
assets to be disposed of have been included in Arch's statement of operations.
No amortization has been recorded on the licenses. Revenues and operating
expenses related to the SMR operation included in the statement of operations
are immaterial.
(g) Debt Exchanged for Equity - In the first quarter of 2001, Arch issued
8,793,350 shares of Arch common stock in exchange for $26.3 million accreted
value ($26.5 million maturity value) of its senior discount notes. Arch recorded
an extraordinary gain of $15.0 million on the early extinguishment of debt as a
result of these transactions.
(h) Derivative Instruments and Hedging Activities - In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 requires that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value
and that changes in the derivative's fair value be recognized in earnings. Arch
adopted this standard effective January 1, 2001. The Company has not designated
any of the outstanding derivatives as a hedge under SFAS No. 133. The initial
application of SFAS No. 133 resulted in a $6.8 million charge, which was
reported as the cumulative effect of a change in accounting principle. This
charge represents the impact of initially recording the derivatives at fair
value as of January 1, 2001. The changes in fair value of the derivative
instruments will be recognized in other expense. The Company recorded other
expense of approximately $5.9 million related to the changes in fair value of
the derivatives during the period ended March 31, 2001.
(i) Segment Reporting - The Company has determined that it has three
reportable segments; traditional paging operations, two-way messaging operations
and international operations. Management makes operating decisions and assesses
individual performances based on the performance of these segments. The
traditional paging operations consist of the provision of paging and other
one-way wireless messaging services to Arch's U.S. customers. Two-way messaging
operations consist of the provision of two-way wireless messaging services to
Arch's U.S. customers. International operations consist of the operations of the
Company's Canadian subsidiary.
7
Each of these segments incur, and are charged, direct costs associated with
their separate operations. Common costs shared by the traditional paging and
two-way messaging operations are allocated based on the estimated utilization of
resources using various factors that attempt to mirror the true economic cost of
operating each segment.
The Company did not begin to market and sell its two-way messaging products
on a commercial scale until August 2000. The Company's Canadian subsidiary was
acquired in November 2000 in the PageNet acquisition. Prior to 2000,
substantially all of the Company's operations were traditional paging
operations. The following tables present segment financial information related
to the Company's segments for the periods indicated (in thousands):
March 31, 2001 Traditional Two-way Messaging International
-------------- Paging Operations Operations Operations Consolidated
----------------- ---------- ---------- ------------
Revenues............................... $ 305,266 $ 17,247 $ 4,916 $ 327,429
Depreciation and amortization expense.. 228,174 13,874 5,040 247,088
Operating income (loss)................ (131,673) (21,582) (4,291) (157,546)
Adjusted EBITDA(1)..................... 96,501 (7,708) 749 89,542
Total assets........................... 1,801,531 261,600 55,499 2,118,630
Capital expenditures................... 17,270 10,337 900 28,507
March 31, 2000 Traditional Two-way Messaging International
-------------- Paging Operations Operations Operations Consolidated
----------------- ---------- ---------- ------------
Revenues............................... $ 189,995 $ -- $ -- $ 189,995
Depreciation and amortization expense.. 90,707 -- -- 90,707
Operating income (loss)................ (25,065) (2,621) -- (27,686)
Adjusted EBITDA(1)..................... 65,642 (2,621) -- 63,021
Total assets........................... 1,295,468 -- -- 1,295,468
Capital expenditures................... 32,854 -- -- 32,854
(1) Adjusted earnings before interest, income taxes, depreciation and
amortization, as determined by Arch, does not reflect interest, income
taxes, depreciation and amortization, restructuring charges, equity in loss
of affiliate and extraordinary items; consequently adjusted earnings before
interest, income taxes, depreciation and amortization may not necessarily
be comparable to similarly titled data of other wireless messaging
companies. Earnings before interest, income taxes, depreciation and
amortization should not be construed as an alternative to operating income
or cash flows from operating activities as determined in accordance with
generally accepted accounting principles or as a measure of liquidity.
