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 September 30, 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: 182,434,590 shares of the
Company's Common Stock ($.01 par value) were outstanding as of November 8, 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 September 30, 2001
and December 31, 2000 3
Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 2001 and 2000 4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARCH WIRELESS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
2001 2000
---- ----
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 47,489 $ 55,007
Accounts receivable, net 110,705 134,396
Inventories 3,132 2,163
Prepaid expenses and other 41,021 19,877
----------- -----------
Total current assets 202,347 211,443
----------- -----------
Property and equipment, at cost 1,488,349 1,442,072
Less accumulated depreciation and amortization (1,045,722) (444,650)
----------- -----------
Property and equipment, net 442,627 997,422
----------- -----------
Intangible and other assets, net 51,475 1,100,744
----------- -----------
$ 696,449 $ 2,309,609
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 1,662,805 $ 177,341
Accounts payable 41,023 55,282
Accrued restructuring 30,792 60,424
Accrued interest 73,447 39,140
Accrued expenses and other liabilities 170,571 165,459
----------- -----------
Total current liabilities 1,978,638 497,646
----------- -----------
Long-term debt -- 1,679,219
----------- -----------
Other long-term liabilities 63,410 74,509
----------- -----------
Deferred income taxes 3,494 121,994
----------- -----------
Redeemable convertible preferred stock 117,511 30,505
----------- -----------
Stockholders' equity (deficit):
Common stock-- $.01 par value 1,824 1,635
Additional paid-in capital 1,107,233 1,095,779
Accumulated other comprehensive income 1,566 (82)
Accumulated deficit (2,577,227) (1,191,596)
----------- -----------
Total stockholders' equity (deficit) (1,466,604) (94,264)
----------- -----------
$ 696,449 $ 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 Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 281,298 $ 184,192 $ 912,126 $ 562,039
Cost of products sold (9,584) (8,636) (32,215) (25,897)
----------- ----------- ----------- -----------
271,714 175,556 879,911 536,142
----------- ----------- ----------- -----------
Operating expenses:
Service, rental, and maintenance 76,085 38,750 233,632 115,704
Selling 35,638 24,388 111,262 73,766
General and administrative 96,972 53,644 304,174 162,940
Depreciation and amortization 68,591 85,772 1,536,565 266,361
Other operating expense 7,455 -- 7,455 --
----------- ----------- ----------- -----------
Total operating expenses 284,741 202,554 2,193,088 618,771
----------- ----------- ----------- -----------
Operating income (loss) (13,027) (26,998) (1,313,177) (82,629)
Interest expense, net (65,935) (36,635) (182,520) (113,334)
Other expense (14,270) (269) (30,799) (2,279)
----------- ----------- ----------- -----------
Income (loss) before income tax benefit,
extraordinary item and accounting change (93,232) (63,902) (1,526,496) (198,242)
Benefit from income taxes 500 -- 118,500 --
----------- ----------- ----------- -----------
Income (loss) before extraordinary item and
accounting change (92,732) (63,902) (1,407,996) (198,242)
Extraordinary gain from early extinguishment of debt -- -- 34,229 52,051
Cumulative effect of accounting change -- -- (6,794) --
----------- ----------- ----------- -----------
Net income (loss) (92,732) (63,902) (1,380,561) (146,191)
Accretion of redeemable preferred stock -- (1,755) -- (3,016)
Preferred stock dividend (3,039) (591) (5,070) (1,726)
----------- ----------- ----------- -----------
Net income (loss) to common stockholders $ (95,771) $ (66,248) $(1,385,631) $ (150,933)
=========== =========== =========== ===========
Basic/diluted net income (loss) per common share
before extraordinary charge and accounting change $ (0.52) $ (1.00) $ (7.98) $ (3.25)
Extraordinary item per basic/diluted common share .. -- -- 0.19 0.83
Cumulative effect of accounting change per
basic/diluted common share -- -- (0.04) --
----------- ----------- ----------- -----------
Basic/diluted net income (loss) per common share $ (0.52) $ (1.00) $ (7.83) $ (2.42)
=========== =========== =========== ===========
Basic/diluted weighted average number of common
shares outstanding 182,434,590 66,078,808 177,073,779 62,410,164
=========== =========== =========== ===========
Cost of products sold and operating expenses listed above are stated exclusive
of depreciation and amortization expense which is shown separately.
