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, 2000
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: 63,579,576 shares of the
Company's Common Stock ($.01 par value) and 2,499,243 shares of the Company's
Class B Common Stock ($.01 par value) were outstanding as of November 7, 2000.
<PAGE>
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, 2000 and December 31, 1999 3
Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999 4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 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 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARCH WIRELESS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,960 $ 3,161
Accounts receivable, net 67,443 61,167
Inventories 2,773 9,101
Prepaid expenses and other 15,411 11,874
----------- -----------
Total current assets 89,587 85,303
----------- -----------
Property and equipment, at cost 810,960 714,644
Less accumulated depreciation and amortization (441,215) (314,445)
----------- -----------
Property and equipment, net 369,745 400,199
----------- -----------
Intangible and other assets, net 736,635 867,543
----------- -----------
$ 1,195,967 $ 1,353,045
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 14,935 $ 8,060
Accounts payable 39,743 30,016
Accrued restructuring 11,121 17,111
Accrued interest 33,003 30,294
Accrued expenses and other liabilities 67,736 79,330
----------- -----------
Total current liabilities 166,538 164,811
----------- -----------
Long-term debt 1,117,911 1,322,508
----------- -----------
Other long-term liabilities 76,585 83,285
----------- -----------
Redeemable convertible preferred stock 45,708 --
----------- -----------
Stockholders' equity (deficit):
Preferred stock-- $.01 par value 3 3
Common stock-- $.01 par value 661 512
Additional paid-in capital 815,965 661,413
Accumulated deficit (1,027,404) (879,487)
----------- -----------
Total stockholders' equity (deficit) (210,775) (217,559)
----------- -----------
$ 1,195,967 $ 1,353,045
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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ARCH WIRELESS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service, rental, and maintenance revenues $ 172,332 $ 190,798 $ 525,623 $ 403,607
Product sales 11,860 15,391 36,416 36,963
------------ ------------ ------------ ------------
Total revenues 184,192 206,189 562,039 440,570
Cost of products sold (8,636) (10,459) (25,897) (24,988)
------------ ------------ ------------ ------------
175,556 195,730 536,142 415,582
------------ ------------ ------------ ------------
Operating expenses:
Service, rental, and maintenance 38,750 43,035 115,704 91,421
Selling 24,388 26,545 73,766 57,589
General and administrative 53,644 60,622 162,940 123,643
Depreciation and amortization 85,772 94,803 266,361 222,836
Restructuring charge -- (2,200) -- (2,200)
------------ ------------ ------------ ------------
Total operating expenses 202,554 222,805 618,771 493,289
------------ ------------ ------------ ------------
Operating income (loss) (26,998) (27,075) (82,629) (77,707)
Interest expense, net (36,635) (39,740) (113,334) (98,927)
Other expense (269) (924) (2,279) (44,396)
Equity in loss of affiliate -- -- -- (3,200)
------------ ------------ ------------ ------------
Income (loss) before extraordinary item and
accounting change (63,902) (67,739) (198,242) (224,230)
------------ ------------ ------------ ------------
Extraordinary gain from early extinguishment of
debt -- -- 52,051 --
Cumulative effect of accounting change -- -- -- (3,361)
------------ ------------ ------------ ------------
Net income (loss) (63,902) (67,739) (146,191) (227,591)
Accretion of redeemable preferred stock (1,755) -- (3,016) --
Preferred stock dividend (591) (546) (1,726) (1,589)
------------ ------------ ------------ ------------
Net income (loss) to common stockholders $ (66,248) $ (68,285) $ (150,933) $ (229,180)
============ ============ ============ ============
Basic/diluted net income (loss) per common share
before extraordinary charge and accounting
change $ (1.00) $ (1.42) $ (3.25) $ (9.00)
Extraordinary item per basic/diluted common share -- -- 0.83 --
Cumulative effect of accounting change per
basic/diluted common share -- -- -- (0.13)
------------ ------------ ------------ ------------
Basic/diluted net income (loss) per common share $ (1.00) $ (1.42) $ (2.42) $ (9.13)
============ ============ ============ ============
Basic/diluted weighted average number of common
shares outstanding 66,078,808 48,060,782 62,410,164 25,088,969
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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ARCH WIRELESS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 75,034 $ 76,422
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (105,052) (65,035)