Amounts reflected as earnings before interest, income taxes, depreciation
and amortization or adjusted earnings before interest, income taxes,
depreciation and amortization are not necessarily available for
discretionary use as a result of restrictions imposed by the terms of
existing indebtedness or limitations imposed by applicable law upon the
payment of dividends or distributions among other things.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated or suggested by such forward-looking statements. These factors
include, without limitation, those set forth below under the caption "Factors
Affecting Future Operating Results".
RESULTS OF OPERATIONS
Revenues increased to $327.4 million, a 72.3% increase, for the three months
ended March 31, 2001 from $190.0 million for the three months ended March 31,
2000 as the number of units in service increased from 6.9 million at March 31,
2000 to 11.1 million at March 31, 2001 due to the PageNet acquisition in
November 2000. Net revenues (revenues less cost of products sold) increased to
$315.9 million, a 74.4% increase, for the three months ended March 31, 2001 from
$181.1 million for the corresponding 2000 period. Revenues and net revenues in
the periods ended March 31, 2000 and 2001 were adversely affected by (1) the
declining demand for traditional paging services and (2) subscriber
cancellations which led to a decrease of 784,000 units in service for the
quarter ended March 31, 2001. For the three months ended March 31, 2001 two-way
messaging revenues and net revenues were $17.2 million and $14.5 million,
respectively. The Company did not begin to sell its two way messaging products
on a commercial scale until August 2000.
Revenues consist primarily of recurring revenues associated with the
provision of messaging services, rental of leased units and product sales.
Product sales represented less than 10% of total revenues for the three months
ended March 31, 2001 and 2000. Arch does not differentiate between service and
rental revenues.
Arch believes the demand for traditional messaging services declined in 2000,
and will continue to decline in the following years and that future growth in
the wireless messaging industry will be attributable to two-way messaging and
information services. As a result, Arch expects to continue to experience
significant declines of units in service during 2001 as Arch's addition of
two-way messaging subscribers will likely be exceeded by its loss of traditional
messaging subscribers.
Service, rental and maintenance expenses, which consist primarily of
telephone, third party carrier fees, site rental expenses and repairs and
maintenance expenses, increased to $81.0 million, or 25.7% of net revenues, in
2001 from $39.1 million, or 21.6% of net revenues, in 2000. The increase was due
to the acquisition of PageNet in November 2000. For the three months ended March
31, 2001 and 2000, there was $11.1 million and $1.2 million, respectively, of
service, rental and maintenance expenses associated with the provision of
two-way messaging and information services.
Selling expenses increased to $36.7 million, or 11.6% of net revenues, for
the three months ended March 31, 2001 from $25.0 million, or 13.8% of net
revenues, for the corresponding 2000 period. The increase in dollar amount was
due to the acquisition of PageNet. Selling expenses related to two-way messaging
and information services were $7.2 million and $0.1 million for the three months
ended March 31, 2001 and 2000, respectively.
General and administrative expenses increased to $108.7 million, or 34.4% of
net revenues, for the three months ended March 31, 2001 from $53.9 million, or
29.8% of net revenues, in 2000. The increase was due to increased headcount,
administrative and facility costs associated with PageNet. General and
administrative expenses associated with the provision of two-way messaging and
information services were $3.9 million in the 2001 period and $1.3 million in
the 2000 period.
Depreciation and amortization expenses increased to $247.1 million in 2001
from $90.7 million in 2000. The increase in these expenses principally reflect
the acquisition of PageNet as well as incremental depreciation and amortization
expense as a result of reducing the remaining lives on messaging equipment and
certain intangible assets in the fourth quarter of 2000.
9
Operating losses were $157.5 million for the three months ended March 31,
2001 compared to $27.7 million in 2000, as a result of the factors outlined
above.
Net interest expense increased to $63.9 million for the three months ended
2001 from $41.3 million for the corresponding 2000 period. The increase was
principally attributable to an increase in Arch's outstanding debt due to the
PageNet acquisition. Interest expense for the three months ended March 31, 2000
and 2001 included approximately $9.4 million and $12.2 million, respectively, of
accretion on assumed bank debt and Arch's senior debt, the payment of which was
deferred.
Other expense increased to $8.2 million for the three months ended March 31,
2001 from $1.2 million for the three months ended March 31, 2000. In 2001, other
expense includes a $5.9 million charge resulting from the application of SFAS
No. 133. See note (h) to the Consolidated Condensed Financial Statements.