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)
Nine Months Ended
September 30,
2001 2000
---- ----
Net cash (used for) provided by operating activities $ 12,935 $ 75,034
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (96,488) (105,052)
Additions to intangible and other assets (3,540) (4,537)
Net proceeds from sale of FCC licenses 175,000 --
Acquisition of company, net of cash acquired 104 --
--------- ---------
Net cash provided by (used for) investing activities 75,076 (109,589)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 7,921 93,000
Repayment of long-term debt (178,111) (58,000)
Net proceeds from sale of preferred stock 75,000 --
Net proceeds from sale of common stock -- 354
--------- ---------
Net cash (used for) provided by financing activities (95,190) 35,354
--------- ---------
Effect of exchange rate changes on cash (339) --
--------- ---------
Net (decrease) increase in cash and cash equivalents (7,518) 799
Cash and cash equivalents, beginning of period 55,007 3,161
--------- ---------
Cash and cash equivalents, end of period $ 47,489 $ 3,960
========= =========
Supplemental disclosure:
Interest paid $ 113,906 $ 89,865
Accretion of discount on senior notes and assumed bank debt $ 30,303 $ 19,234
Issuance of common stock in exchange for debt $ 11,643 $ 155,637
Issuance of preferred stock in exchange for debt $ 6,936 $ 42,692
Accretion of redeemable preferred stock $ -- $ 3,016
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/A 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.
Risks and Other Important Factors--Arch sustained net losses of $206.1
million, $285.6 million and $309.8 million for the years ended December 31,
1998, 1999 and 2000, respectively and net losses of $1.4 billion in the nine
months ended September 30, 2001. Arch's loss from operations for the nine months
ended September 30, 2001 was $1.3 billion which includes an impairment charge of
$976.2 million on certain long-lived assets (see Note (b) below). In addition,
at September 30, 2001, Arch had an accumulated deficit of approximately $2.6
billion and a deficit in working capital of $1.77 billion, including $1.66
billion of debt classified as current liabilities due to Arch's default under
substantially all of its indebtedness (see Note (c) below). The impairment
charge will result in lower depreciation and amortization expenses in future
periods which will decrease Arch's losses from operations and net losses in the
future. Arch cannot predict whether or when its operations will become
profitable.
Arch's ability to continue as a going concern is dependent upon its ability
to restructure its existing debt such that interest expense is substantially
reduced. In July 2001, Arch announced the withdrawal of its previously announced
proposal to restructure its outstanding debt and the withdrawal of its previous
financial projections, primarily due to lower than expected operating results in
the second quarter of 2001. The lower than anticipated operating results will
negatively impact future operating results and projected year-end liquidity and
made the previously proposed restructuring infeasible. On November 9, 2001,
certain holders of 12 3/4% senior notes of Arch Wireless Communications, Inc.
("AWCI"), a wholly-owned subsidiary of Arch, commenced an involuntary proceeding
under Chapter 11 of the U.S. Bankruptcy code against AWCI. AWCI has until
December 10, 2001 to respond to this involuntary proceeding, and is currently
evaluating its legal options. Arch will also consider the implications of this
filing against AWCI for it and its other subsidiaries. Arch continues to update
its business plan and projections to take into account its second and third
quarter results and evaluate its restructuring options. These options include
voluntary filings for protection under Chapter 11 of the U.S. Bankruptcy Code.
Arch cannot predict the outcome of the involuntary petition against AWCI, the
effects the involuntary petition will have on it and its other subsidiaries, or
whether it will be successful in its restructuring efforts.
Arch's financial results and lack of additional sources of liquidity indicate
that it may not be able to continue as a going concern unless it restructures
its existing debt such that interest expense is substantially reduced.
Furthermore, Arch is in default under its secured credit facility and
substantially all of its other indebtedness due to nonpayment of approximately
$50.3 million of interest due under its outstanding notes and credit facility as
of September 30, 2001 (see Note (c) below). Arch is also subject to additional
risks and uncertainties including, but not limited to, changes in technology,
subscriber turnover and competition.
(b) Impairment of Property and Equipment and Intangible Assets--In
accordance with Statement of Financial Accounting Standards (SFAS) No. 121
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets To Be
6
Disposed Of," Arch evaluates the recoverability of the carrying value of its
long-lived assets and certain intangible assets based on estimated undiscounted
cash flows to be generated from such assets. The aggregate undiscounted cash
flows are compared to the assets' current book value. To the extent impairment
is identified, Arch reduces the carrying value of such impaired assets to fair
value based on estimated discounted future cash flows.
In July 2001, due to the facts and circumstances discussed in Note (a) above,
Arch developed preliminary projections in order to assess the carrying value of
its long-lived assets. These projections were management's best estimate, at the
time, of future results based on lower than expected operating results for the
quarter ended June 30, 2001 and potential yearend liquidity constraints that
could arise. The aggregate undiscounted cash flows from these projections was
compared to the carrying value of the long-lived assets. Since the carrying
value exceeded the aggregate undiscounted cash flows, fair value of the assets
was determined based on a discounted cash flow analysis. As a result, Arch
recorded an impairment charge of $976.2 million in the second quarter of 2001,
which is included in depreciation and amortization expense in the statement of
operations for the nine months ended September 30, 2001, and reduced the
carrying value of certain one-way paging equipment, computer equipment and
intangible assets.