Additions to intangible and other assets (4,537) (18,151)
Net proceeds from tower site sale -- 3,046
Acquisition of company, net of cash acquired -- (518,729)
--------- ---------
Net cash used for investing activities (109,589) (598,869)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 93,000 466,058
Repayment of long-term debt (58,000) (140,999)
Net proceeds from sale of common stock 354 217,243
--------- ---------
Net cash provided by financing activities 35,354 542,302
--------- ---------
Net increase in cash and cash equivalents 799 19,855
Cash and cash equivalents, beginning of period 3,161 1,633
--------- ---------
Cash and cash equivalents, end of period $ 3,960 $ 21,488
========= =========
Supplemental disclosure:
Interest paid $ 89,865 $ 58,734
Accretion of discount on senior notes $ 19,234 $ 30,995
Issuance of common stock in exchange for debt $ 155,637 $ --
Issuance of preferred stock in exchange for debt $ 42,692 $ --
Accretion of redeemable preferred stock $ 3,016 $ --
Issuance of common stock in acquisition of company $ -- $ 20,083
Liabilities assumed in acquisition of company $ -- $ 135,676
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
ARCH WIRELESS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(a) Name Change - On September 25, 2000, Arch Communications Group, Inc.
announced the following corporate name changes:
o Arch Communications Group, Inc. was renamed "Arch Wireless, Inc.";
o Arch Communications, Inc., a wholly owned subsidiary of the Company,
was renamed "Arch Wireless Communications, Inc."; and
o Arch Paging, Inc., a wholly owned subsidiary of Arch Communications,
Inc., was renamed "Arch Wireless Holdings, Inc."
(b) 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, 1999, 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, 1999
has been derived from, but does not include all the disclosures contained in,
the audited consolidated financial statements for the year ended December 31,
1999. 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, 1999. The results of operations for the periods
presented are not necessarily indicative of the results that may be expected for
a full year.
(c) Intangible and Other Assets - Intangible and other assets, net of
accumulated amortization, are comprised of the following (in thousands):
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
Goodwill $217,371 $249,010
Purchased FCC licenses 315,909 354,246
Purchased subscriber lists 184,130 239,114
Deferred financing costs 14,480 19,915
Other 4,745 5,258
-------- --------
$736,635 $867,543
======== ========
(d) Acquisition of PageNet - On November 10, 2000, Arch completed its
acquisition of Paging Network, Inc., a Delaware corporation ("PageNet"),
pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), dated as
of November 7, 1999, and amended as of January 7, 2000, May 10, 2000, July 23,
2000 and September 7, 2000.
Pursuant to the Merger Agreement and the Plan, in connection with the
merger, Arch issued approximately 84.9 million shares of Arch common stock to
PageNet's noteholders and 5.0 million shares of Arch common stock to PageNet's
stockholders. Additionally, upon consummation of the merger, each outstanding
option to purchase PageNet common stock was converted into an option to purchase
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the same number of shares of Arch common stock that the holder of the option
would have received in the merger if the holder had exercised the option
immediately prior to the merger.
The acquisition of PageNet by Arch was originally announced on November 7,
1999. In July 2000, PageNet and all of its wholly owned domestic subsidiaries,
except for Vast Solutions, Inc. ("Vast"), became parties to a proceeding under
Chapter 11 of the U.S. Bankruptcy Code filed with the U.S. Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). On July 25, 2000, PageNet
filed a Plan of Reorganization (the "Plan") with the Bankruptcy Court that
provided for the merger of PageNet into Arch and the related transactions on the
same terms as are provided in the Merger Agreement. Accordingly, PageNet's
ability to consummate the merger was subject to the approval of the Plan by the
Bankruptcy Court, which was obtained on October 26, 2000. The shareholders of
Arch approved the issuance of shares of Arch common stock in the merger at a
meeting held on October 5, 2000.
As provided in the Merger Agreement and the Plan, immediately prior to the
consummation of the merger, 80.5% of the total equity of Vast was distributed to
PageNet's existing stockholders and noteholders (the "Vast Distribution"), while
PageNet retained ownership of the remaining 19.5% of Vast's equity. Immediately
following the Vast Distribution, PageNet became a wholly owned subsidiary of
Arch.