For the three months ended March 31, 2001 and 2000, Arch recognized
extraordinary gains of $15.0 million and $7.6 million, respectively, on the
retirement of debt exchanged for Arch stock.
Arch recognized an income tax benefit of $35.5 million for the three months
ended March 31, 2001. The benefit represented the tax benefit of operating
losses incurred subsequent to the acquisition of PageNet which were available to
offset deferred tax liabilities arising from the PageNet acquisition.
On January 1, 2001, Arch adopted SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized in earnings. Initial application of SFAS No. 133 resulted in a $6.8
million charge in the quarter ended march 31, 2001, which was reported as the
cumulative effect of a change in accounting principle. This charge represents
the impact of initially recording the derivatives at fair value as of January 1,
2001.
Net loss increased to $186.6 million for the three months ended March 31,
2001 from $62.6 million for the corresponding 2000 period, as a result of the
factors outlined above.
LIQUIDITY AND CAPITAL RESOURCES
Arch's business strategy requires the availability of substantial funds to
finance the expansion of existing operations, to fund capital expenditures for
messaging devices and system equipment, to service debt.
Capital Expenditures and Commitments
Arch's capital expenditures decreased from $32.9 million for the three months
ended March 31, 2000 to $28.5 million for the three months ended March 31, 2001.
These capital expenditures primarily include the purchase of wireless messaging
devices, system and transmission equipment, information systems and capitalized
financing costs. Arch generally has funded its capital expenditures with net
cash provided by operating activities and the incurrence of debt. Arch estimates
that capital expenditures for 2001 will be approximately $130 million. Arch
believes that it will have sufficient cash available from operations and the
proceeds of the Nextel transaction, as described below, to fund its capital
expenditures for the remainder of the year.
Sources of Funds
Sale of SMR Licenses
In January 2001, Arch announced an agreement with Nextel Communications, Inc.
to sell its Specialized Mobile Radio (SMR) licenses to Nextel for an aggregate
purchase price of $175 million. Concurrent with this transaction, Nextel agreed
to invest $75 million in Arch Series F 12% Redeemable Cumulative Junior
Preferred Stock.
Pursuant to these transactions, in February 2001, Nextel advanced $250
million to Arch in the form of a $175 million loan secured by a pledge of the
shares of the Arch subsidiary which owns the SMR licenses, and a $75 million
unsecured loan. Upon receipt of regulatory approvals, the SMR licenses will be
transferred to Nextel and the principal amount of the $175 million loan will be
satisfied in consideration for such transfer, and the principal amount of the
10
$75 million unsecured loan will be exchanged for shares of Arch Series F
Preferred stock. Interest payments on such loans shall be made in shares of
Series F preferred stock.
Arch used $175.2 million of the proceeds from these transactions to prepay
all required 2001 amortization payments under its senior credit facility. The
remaining $75 million of proceeds, with the exception of $5 million of escrowed
cash, is available for working capital purposes. At March 31, 2000, Arch had
approximately $92 million of cash on hand and no additional borrowing capacity
under its senior credit facility.
Arch believes that based on its current cash position and projected
requirements, it will have sufficient cash to fund operations through December
31, 2001. Arch's ability to borrow in the future will depend, in part, on its
ability to continue to increase its adjusted earnings before interest, income
taxes, depreciation and amortization.
Equity Issued in Exchange for Debt
In the first quarter of 2001, Arch issued 8,793,350 shares of Arch common
stock in exchange for $26.3 million accreted value ($26.5 million maturity
value) of its 107/8% senior discount notes. See note (g) to the consolidated
condensed financial statements.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The following important factors, among others, could cause Arch's actual
operating results to differ materially from those indicated or suggested by
forward-looking statements made in this Form 10-Q or presented elsewhere by
Arch's management from time to time.
Arch may not be able to amend the terms of, or refinance, scheduled debt
repayments. Failure to amend scheduled 2002 debt repayments could lead to
possible defaults and liquidity problems.