Intangible and Other Assets - Intangible and other assets, net of accumulated
amortization, are comprised of the following (in thousands):
September 30, December 31,
2001 2000
---- ----
Purchased Federal Communications Commission licenses..... $ 74 $ 451,431
Purchased subscriber lists............................... -- 412,015
Goodwill................................................. -- 163,027
Restricted cash.......................................... 34,657 35,280
Deferred financing costs................................. 14,719 24,905
Other.................................................... 2,025 14,086
---------- ----------
$ 51,475 $1,100,744
========== ==========
(c) Classification of Debt - Effective August 2, 2001,AWCI, a subsidiary
of Arch, was in default under the indenture governing its 12 3/4% senior notes
for nonpayment of interest due on July 2, 2001. This default also constituted a
default under substantially all other indebtedness of Arch and its direct and
indirect subsidiaries. Due to this default, Arch's lenders currently have the
right, if they so elect, to declare the entire amount of principal and interest
to be immediately due and payable, to seek foreclosure upon Arch's assets, to
file a bankruptcy petition against Arch or to pursue other remedies. As a
result, Arch has reclassified its debt to current liabilities. Subsequent to
August 2, 2001, Arch has not made any interest payments on its other outstanding
notes or its credit facility. Interest payments due prior to September 30, 2001
which have not been paid total $50.3 million.
(d) Divisional Reorganization - As of September 30, 2001, 1,268 former
Arch and MobileMedia employees had been terminated due to the MobileMedia and
PageNet integrations and a previous divisional reorganization. Arch's
restructuring activity as of September 30, 2001 is as follows (in thousands):
Reserve Balance Reserve Utilization of
at December 31, Adjustment in Reserve in Remaining
2000 2001 2001 Reserve
---- ---- ---- -------
Severance costs................... $ 2,957 $ 1,960 $ 4,917 $ --
Lease obligation costs............ 10,776 -- 4,650 6,126
Other costs....................... 162 -- 158 4
--------- --------- --------- ---------
Total.......................... $ 13,895 $ 1,960 $ 9,725 $ 6,130
========= ========= ========= =========
7
(e) PageNet Acquisition Reserve - As of September 30, 2001, 1,628 former
PageNet employees had been terminated. Arch's restructuring activity as of
September 30, 2001 is as follows (in thousands):
Reserve Balance Reserve Utilization of
at December 31, Adjustment in Reserve in Remaining
2000 2001 2001 Reserve
---- ---- ---- -------
Severance costs................... $ 36,767 $ 10,900 $ 37,143 $ 10,524
Lease obligation costs............ 9,264 11,062 6,326 14,000
Other costs....................... 500 -- 362 138
--------- --------- --------- ---------
Total.......................... $ 46,531 $ 21,962 $ 43,831 $ 24,662
========= ========= ========= =========
(f) Nextel Agreement - In January 2001, Arch agreed to sell its 900 MHz
SMR (Specialized Mobile Radio) licenses to Nextel Communications, Inc. Nextel
acquired the SMR licenses for an aggregate purchase price of $175 million and
invested approximately $75 million in a new equity issue, Arch series F 12%
redeemable cumulative junior preferred stock. The transaction was completed in
two stages. In February 2001, Nextel advanced $250 million in the form of a
secured loan in the principal amount of $175 million and an unsecured loan in
the principal amount of $75 million to a newly created, stand-alone Arch
subsidiary that held the SMR licenses pending FCC regulatory approval of their
transfer. The new Arch subsidiary was not permitted to engage in any business
other than ownership and maintenance of the SMR licenses and did not have any
liability or obligation with respect to any of the debt obligations of Arch or
its subsidiaries. In May 2001, upon transfer of the SMR licenses to Nextel, the
principal amount of the secured loan was offset against the $175.0 million
aggregate purchase price for the SMR licenses, and the principal amount of the
unsecured loan was exchanged for shares of series F preferred stock. Accrued
interest on the secured and unsecured loans was also paid in series F preferred
stock.
Arch acquired the SMR licenses as part of its acquisition of PageNet in
November 2000. In accordance with the purchase method of accounting, the SMR
licenses were recorded at their fair value of $175.0 million and were included
in the Purchased Federal Communications Commission licenses balance in Note (b)
above.
(g) Debt Exchanged for Equity - In the six months ended June 30, 2001,
Arch issued 18,905,989 shares of Arch common stock in exchange for $50.8 million
accreted value ($51.0 million maturity value) of its senior discount notes. Arch
recorded an extraordinary gain of $34.2 million on the early extinguishment of
debt as a result of these transactions.