Also pursuant to the Merger Agreement, Arch increased the size of its board
of directors to 12 members, and the board of directors elected Joseph A. Bondi,
Gregg R. Daugherty, John P. Frazee, Jr. and John H. Gutfreund and to serve on
the board. Mr. Frazee was also elected as Chairman of the board of directors.
(e) Divisional Reorganization - As of September 30, 2000, 489 employees had
been terminated due to the divisional reorganization and restructuring. The
Company's restructuring activity as of September 30, 2000 is as follows (in
thousands):
Reserve Balance Utilization of
at December 31, Reserve in Remaining
1999 2000 Reserve
---- ---- -------
Severance costs $ 1,030 $ 525 $ 505
Lease obligation costs 5,198 1,518 3,680
------- ------- -------
Total $ 6,228 $ 2,043 $ 4,185
======= ======= =======
(f) MobileMedia Acquisition Reserve - As of September 30, 2000, 293 former
MobileMedia employees had been terminated. The Company's restructuring activity
as of September 30, 2000 is as follows (in thousands):
Reserve Balance Utilization of
at December 31, Reserve in Remaining
1999 2000 Reserve
---- ---- -------
Severance costs $ 2,678 $ 2,146 $ 532
Lease obligation costs 7,828 1,611 6,217
Other costs 377 190 187
------- ------- -------
Total $10,883 $ 3,947 $ 6,936
======= ======= =======
(g) Debt Exchanged for Equity - In February and March 2000, Arch completed
transactions in which Arch issued an aggregate of 11,926,036 shares of Arch
common stock in exchange for approximately $160.9 million accreted value of debt
securities. Under one of the exchange agreements, Arch issued 285,715 shares of
common stock in exchange for $3.5 million principal amount of Arch convertible
debentures. Arch recorded $2.4 million of non-cash interest expense in
conjunction with this transaction. Under the other exchange agreements, Arch
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issued 11,640,321 shares of common stock in exchange for $157.4 million accreted
value ($176.0 million maturity value) of its senior discount notes. Arch
recorded an extraordinary gain of $7.6 million on the early extinguishment of
debt as a result of these transactions.
On May 10, 2000, Arch announced it had completed its agreement with
Resurgence Asset Management L.L.C. for the exchange of $91.1 million accreted
value ($100.0 million maturity value) of senior discount notes held by various
Resurgence entities for 1,000,000 shares of a new class of Arch's preferred
stock called Series D preferred stock. The Series D preferred stock was
converted into an aggregate of 6,613,180 shares of common stock upon completion
of Arch's merger with PageNet.
Arch recorded an extraordinary gain of $44.4 million on the early
extinguishment of debt as a result of this transaction based on the difference
between the carrying value of the exchanged debt and the fair value of the
preferred stock issued. As of September 30, 2000, the Series D preferred stock
was stated at its accreted redemption value after recording $3.0 million of
accretion in the nine months ended September 30, 2000.
In November 2000, Arch issued 542,347 shares of common stock in exchange
for $7.9 million accreted value ($8.2 million maturity value) of its senior
discount notes. Arch will record an extraordinary gain of $6.6 million on the
early extinguishment of debt as a result of these transactions. Following this
exchange, an aggregate of $158.0 million accreted value ($164.2 million maturity
value) of the senior discount notes remained outstanding.
8
<PAGE>
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".
PAGENET MERGER
On November 1999, Arch signed a definitive agreement with Paging Network,
Inc. (PageNet) providing for the merger of PageNet with a wholly-owned
subsidiary of Arch. On July 14, 2000, before the merger could take place,
creditors of PageNet commenced a proceeding against PageNet under Chapter 11 of
the U.S. Bankruptcy Code in the U.S. Bankruptcy Court in the District of
Delaware. PageNet filed a bankruptcy plan in order to implement the merger on
modified terms agreed to by Arch and PageNet. The Reorganization Plan was
confirmed by the U.S. Bankruptcy Court for the District of Delaware on October
26, 2000. The PageNet merger was consummated on November 10, 2000.