Arch's credit facility originated in June 1998 and was amended in conjunction
with both the MobileMedia and PageNet acquisitions. Scheduled debt repayments
between March 2002 and June 2006 were established based on expectations at the
time of these transactions. Arch may not be able to repay amounts currently
scheduled to be paid in 2002. If Arch's lenders do not agree to amend scheduled
repayments Arch may not be able to meet its repayment obligations and its
lenders could declare a default and seek immediate repayment. Such actions by
Arch's lenders would prohibit interest payments on Arch's senior notes and would
allow senior noteholders to declare a default and seek immediate repayment. Any
action that would accelerate Arch's debt obligations could result in immediate
liquidity problems.
Leverage is significant and may continue to burden Arch's operations, impair its
ability to obtain additional financing, reduce the amount of cash available for
operations and required debt repayments and make Arch more vulnerable to
financial downturns.
Arch has been highly leveraged, and remains leveraged to a substantial
degree. Arch's ratio of total debt to latest three month annualized adjusted
earnings before interest, income taxes, depreciation and amortization was 4.6 to
1 as of March 31, 2001.
Adjusted earnings before interest, income taxes, depreciation and
amortization is not a measure defined by generally accepted accounting
principles and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. Adjusted earnings before interest, income taxes,
depreciation and amortization, as determined by Arch, may not necessarily be
comparable to similarly titled data of other wireless messaging companies.
Leverage may:
o limit Arch's ability to refinance or amend the terms of its existing debt
obligations, including scheduled repayments between March 2002 and June
2006.
o impair Arch's ability to obtain additional financing necessary for working
capital, capital expenditures or other purposes on acceptable terms, if at
all.
11
o require a substantial portion of Arch's cash flow to be used to pay
interest expense; for example, interest payments will commence on
September 15, 2001 on Arch's 107/8% senior discount notes requiring
interest payments of $7.5 million on March 15 and September 15 of each
year until March 15, 2008.
Arch may not be able to reduce its financial leverage as it intends, and may
not be able to achieve an appropriate balance between growth which it considers
acceptable and future reductions in financial leverage. If Arch is not able to
achieve continued growth in adjusted earnings before interest, income taxes,
depreciation and amortization, it may not be able to amend or refinance its
existing debt obligations and it may be precluded from incurring additional
indebtedness due to cash flow coverage requirements under existing or future
debt instruments.
Restrictions under debt instruments may prevent Arch from declaring dividends,
incurring or repaying debt, making acquisitions, altering lines of business or
taking actions which its management considers beneficial.
Various debt instruments impose operating and financial restrictions on Arch.
Arch's credit facility requires various operating subsidiaries to maintain
specified financial ratios, including a maximum leverage ratio, a minimum
interest coverage ratio, a minimum debt service coverage ratio and a minimum
fixed charge coverage ratio. It also limits or restricts, among other things,
Arch's operating subsidiaries' ability to:
o declare dividends or repurchase capital stock;
o incur or pay back indebtedness; o engage in mergers, consolidations,
acquisitions and asset sales; or
o alter its lines of business or accounting methods, even though these
actions would otherwise benefit Arch.
A breach of any of these covenants could result in a default under the credit
facility and/or other debt instruments. Upon the occurrence of an event of
default, the creditors could elect to declare all amounts outstanding to be
immediately due and payable, together with accrued and unpaid interest. If Arch
were unable to repay any such amounts, the lenders could proceed against any
collateral securing the indebtedness. If the lenders under the credit facility
or other debt instruments accelerated the payment of such indebtedness, there
can be no assurance that the assets of Arch would be sufficient to repay in full
such indebtedness and other indebtedness of Arch.
Arch's common stock has been delisted from the Nasdaq National Market.
On November 13, 2000, Arch received a notice from the Nasdaq National Stock
Market that its common stock had failed to maintain a minimum bid price of $1.00
over the previous 30 consecutive trading days as required for continued listing
on the Nasdaq National Market. Effective with the opening of the market on April
30, 2001, Arch's common stock was no longer listed on the Nasdaq National Stock
Market but is eligible for quotation on the OTC Bulletin Board. Trading in
shares of Arch's common stock could decrease substantially and the market price
of its common stock may decline further.
Recent declines in Arch's units in service may continue or even accelerate; this
trend may impair Arch's financial results.