(h) Series F Redeemable Cumulative Junior Preferred Stock - In May 2001,
in connection with the Nextel transactions discussed in Note (f) above, Arch
issued 793,219 shares of series F preferred stock. The series F preferred stock:
(i) is convertible into Arch common stock at a conversion price equal to the
then prevailing market price of the common stock per share, subject to certain
adjustments; (ii) bears dividends at an annual rate of 12.0%, (A) payable
quarterly in cash or, at Arch's option, through the issuance of shares of Arch
common stock valued at the then prevailing market price or (B) if not paid
quarterly, accumulating and payable upon redemption or conversion of the series
F preferred stock or liquidation of Arch; (iii) must be redeemed on the tenth
anniversary of the date of issuance, at Arch's option, for cash or converted
into Arch common stock valued at the then prevailing market price of Arch common
stock, so long as the common stock remains listed on a national securities
exchange; (iv) is subject to redemption for cash or conversion into Arch common
stock at Arch's option in certain circumstances; (v) in the event of a "Change
of Control" as defined, requires Arch, at its option, to redeem the series F
preferred stock for cash or convert such shares into Arch common stock valued at
the then prevailing market price of Arch common stock, with such cash redemption
or conversion being at a price equal to 101% of the sum of the original purchase
price plus accumulated dividends; (vi) limits certain mergers or asset sales by
Arch; and (vii) has certain voting and preemptive rights.
8
(i) 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
on 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. Arch 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 have been recognized in other expense. Arch recorded other expense
of approximately $14.6 million related to the changes in fair value of the
derivatives during the nine months ended September 30, 2001.
(j) Segment Reporting - Arch 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 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 Arch's Canadian
subsidiary.
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.
Arch did not begin to market and sell its two-way messaging products on a
commercial scale until August 2000. Arch's Canadian subsidiary was acquired in
November 2000 in the PageNet acquisition. Prior to 2000, substantially all of
Arch's operations were traditional paging operations. The following tables
present segment financial information related to Arch's segments for the periods
indicated (in thousands):
Traditional Two-way Messaging International
Paging Operations Operations Operations Consolidated
----------------- ---------- ---------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 2001
Revenues................................... $ 247,030 $ 29,455 $ 4,813 $ 281,298
Depreciation and amortization expense...... 46,339 20,925 1,327 68,591
Operating income (loss).................... 8,388 (20,601) (814) (13,027)
Adjusted EBITDA(1)......................... 62,182 324 513 63,019
Total assets............................... 445,416 228,805 22,228 696,449
Capital expenditures....................... 8,091 16,791 563 25,445
THREE MONTHS ENDED SEPTEMBER 30, 2000
Revenues................................... $ 183,291 $ 901 $ -- $ 184,192
Depreciation and amortization expense...... 84,930 842 -- 85,772
Operating income (loss).................... (22,079) (4,919) -- (26,998)
Adjusted EBITDA(1)......................... 62,851 (4,077) -- 58,774
Total assets............................... 1,178,907 17,060 -- 1,195,967
Capital expenditures....................... 19,551 7,441 -- 26,992
9
Traditional Two-way Messaging International
Paging Operations Operations Operations Consolidated
----------------- ---------- ---------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues................................... $ 828,517 $ 69,026 $ 14,583 $ 912,126
Depreciation and amortization expense...... 1,442,364 48,750 45,451 1,536,565
Operating income (loss).................... (1,206,881) (62,766) (43,530) (1,313,177)
Adjusted EBITDA(1)......................... 242,938 (14,016) 1,921 230,843
Total assets............................... 445,416 228,805 22,228 696,449
Capital expenditures....................... 51,954 45,924 2,150 100,028
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues................................... $ 560,996 $ 1,043 $ -- $ 562,039
Depreciation and amortization expense...... 265,329 1,032 -- 266,361
Operating income (loss).................... (72,941) (9,688) -- (82,629)
Adjusted EBITDA(1)......................... 192,388 (8,656) -- 183,732
Total assets............................... 1,178,907 17,060 -- 1,195,967
Capital expenditures....................... 91,497 18,092 -- 109,589
(1) Adjusted earnings before interest, income taxes, depreciation and
amortization, as determined by Arch, does not reflect interest, income
taxes, depreciation and amortization, other operating expenses, other
expense or 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on 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 Arch'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 $281.3 million, a 52.7% increase, and $912.1 million, a
62.3% increase, for the three and nine months ended September 30, 2001,
respectively, from $184.2 million and $562.0 million for the three and nine
months ended September 30, 2000, respectively, as the number of units in service
increased from 6.4 million at September 30, 2000 to 9.4 million at September 30,
2001 due to the acquisition of PageNet in November 2000. Net revenues (revenues
less cost of products sold) increased to $271.7 million, a 54.8% increase, and
$879.9 million, a 64.1% increase, for the three and nine months ended September
30, 2001, respectively, from $175.6 million and $536.1 million for the
corresponding periods in 2000. Revenues and net revenues in the three and nine
months ended September 30, 2000 and 2001 were adversely affected by (i) the
declining demand for traditional paging services and (ii) subscriber
cancellations, which led to a decrease of 809,000 and 2,468,000 units in service
for the three and nine months ended September 30, 2001, respectively.