In the merger, each outstanding share of PageNet's common stock was exchanged
for 0.04796505 shares of Arch's common stock. The merger was accompanied by a
recapitalization of Arch and PageNet involving the exchange of common stock for
outstanding debt. PageNet's bankruptcy plan provided for the exchange of a total
of approximately 89.9 million shares of Arch's common stock for all of PageNet's
outstanding senior subordinated notes as well as all of PageNet's outstanding
common stock. Arch offered to exchange a total of 29,651,984 shares of its
common stock for all of its outstanding 107/8% senior discount notes that were
outstanding on November 7, 1999. Arch exchanged shares of its common stock for a
significant portion of these discount notes so that approximately $158.0 million
in accreted value of discount notes remained outstanding at November 10, 2000.
In connection with the merger, 80.5% of the total equity of PageNet's
subsidiary, Vast Solutions, Inc. was issued to PageNet's current stockholders
and noteholders and Arch holds the remaining 19.5% of Vast's equity.
Pursuant to the terms of the merger, Joseph A. Bondi, Gregg R. Daugherty,
John P. Frazee, Jr. and John H. Gutfreund joined the Arch board of directors.
RESULTS OF OPERATIONS
Total revenues were $184.2 million (a 10.7% decrease) and $562.0 million (a
27.6% increase) in the three and nine months ended September 30, 2000,
respectively, compared to $206.2 million and $440.6 million in the three and
nine months ended September 30, 1999, respectively, The number of units in
service increased from 4.3 million at March 31, 1999 to 7.1 million at June 30,
1999, entirely due to the MobileMedia acquisition in June 1999 and decreased to
6.4 million at September 30, 2000. Net revenue (total revenues less cost of
products sold) was $175.6 million (a 10.3% decrease) and $536.1 million (a 29.0%
increase) in the three and nine months ended September 30, 2000, respectively,
compared to $195.7 million and $415.6 million in the three and nine months ended
September 30, 1999, respectively. Total revenue and net revenue in 1999 and 2000
were adversely affected by (1) the declining demand for basic paging services
and (2) subscriber cancellations and unit in service definition changes which
led to a decrease of 571,000 units in service during the nine months ended
September 30, 2000.
Arch expects revenue to continue to be adversely affected in 2000 and 2001 by
declining demand for basic numeric and alphanumeric paging services. Arch
believes that demand for basic paging services will decline in 2000 and the
following years and that any significant future growth in the industry will be
attributable to advanced messaging services. As a result, Arch believes that it
will experience a net decline in the number of its units in service for the
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remainder of 2000 and 2001, excluding the addition of subscribers from the
PageNet acquisition, as Arch's addition of two-way messaging subscribers is
likely to be exceeded by its loss of basic paging subscribers.
Total revenues from advanced messaging services were $2.0 million and $2.2
million in the three and nine months ended September 30, 2000, respectively. The
number of advanced messaging units in service at September 30, 2000 was 25,000.
Service, rental and maintenance revenues, which consist primarily of
recurring revenues associated with the sale or lease of pagers, were $172.3
million (a 9.7% decrease) and $525.6 million (a 30.2% increase) in the three and
nine months ended September 30, 2000, respectively, compared to $190.8 million
and $403.6 million in the three and nine months ended September 30, 1999,
respectively. The increase in revenues during the nine month period was due
entirely to the acquisition of MobileMedia on June 3, 1999. Maintenance revenues
represented less than 10% of total service, rental and maintenance revenues in
the three and nine months ended September 30, 2000 and 1999. Arch does not
differentiate between service and rental revenues. Product sales, less cost of
products sold, decreased to $3.2 million (a 34.6% decrease) and $10.5 million (a
12.2% decrease) in the three and nine months ended September 30, 2000,
respectively, from $4.9 million and $12.0 million in the three and nine months
ended September 30, 1999, respectively. These decreases were primarily the
result of lower sales due to slowing demand for traditional paging services.