For the three months ended December 31, 2000, Arch experienced a decrease of
1,502,000 units in service; 504,000 due to subscriber cancellations and 998,000
due to definitional changes. For the three months ended March 31, 2001 Arch
experienced a further decrease of 784,000 units in service due to subscriber
cancellations. Arch believes the demand for traditional messaging services
declined in 2000 and will continue to decline in the following years and that
future growth in the wireless messaging industry will be attributable to two-way
messaging and information services. As a result, Arch expects to continue to
experience significant declines of units in service during 2001 as Arch's
addition of two-way messaging subscribers will likely be exceeded by its loss of
traditional messaging subscribers.
Cancellation of units in service can significantly affect the results of
operations of wireless messaging service providers. The sale and marketing costs
associated with attracting new subscribers are substantial compared to the costs
of providing service to existing customers. Because the wireless messaging
business is characterized by high fixed costs, cancellations directly and
adversely affect earnings before interest, income taxes, depreciation and
amortization.
12
Competition from larger telephone, cellular and PCS companies is intensifying
and may reduce Arch's revenues and adjusted earnings before interest, income
taxes, depreciation and amortization.
Wireless messaging companies like Arch, whose units in service have been
declining, increasingly compete for market share against large telephone,
cellular and PCS providers like AT&T Wireless, Cingular, MCI/WorldCom, Sprint
PCS, Verizon and Nextel. Arch will also compete with other messaging companies
that continue to offer traditional and two-way messaging services. Some
competitors possess greater financial, technical and other resources than those
available to Arch. If any of such competitors were to devote additional
resources to their wireless messaging business or focus on Arch's historical
business segments, they could secure Arch's customers and reduce demand for its
products. This could materially reduce Arch's revenues and earnings before
interest, income taxes, depreciation and amortization and have a material
adverse effect on earnings before interest, income taxes, depreciation and
amortization.
Mobile, cellular and PCS telephone companies have introduced phones and services
with substantially the same features and functions as the two-way messaging
products and services provided by Arch, and have priced such devices and
services competitively. The future growth and profitability of Arch depends on
the success of its two-way messaging services.
Arch's two-way messaging services will compete with other available mobile
wireless services, which have already demonstrated high levels of market
acceptance, including cellular, PCS and other mobile phone services. Many of
these other mobile wireless phone services now include wireless messaging as an
adjunct service or may replace send-and-receive messaging services entirely. It
is less expensive for an end user to enhance a cellular, PCS or other mobile
phone with modest data capability than to use both a mobile phone and a pager.
This is because the nationwide cellular, PCS and other mobile phone carriers
have subsidized the purchase of mobile phones more heavily and because prices
for mobile wireless services have been declining rapidly. In addition, the
availability of coverage for these services has increased, making the two types
of service and product offerings more comparable. Thus, companies other than
Arch seeking to provide wireless messaging services may be able to bring their
products to market faster or in packages of products that consumers and
businesses find more valuable than those to be provided by Arch. If this occurs,
Arch's market share will erode and financial operations will be impaired.
Arch may need additional capital to expand its business and to refinance
existing debt, which could be difficult to obtain. Failure to obtain additional
capital may preclude Arch from developing or enhancing its products, taking
advantage of future opportunities, growing its business or responding to
competitive pressures.
Arch's business strategy requires substantial funds to be available to
finance the continued development and future growth and expansion of its
operations, including the development and implementation of two-way messaging
services. Arch's future capital requirements will depend on factors that
include:
o subscriber growth;
o the type of wireless messaging devices and services demanded by customers;
o technological developments;
o competitive conditions;
o the nature and timing of Arch's strategy for developing technical
resources to provide two-way messaging services; and
o acquisition strategies and opportunities.
Revenues and operating results may fluctuate, leading to fluctuations in trading
prices and possible liquidity problems.
Arch believes that future fluctuations in its revenues and operating results
may occur due to many factors, particularly the decreased demand for traditional
messaging services and the uncertain market for two-way messaging services.