10
For the three and nine months ended September 30, 2001, two-way messaging
revenues were $29.5 million, 10.5% of total revenue, and $69.0 million, 7.6% of
total revenue, respectively. Two-way messaging net revenues were $24.6 million,
9.1% of total net revenue, and $58.1 million, 6.6% of total net revenue,
respectively. The Company did not begin to sell its two-way messaging products
and services on a commercial scale until August 2000. Two-way units in service
increased from 25,000 at September 30, 2000 to 320,000 at September 30, 2001.
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 and nine
months ended September 30, 2000 and 2001. Arch does not differentiate between
service and rental revenues.
Arch believes the demand for traditional messaging services declined in 2000
and in the first nine months of 2001, and will continue to decline in the
foreseeable future. Arch believes that any element of future growth in the
wireless messaging industry will be attributable to two-way messaging. As a
result, Arch expects to continue to experience significant declines of units in
service during 2001 and 2002, 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 $76.1 million, or 28.0% of net revenues, and
$233.6 million, or 26.6% of net revenues, in the three and nine months ended
September 30, 2001, respectively, from $38.8 million, or 22.1% of net revenues,
and $115.7 million, or 21.6% of net revenues in the corresponding periods in
2000. The increase in dollar amount was due to the acquisition of PageNet in
November 2000. Since many of these costs are fixed in the short term, Arch has
not been able to reduce its service, rental and maintenance expenses at the same
rate of decline as units in service and net revenues, resulting in an increase
as a percentage of net revenues. For the three and nine months ended September
30, 2001, there were $12.1 million and $34.7 million, respectively, of service,
rental and maintenance expenses associated with the provision of two-way
messaging and information services, compared to $1.5 million and $3.7 million,
respectively, for the three and nine months ended September 30, 2000.
Selling expenses increased to $35.6 million, or 13.1% of net revenues, and
$111.3 million, or 12.6% of net revenues, for the three and nine months ended
September 30, 2001, respectively, from $24.4 million, or 13.9% of net revenues,
and $73.8 million, or 13.8% of net revenues, for the corresponding periods in
2000. The increase in dollar amount was due to the acquisition of PageNet.
Selling expenses related to two-way messaging and information services were $9.3
million and $26.1 million for the three and nine months ended September 30,
2001, respectively, compared to $2.2 million and $2.3 million for the three and
nine months ended September 30, 2000.
General and administrative expenses increased to $97.0 million, or 35.7% of
net revenues, and $304.2 million, or 34.6% of net revenues, for the three and
nine months ended September 30, 2001, respectively, from $53.6 million, or 30.6%
of net revenues, and $162.9 million, or 30.4% of net revenues for the
corresponding periods 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 $3.0 million and $11.3 million in the three and nine
months ended September 30, 2001, respectively, compared to $1.3 million and $3.7
million in the corresponding periods in 2000.
Depreciation and amortization expense increased to $1,536.6 million in the
nine months ended September 30, 2001 from $266.4 million in the nine months
ended September 30, 2000. The increase was principally due to a $976.2 million
impairment charge, recorded in June 2001, related to certain one-way paging
equipment, computer equipment and intangible assets. See Note (b) to the
Consolidated Condensed Financial Statements. The remaining increase in these
expenses reflects the acquisition of PageNet. As a result of the impairment
charge in the second quarter, depreciation and amortization expenses decreased
to $68.6 million in the three months ended September 30, 2001 from $85.8 million
in the three months ended September 30, 2000.
Operating losses were $13.0 million and $1,313.2 million for the three and
nine months ended September 30, 2001, respectively, compared to $27.0 million
and $82.6 million in the three and nine months ended September 30, 2000,
respectively, as a result of the factors outlined above.
11
Net interest expense increased to $65.9 million and $182.5 million for the
three and nine months ended September 30, 2001, respectively, from $36.6 million
and $113.3 million for the corresponding periods in 2000. The increase was
principally attributable to an increase in Arch's outstanding debt due to the
PageNet acquisition. Interest expense for the nine months ended September 30,
2000 and 2001 included approximately $19.2 million and $30.3 million,
respectively, of accretion on assumed bank debt and Arch's senior debt, the
payment of which was deferred.
Other expense increased to $14.3 million and $30.8 million for the three and
nine months ended September 30, 2001, respectively, from $269,000 and $2.3
million for the three and nine months ended September 30, 2000. In 2001, other
expense includes a $14.6 million charge related to changes in the market value
of certain interest rate swaps which have not been designated as a hedge for
accounting purposes and a $7.5 million charge resulting from the write-off of a
note receivable from Vast Solutions, Inc., which filed for bankruptcy in April
2001.