Service, rental and maintenance expenses, which consist primarily of
telephone, third party carrier fees and site rental expenses, were $38.8 million
(22.1% of net revenues) and $115.7 million (21.6% of net revenues) in the three
and nine months ended September 30, 2000, respectively, compared to $43.0
million (22.0% of net revenues) and $91.4 million (22.0% of net revenues) in the
three and nine months ended September 30, 1999, respectively. The increase in
the nine month period was due primarily to increased expenses associated with
providing wireless messaging services to a greater number of units due to the
MobileMedia acquisition. Annualized service, rental and maintenance expenses per
unit were $24 and $23 in the three and nine months ended September 30, 2000,
respectively, compared to $24 and $22 in the corresponding 1999 periods. This
increase in the nine month period was due primarily to the provision of
alphanumeric and nationwide messaging services to a higher percentage of
customers due to the MobileMedia acquisition. In the three and nine months ended
September 30, 2000 there were $1.5 million and $3.7 million, respectively, of
service, rental and maintenance expenses associated with the provision of
advanced messaging services.
Selling expenses were $24.4 million (13.9% of net revenues) and $73.8 million
(13.8% of net revenues) in the three and nine months ended September 30, 2000,
respectively, compared to $26.5 million (13.6% of net revenues) and $57.6
million (13.9% of net revenues) in the three and nine months ended September 30,
1999, respectively. The increase in the nine month period was due primarily to
the MobileMedia acquisition. Advanced messaging selling expenses were $2.3
million in both the three and nine months ended September 30, 2000.
General and administrative expenses were $53.6 million (30.5% of net
revenues) and $162.9 million (30.4% of net revenues) in the three and nine
months ended September 30, 2000, respectively, compared to $60.6 million (31.0%
of net revenues) and $123.6 million (29.8% of net revenues) in the three and
nine months ended September 30, 1999, respectively. The decrease in the three
month period was the result of decreased headcount and facilities costs
resulting from the integration of Arch and MobileMedia. The increase in the nine
month period was due primarily to the MobileMedia acquisition on June 3, 1999.
General and administrative expenses associated with the provision of advanced
messaging services were $1.3 million and $3.7 million in the three and nine
months ended September 30, 2000, respectively.
Depreciation and amortization expenses were $85.8 million and $266.4 million
in the three and nine months ended September 30, 2000, respectively, compared to
$94.8 million and $222.8 million in the three and nine months ended September
30, 1999, respectively. The increase in the nine month period in these expenses
was principally attributable to additional depreciation associated with assets
purchased in the MobileMedia acquisition and amortization expense associated
with intangibles which resulted from the MobileMedia acquisition. Additionally,
depreciation expense for the nine months ended September 30, 1999 includes the
write-off of approximately $7.1 million of costs associated with the development
of an integrated billing and management system. The Company decided to
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discontinue development efforts due to the capabilities of the system acquired
in conjunction with the MobileMedia acquisition. Depreciation and amortization
of advanced messaging assets was $0.8 million and $1.0 million in the three and
nine months ended September 30, 2000, respectively.
Operating losses were $27.0 million and $82.6 million in the three and nine
months ended September 30, 2000, respectively, compared to $27.1 million and
$77.7 million in the three and nine months ended September 30, 1999,
respectively, as a result of the factors outlined above.
Net interest expense was $36.6 million and $113.3 million in the three and
nine months ended September 30, 2000, respectively, compared to $39.7 million
and $98.9 million in the three and nine months ended September 30, 1999,
respectively. The increase in the nine month period was principally attributable
to an increase in Arch's outstanding debt in connection with the MobileMedia
acquisition. Interest expense for the nine months ended September 30, 2000 and
1999 include approximately $19.2 million and $31.0 million, respectively, of
non-cash interest accretion on Arch's discount notes. The reduced amount of
non-cash accretion reflects Arch's exchanges to equity securities for a portion
of the discount notes.
Other expense decreased to $0.3 million and $2.3 million in the three and
nine months ended September 30, 2000, respectively, from $0.9 million and $44.4
million in the three and nine months ended September 30, 1999, respectively. In
the 1999 periods, other expense includes $42.3 million representing the
write-off of Arch's investments in a narrowband PCS joint venture.
In 2000, Arch recognized an extraordinary gain of $52.1 million on the
retirement of debt exchanged for common and preferred stock.
On January 1, 1999, Arch adopted SOP 98-5. SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. Initial
application of SOP 98-5 resulted in a $3.4 million charge in the quarter ended
March 31, 1999 which was reported as the cumulative effect of a change in
accounting principle. This charge represents the unamortized portion of start-up
and organization costs which had been deferred in prior years.