Arch's current and planned expenses and debt repayment levels, are to a large
extent, fixed in the short term, and are based in part on past expectations as
to future revenues and cash flow growth. Arch may be unable to adjust spending
13
in a timely manner to compensate for any past or future revenue or cash flow
shortfall. It is possible that, due to these fluctuations, Arch's revenue, cash
flow or operating results may not meet the expectations of securities analysts
or investors. If shortfalls were to cause Arch not to meet the financial
covenants or debt repayment schedules contained in its debt instruments, the
debtholders could declare a default and seek immediate repayment. This may have
a material adverse effect on the price of Arch's common stock and its liquidity.
Continued net losses are likely and Arch cannot predict whether it will ever be
profitable.
Arch has reported net losses in the past. Arch expects that it will continue
to report net losses and cannot give any assurance about when, if ever, it is
likely to attain profitability. Many of the factors that will determine whether
or not Arch attains profitability are inherently difficult to predict. These
include the decreased demand for traditional messaging services and the
uncertain market for two-way messaging services which compete against services
offered by telephone, cellular and PCS providers, new service developments and
technological change.
Obsolescence in company-owned units may impose additional costs on Arch.
Technological change may also adversely affect the value of the units owned
by Arch that are leased to its subscribers. If Arch's current subscribers
request more technologically advanced units, including two-way messaging
devices, Arch could incur additional inventory costs and capital expenditures if
required to replace units leased to its subscribers within a short period of
time. Such additional costs or capital expenditures could have a material
adverse effect on Arch's results of operations.
Because Arch depends on Motorola for devices and on Glenayre for other
equipment, Arch's operations may be disrupted if it is unable to obtain
equipment from them in the future.
Arch does not manufacture any of the equipment customers need to take
advantage of its services. It is dependent primarily on Motorola, Inc. to obtain
sufficient equipment inventory for new subscribers and replacement needs and on
Glenayre Electronics, Inc. for sufficient terminals and transmitters to meet its
expansion and replacement requirements. Significant delays in obtaining any of
this equipment, could lead to disruptions in operations and adverse financial
consequences. Arch's purchase agreement with Motorola for messaging devices
expires on October 1, 2001. There can be no assurance that the agreement with
Motorola for messaging devices will be renewed or, if renewed, that the renewed
agreement will be on terms and conditions as favorable to Arch as those under
the current agreement.
Arch relies on third parties to provide satellite transmission for some
aspects of its wireless messaging services. To the extent there are satellite
outages or if satellite coverage is impaired in other ways, Arch may experience
a loss of service until such time as satellite coverage is restored, which could
have a material adverse effect due to customer complaints.
Challenges involved in integrating PageNet's operations with those of Arch may
strain Arch's capacities and may prevent the combined company from achieving
intended synergies.
Arch may not be able to successfully finish integrating PageNet's operations.
The combination of the two companies will require, among other things,
coordination of administrative, sales and marketing, customer billing and
services distribution, accounting and finance functions and conversion of
information and management systems. The difficulties of such integration will
initially be increased by the need to coordinate geographically separate
organizations and to integrate personnel with disparate business backgrounds and
corporate cultures and by the fact that PageNet had previously suspended a
significant restructuring of its own operations.
The integration process could cause the disruption of the activities of the
two businesses that are being combined. Arch may not be able to retain key
employees of PageNet. The process of integrating the businesses of Arch and
PageNet may require a disproportionate amount of time and attention of Arch's
management and financial and other resources of Arch. Even if integrated in a
timely manner, there is no assurance that Arch will operate smoothly or that it
will fulfill management's objective of achieving cost reductions and synergies.
In addition to the specific risks described above, an investment in Arch is
also subject to many risks which affect all companies, or all companies in its
industry.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of the Company's long-term debt is subject to fixed rates of
interest or interest rate protection. In the event that the interest rate on the
Company's non-fixed rate debt fluctuates by 10% in either direction, Arch
believes the impact on its results of operations would be immaterial. The
Company transacts infrequently in foreign currency and therefore is not exposed
to significant foreign currency market risk.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Arch, from time to time, is involved in lawsuits arising in the normal course
of business. Arch believes that its currently pending lawsuits will not have a
material adverse effect on its financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 14, 2001, Arch issued and sold 1,015,000 shares of its Series F
12% Redeemable Cumulative Junior Preferred Stock to AWI Spectrum Co., LLC, a
newly created, indirect subsidiary of Arch, for total consideration of
$70,000,000. The Series F preferred stock was issued and sold in connection with
the transactions relating to the sale of SMR licenses to Nextel Communications,
Inc. discussed above in Item 2 of Part I of this Report under the heading
"Liquidity and Capital Resources - Sources of Funds - Sale of SMR Licenses" and
on Arch's Current Reports on Form 8-K dated January 24, 2001 and February 13,
2001, which were filed with the Securities and Exchange Commission on February
6, 2001 and February 23, 2001, respectively. The use of proceeds from the sale
of the Series F preferred stock, as well as the other proceeds from the
transactions relating to the sale of the SMR licenses to Nextel, is described
above in Item 2 of Part I of this Report, which description is hereby
incorporated herein by reference.