For the nine months ended September 30, 2001, Arch recognized extraordinary
gains of $34.2 million, on the retirement of debt exchanged for Arch stock. For
the nine months ended September 30, 2000, Arch recognized extraordinary gains of
$52.1 million, on the retirement of debt exchanged for Arch stock.
Arch recognized an income tax benefit of $500,000 and $118.5 million for the
three and nine months ended September 30, 2001, respectively. 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 $92.7 million and $1,380.6 million for the three and
nine months ended September 30, 2001, from $63.9 million and $146.2 million for
the corresponding periods in 2000, as a result of the factors outlined above.
LIQUIDITY AND CAPITAL RESOURCES
Arch is evaluating options to restructure its debt in light of its inability
to make required principal and interest payments under its secured credit
facility and outstanding notes. These options include filing for protection
under Chapter 11 of the U.S. Bankruptcy Code. Arch's inability to pay required
principal and interest payments arises primarily from the lack of sufficient
cash flow from operations. Arch is in default under its secured credit facility
and substantially all of its other indebtedness. The defaults result primarily
from the nonpayment of approximately $67.7 million of interest as of November
14, 2001. Arch's lenders currently have the right, if they so elect, to declare
the entire amount of principal and interest, approximately $1.8 billion as of
November 1, 2001, to be immediately due and payable.
Cash Flow
Arch's business strategy requires the availability of substantial funds to
finance capital expenditures for messaging devices and system equipment and to
service debt. Arch's net cash flows from operating, investing and financing
activities for the nine months ended September 30, 2001 and 2000 were as follows
(in millions):
Nine Months Ended
September 30,
2001 2000
---- ----
Net cash provided by operating activities............. $ 12.9 $ 75.0
Net cash provided by (used in) investing activities... $ 75.1 $ (109.6)
Net cash (used in) provided by financing activities... $ (95.2) $ 35.4
12
Investing activities in 2001 included a cash inflow of $175.0 million for
specialized mobile radio licenses sold to Nextel offset by $100.0 of capital
expenditures. Financing activities in 2001 include an investment of $75.0
million by Nextel in Arch series F preferred stock and borrowings by Arch's
Canadian subsidiary of approximately $7.9 million, offset by the repayment of
$178.1 million of long-term debt, including $175.2 million under the secured
credit facility.
Investing activities in 2000 consisted only of capital expenditures.
Financing activities in 2000 included net borrowings of $35.0 million and the
sale of $354,000 of Arch common stock.
Capital Expenditures and Commitments
Arch's capital expenditures decreased from $109.6 million for the nine months
ended September 30, 2000 to $100.0 million for the nine months ended September
30, 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 $125 million.
If its indebtedness is appropriately restructured such that interest expense is
substantially reduced, 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.
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 approximately $75 million in Arch series F preferred stock.
Pursuant to these transactions, in February 2001, Nextel advanced $250
million to Arch in the form of a $175 million loan, which was secured by a lien
on certain of the assets of the Arch subsidiary which owned the SMR licenses and
by a guaranty from another Arch subsidiary, and a $75 million unsecured loan.
Upon receipt of regulatory approvals in May 2001, the SMR licenses were
transferred to Nextel and the principal amount of the secured loan was offset
against the $175 million aggregate purchase price for the SMR licenses, and the
principal amount of the unsecured loan was exchanged for shares of Arch series F
preferred stock. Accrued interest on these loans was also paid 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 $74.8 million of proceeds was available for working capital purposes.
At September 30, 2001, Arch had approximately $47.5 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 for the next
twelve months, provided Arch defers interest payments due on its outstanding
indebtedness. However, Arch is in default under its secured credit facility and
outstanding notes. See Note (c) to the Consolidated Condensed Financial
Statements.
Equity Issued in Exchange for Debt
In the first half of 2001, Arch issued 18,905,989 shares of Arch common stock
in exchange for $50.8 million accreted value ($51.0 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.
13
Unless Arch succeeds in restructuring its outstanding indebtedness, it will not
be able to continue as a going concern.
Arch's ability to continue as a going concern is dependent upon its ability
to restructure its existing debt such that interest expense is substantially
reduced. In July 2001, Arch announced the withdrawal of its previously announced
proposal to restructure its outstanding debt and the withdrawal of its previous
financial projections, primarily due to lower than expected operating results in
the second quarter of 2001. The lower than anticipated operating results will
negatively impact future operating results and projected year-end liquidity and
made the previously proposed restructuring infeasible. On November 9, 2001,
certain holders of 12 3/4% senior notes of Arch Wireless Communications, Inc.
("AWCI"), a wholly-owned subsidiary of Arch, commenced an involuntary proceeding
under Chapter 11 of the U.S. Bankruptcy code against AWCI. AWCI until December
10, 2001 to respond to this involuntary proceeding, and is currently evaluating
its legal options. Arch will also consider the implications of this filing
against AWCI for it and its other subsidiaries. Arch continues to update its
business plan and projections to take into account its second and third quarter
results and evaluate its restructuring options. These options include voluntary
filings for protection under Chapter 11 of the U.S. Bankruptcy Code. Arch cannot
predict the outcome of the involuntary petition against AWCI, the effects the
involuntary petition will have on it and its other subsidiaries, or whether it
will be successful in its restructuring efforts.