Net loss decreased to $63.9 million and $146.2 million in the three and nine
months ended September 30, 2000, respectively, from $67.7 million and $227.6
million in the three and nine months ended September 30, 1999, respectively, 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 and to service debt.
Capital Expenditures and Commitments
Arch's capital expenditures increased from $83.2 million in the nine months
ended September 30, 1999 to $109.6 million in the nine months ended September
30, 2000, including $18.1 million for advanced messaging devices and equipment.
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 believes
that it will have sufficient cash available from operations and credit
facilities to fund its capital expenditures for the next twelve months.
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.
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Recent declines in Arch's units in service may continue or even accelerate; this
trend may impair Arch's financial results
In 1999, Arch experienced a decrease of 89,000 units in service, excluding
the addition of subscribers from the MobileMedia acquisition. For the nine
months ended September 30, 2000 Arch experienced a further decrease of 571,000
units in service due to subscriber cancellations and definitional changes. Arch
believes that the basic paging industry did not grow during 1999, that demand
for basic paging services will decline in 2000 and in the following years and
that any significant future growth in the paging industry will be attributable
to advanced messaging services. As a result, Arch believes that it will
experience a net decline in the number of its units in service during the
remainder of 2000, excluding the addition of subscribers from the PageNet
acquisition, as Arch's addition of two-way messaging subscribers is likely to be
exceeded by its loss of traditional paging subscribers. However, the magnitude
of the expected decline cannot be predicted.
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
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.
PageNet had approximately 7,858,000 units in service at June 30, 2000, down
from its high of approximately 10,604,000 units in service at June 30, 1998.
PageNet has had a net reduction in the number of units in service during each of
the eight previous quarters ended June 30, 2000, and the amount of such net
reduction has increased during each quarter. Units in service are expected to
continue to decline in the second half of 2000. The net reduction of units in
service with subscribers is due to a combination of factors, including customer
service problems, the impact of various price increases by PageNet, increased
sales activity by competitors since the merger announcement, and an increasing
number of paging customers who are choosing cellular, PCS and other mobile phone
services instead of paging services.
Competition from large telephone, cellular and PCS companies is intensifying and
may reduce Arch's revenues and operating margins
Traditional paging companies like Arch, whose units in service have been
declining, increasingly compete for market share against large telephone,
cellular and PCS providers like MCI WorldCom, AT&T, Nextel, BellSouth Wireless
Data and Motient. Arch will also compete with other paging companies that
continue to offer paging 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 communications 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 operating margins 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 phone
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 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 services 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
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valuable than those to be provided by Arch. If this occurs, Arch's market share
will erode and financial operations will be impaired.
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 basic paging 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.
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 basic
paging 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 its expectations as to future
revenues and cash flow growth. Arch may be unable to adjust spending in a timely
manner to compensate for any revenue or cash flow shortfall. It is possible
that, due to future fluctuations, Arch's revenue, cash flow or operating results
may not meet the expectations of securities analysts or investors. This may have
a material adverse effect on the price of Arch's common stock. If shortfalls
were to cause Arch not to meet the financial covenants contained in its debt
instruments, the debtholders could declare a default and seek immediate
repayment.
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 make Arch more vulnerable to financial downturns
Arch has been highly leveraged, and will remain leveraged to a substantial
degree following the PageNet merger. Arch's ratio of total debt to latest
quarter annualized adjusted earnings before interest, income taxes, depreciation
and amortization was 4.4 to 1 as of September 30, 2000.
Adjusted earnings before interest, income taxes, depreciation and
amortization is not a measure defined by GAAP and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with GAAP. 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 impair Arch's ability to obtain additional financing necessary for working
capital, capital expenditures or other purposes on acceptable terms, if at
all.
o require a substantial portion of Arch's cash flow to be used to pay
interest expense; this will reduce the funds which would otherwise be
available for operations and future business opportunities.
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 EBITDA, 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:
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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 may need additional capital to expand its business 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 and possible acquisitions. 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 marketing and sales expenses;
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.