The holders of Series F preferred stock do not have the right to cause the
conversion of those shares into Arch's common stock. However, Arch is required
to redeem/convert all outstanding shares of Series F preferred stock on the
tenth anniversary of the date that the Series F preferred stock is issued at a
redemption/conversion price equal to the liquidation preference of the Series F
preferred stock then in effect payable in cash or, at Arch's option so long as
shares of Arch's common stock remain listed on the Nasdaq National Market or
another national securities exchange, through the issuance of shares of Arch's
common stock valued at the then prevailing market price. Additionally, shares of
Series F preferred stock are redeemable/convertible, in whole or in part, at
Arch's option at any time at a redemption/conversion price equal to the
liquidation preference then in effect payable in cash or, at Arch's option so
long as shares of Arch's common stock remain listed on the Nasdaq National
Market or another national securities exchange, through the issuance of shares
of its common stock valued at the then prevailing market price.
The offer and sale of the shares of Series F preferred stock were not
registered under the Securities Act of 1933 in reliance upon Section 4(2)
thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
Stockholder Proposals for 2002 Annual Meeting
As set forth in the Company's Proxy Statement for its 2001 Annual Meeting of
Stockholders, stockholder proposals submitted pursuant to Rule 14a-8 under the
Exchange Act for inclusion in the Company's proxy materials for its 2002 Annual
Meeting of Stockholders must be received by the Secretary of the Company at the
principal offices of the Company no later than December 11, 2001.
In addition, the Company's By-laws require that the Company be given advance
notice of stockholder nominations for election to the Company's Board of
Directors and of other matters which stockholders wish to present for action at
an annual meeting of stockholders (other than matters included in the Company's
proxy statement in accordance with Rule 14a-8). The required notice must be made
in writing and delivered or mailed to the Secretary of the Company at the
principal offices of the Company, and received not less than 80 days prior to
the 2001 Annual Meeting; provided, however, that if less than 90 days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, such nomination shall have been mailed or delivered to the
Secretary not later than the close of business on the 10th day following the
date on which the notice of the meeting was mailed or such public disclosure was
made, whichever occurs first. The 2002 Annual Meeting is currently expected to
be held on May 14, 2002. Assuming that this date does not change, in order to
comply with the time periods set forth in the Company's By-Laws, appropriate
notice would need to be provided no later than February 21, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying index to exhibits are filed as
part of this Quarterly Report on Form 10-Q.
(b) The following reports on Form 8-K were filed for the quarter for which
this report is filed:
Current Report on Form 8-K/A dated November 10, 2000 (updating PageNet
acquisition pro forma financial information) filed February 9, 2001.
Current Report on Form 8-K dated January 24, 2001 (reporting sale of SMR
licenses to Nextel) filed February 6, 2001.
Current Report on Form 8-K dated February 9, 2001 (updating description
of securities) filed February 9, 2001.
Current Report on Form 8-K dated February 13, 2001 (reporting receipt of
proceed from Nextel transaction) filed February 23, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q for the quarter ended March
31, 2001, to be signed on its behalf by the undersigned thereunto duly
authorized.
ARCH WIRELESS, INC.
Dated: May 2, 2001 By: /s/ J. Roy Pottle
------------------------------
J. Roy Pottle
Executive Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
10.1* Executive Employment Agreement between Arch Wireless, Inc, and C.
Edward Baker
10.2* Executive Employment Agreement between Arch Wireless, Inc, and J. Roy
Pottle
10.3* Form of Executive Retention Agreement
* Filed herewith
18