Arch's financial results and lack of additional sources of liquidity indicate
that it will not be able to continue as a going concern unless it restructures
its existing debt such that interest expense is substantially reduced.
Furthermore, Arch is in default under its secured credit facility and
substantially all of its other indebtedness, primarily due to nonpayment of
approximately $67.7 million of interest as of November 14, 2001. Due to this
default, Arch's lenders currently have the right, if they so elect, to declare
the entire amount of principal and interest to be immediately due and payable,
to seek foreclosure upon Arch's assets, to file a bankruptcy petition against
Arch or to pursue other remedies. Any of these developments would have a
material adverse effect on Arch's business operations, liquidity, cash flows and
ability to continue as a going concern. Arch is currently 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 7.0 to 1 as of September 30, 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.
Arch's current debt structure:
o requires Arch to make interest payments and scheduled repayments of
principal of approximately $1.4 billion through June 2006; and
o impairs Arch's ability to obtain additional financing necessary for
working capital, capital expenditures or other purposes on acceptable
terms, if at all.
Recent declines in Arch's units in service are likely to continue or even
accelerate; this trend is likely to 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, June 30, and
September 30, 2001, Arch experienced further decreases of units in service due
to subscriber cancellations of 784,000, 875,000 and 809,000, respectively. 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. As a
result, Arch expects to continue to experience significant decreases in units in
service for the foreseeable future 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 sales and marketing
costs associated with attracting new subscribers are substantial compared to the
14
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. Primarily as a result of the decline in its one-way messaging
operations, Arch recorded an impairment charge of $976.2 million in the carrying
value of certain one-way paging equipment, computer equipment and intangible
assets during the second quarter of 2001.
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.
The future growth and profitability of Arch depends on the success of its
two-way messaging services. However, 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.
Arch's two-way messaging services 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 two-way 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 will need to
restructure existing debt, which could be difficult to achieve. 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.
15
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
will 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 in a timely manner to compensate for any past or future revenue
or cash flow shortfall.
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 prediction about when, if ever, it is
likely to attain profitability. However, the impairment charge recorded in June
2001 will result in lower depreciation and amortization expenses in future
periods, therefore Arch's net losses are expected to decrease in the future.
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 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
replacement requirements. Arch will seek other sources for terminals and
transmitters to meet its expansion requirements, since Glenayre has announced it
will discontinue its network infrastructure operations. 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 November 15, 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.
On March 21, 2001, Arch entered into an agreement with Glenayre, under which
Glenayre agreed to develop and license to Arch, under a perpetual, enterprise
wide license, software to enable Arch to upgrade its two-way network to
significantly increase network capacity and reduce latency. On June 8, 2001,
Glenayre announced plans to discontinue operations of its wireless messaging
business unit, but, in accordance with its contractual commitments, would
complete development of the network technology that is the subject of the
agreement with Arch. On June 29, 2001, Glenayre sent Arch a notice claiming that
Arch was in default of the agreement for failure to reimburse Glenayre for
certain sales taxes which Glenayre allegedly paid in connection with the
agreement. Arch disputes that it is obligated to reimburse Glenayre for the full
amount claimed and withheld the disputed portion of the payment. Glenayre sent a
subsequent letter on July 29, 2001, purporting to terminate the agreement with
Arch. Arch disputes that the termination was effective, but nevertheless,
reserving its rights, paid Glenayre the full amount claimed by it. Arch believes
that the agreement continues in full force and effect. Arch does not know if
Glenayre continues to believe that the agreement was effectively terminated. If
Glenayre ceases to perform and Arch is unable to secure alternative sources for
network upgrades, the resulting disruption in Arch's business could have a
material adverse affect on Arch's results of operations.
16
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.
Restrictions under debt instruments prevent Arch from declaring dividends,
incurring or repaying debt, making acquisitions, altering lines of business or
taking actions which its management may consider 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Arch's debt financing primarily consists of senior bank debt and fixed rate
senior notes.
SENIOR SECURED DEBT, VARIABLE RATE DEBT:
Borrowings outstanding under Arch's credit facility are secured by
substantially all of Arch's assets. Arch's senior bank debt trades on a limited
basis, therefore the fair value at September 30, 2001 was determined with
reference to market quotes. Arch considers the fair value of the Canadian bank
debt to be equal to the carrying value since it has never traded and the related
facilities bear a current market rate of interest.
Weighted Average Scheduled Interest
Principal Balance Fair Value Interest Rate Maturity Payments Due
----------------- ---------- ------------- -------- ------------
$1.120 billion $167.9 million 10.8% 2006 Quarterly
$67.8 million $67.8 million 6.6% 2004 Quarterly
Arch's credit facility bears interest at floating rates and matures in 2006 and
is therefore subject to risks associated with changes in interest rates. To the
extent there are fluctuations in the agent bank's alternate base rate or LIBOR,
Arch's annual interest expense would increase or decrease by $2.8 million for
each 1/4% fluctuation.
SENIOR SUBORDINATED NOTES, FIXED RATE DEBT:
Arch's fixed rate senior notes are traded publicly and are subject to market
risk. The fair values of the fixed rate senior notes were based on current
market quotes as of September 30, 2001.
Principal Balance Fair Value Stated Interest Rate Scheduled Maturity
----------------- ---------- -------------------- ------------------
$113.1 million $ -- 10 7/8% 2008
$125.0 million $6.3 million 9 1/2% 2004
$100.0 million $5.0 million 14% 2004
$130.0 million $650 thousand 12 3/4% 2007
$147.0 million $735 thousand 13 3/4% 2008
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 9, 2001, certain holders of 12-3/4% Senior Notes due 2007 of Arch
Wireless Communications, Inc. ("AWCI"), a subsidiary of Arch, commenced an
involuntary case under Chapter 11 of the United States Bankruptcy Code against
AWCI. The petition requesting an order for relief under Chapter 11 was filed in
United States District Court, District of Massachusetts, where the case is now
pending. AWCI has until December 10, 2001 to respond to the filing of this
involuntary proceeding and is currently evaluating its legal options.
Arch is involved in a number of law suits which it does not believe will have
a material adverse effect on its financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As reported in the quarterly report for the three months ended March 31,
2001, Arch issued and sold 1,015,000 shares of its series F 12% redeemable
cumulative junior preferred stock to AWI Spectrum Co., LLC, an indirect
subsidiary of Arch, in connection with the sale of the SMR licenses to Nextel
Communications, Inc. discussed in Item 2 of Part I of this report under the
caption "Liquidity and Capital Resources--Sources of Funds." In May 2001, AWI
Spectrum Co., LLC delivered to Nextel (1) 43,219 shares of series F preferred
stock in satisfaction of the accrued interest on the secured loan issued in
connection with the sale and (2) 750,000 shares of series F preferred stock in
satisfaction of the principal amount and accrued interest under the unsecured
loan issued in connection with the sale.
The shares of series F preferred stock were offered and sold without
registration under the Securities Act of 1933 in reliance on the exemptions
provided by Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On July 2, 2001, Arch Wireless Communications, Inc. ("AWCI"), a subsidiary of
Arch, announced that it was deferring an interest payment of approximately
$8,287,500 which was due on July 2, 2001 under AWCI's outstanding 12 3/4% Senior
Notes due 2007. AWCI also announced that if it did not pay the interest payment
within 30 days, it would be in default under the indenture governing the 12 3/4%
notes, which would also then constitute a default under substantially all
indebtedness of Arch and its direct and indirect subsidiaries.
On August 2, 2001, AWCI announced that it had deferred an interest payment of
approximately $5,937,500 which was due on August 1, 2001 under AWCI's 9 1/2%
Senior Notes due 2004.
On August 27, 2001, Arch announced that Arch Wireless Holdings, Inc ("AWHI"),
a subsidiary of AWCI, had defaulted under its credit facility for nonpayment of
interest due August 21, 2001
As of the date of the filing of this report, the total arrearage relating to
these defaults is approximately $67.7 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
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 10, 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 23, 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 March 3, 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 dated July 2, 2001 (reporting, under item
5, that Arch Wireless Communications, Inc. was deferring an
interest payment due under its 12 3/4% notes), filed July 2,
2001.
Current Report on Form 8-K dated July 12, 2001 (reporting, under
item 5, that the Bank of New York believed that it was in default
under Arch Wireless Holdings, Inc.'s credit facility), filed July
13, 2001.
Current Report on Form 8-K dated August 2, 2001 (reporting, under
items 5 and 7, that Arch Wireless Communications, Inc. defaulted
under its 12 3/4% notes for nonpayment of interest due July 2,
2001), filed August 2, 2001.
Current Report on Form 8-K dated August 24, 2001 (reporting, under
item 5, that Arch Wireless Holdings, Inc. defaulted under its
credit facility for nonpayment of interest due August 21, 2001),
filed August 27, 2001.
19
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
September 30, 2001, to be signed on its behalf by the undersigned thereunto duly
authorized.
ARCH WIRELESS, INC.
Dated: November 14, 2001 By: /s/ J. Roy Pottle
--------------------------
J. Roy Pottle
Executive Vice President and
Chief Financial Officer
20
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
+10.1* Executive Employment Agreement between Arch Wireless, Inc, and
Lyndon R. Daniels
* Filed herewith
+Identifies exhibit constituting a management contract or compensation plan.