Arch cannot be certain that additional equity or debt financing will be
available to Arch when needed on acceptable terms, if at all. If sufficient
financing is unavailable when needed, Arch may be unable to develop or enhance
its products, take advantage of future opportunities, grow its business or
respond to competitive pressures or unanticipated needs.
Amortization charges from the PageNet merger and the earlier MobileMedia
acquisition may occur sooner than management expects, resulting in earlier
decrease in earnings
Under the purchase method of accounting for the PageNet merger and the
acquisition of MobileMedia Communications, Inc. in June 1999, Arch will have
recorded a substantial amount of goodwill and other intangible assets. This will
result in substantial amortization charges to the consolidated income of Arch
over the useful lives of those assets. Arch estimates the amount of those
charges will total approximately $73.2 million per year for ten years. However,
actual charges in the early years could adversely affect reported results of
operations more than is currently anticipated if the useful lives of the assets
are less than currently estimated.
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 pagers that can send and
receive messages, 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.
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Because Arch depends on Motorola for pagers and on Glenayre and Motorola 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. and Motorola for sufficient terminals and
transmitters to meet its expansion and replacement requirements. Significant
delays in obtaining any of this equipment, such as MobileMedia experienced
before its bankruptcy filing, could lead to disruptions in operations and
adverse financial consequences. Motorola has announced its intention to
discontinue manufacturing transmitters during 2000, although it will continue to
maintain and service existing equipment into the future. Arch's purchase
agreement with Motorola for messaging devices expires on March 17, 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 Arch and PageNet may strain Arch's capacities
and may prevent the combined company from achieving intended synergies
Arch may not be able to successfully integrate 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 and accounting and finance functions and expansion 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 has 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.
Until integration is complete, PageNet's business will continue to operate with
some autonomy. This degree of autonomy may blunt the implementation of Arch's
operating strategy.
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
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, the Company
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the normal
course of business. The Company believes that none of such matters will have a
material adverse effect on the Company's business or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting of Stockholders held on October 5, 2000 the
following proposal was adopted by the vote specified below:
<TABLE>
<CAPTION>
Broker
Proposal For Against Abstain Nonvotes
-------- --- ------- ------- --------
<S> <C> <C> <C> <C>
To issue shares of Arch's common stock pursuant to
an agreement and plan of merger, dated November
7, 1999, as subsequently amended, among Arch,
Paging Network, Inc. and a wholly owned
subsidiary of Arch. 48,291,689 89,769 691,157 --
To amend Arch's restated certificate of incorporation
to increase the number of authorized shares of Arch
common stock from 150,000,000 to 300,000,000
shares. 48,263,344 114,847 694,424 --
</TABLE>
ITEM 5. OTHER INFORMATION
Stockholder Proposals for 2001 Annual Meeting
As set forth in the Company's Proxy Statement for its 2000 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 2001 Annual
Meeting of Stockholders must be received by the Secretary of the Company at the
principal offices of the Company no later than December 29, 2000.
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 2000 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 2001 Annual Meeting is currently expected to
be held on May 15, 2001. 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 23, 2001.
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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 24, 2000 (reporting that the Company
executed an Amendment to its definitive merger agreement with Paging
Network, Inc) filed July 28, 2000.
Current Report on Form 8-K dated September 7, 2000 (reporting that the
Company executed an Amendment to its definitive merger agreement with
Paging Network, Inc) filed September 21, 2000.
Current Report on Form 8-K dated September 25, 2000 (reporting that the
Company changed its name to Arch Wireless, Inc.) filed September 26,
2000.
Current Report on Form 8-K dated November 10, 2000 (reporting that the
Company completed its merger with Paging Network, Inc) filed November
14, 2000.
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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
September 30, 2000, to be signed on its behalf by the undersigned thereunto duly
authorized.
ARCH WIRELESS, INC.
Dated: November 14, 2000 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* Third Amended and Restated Credit Agreement, dated as of March 23,
2000 by and among Arch Paging, Inc., the Lenders Party Hereto, the Bank
Of New York, Royal Bank of Canada, Toronto Dominion (Texas), Inc.,
Barclays Bank PLC and Fleet National Bank, as amended on May 19, 2000
(Amendment No. 1), August 15, 2000 (Amendment No. 2) and October 20,
2000 (Amendment No.3).
27.1* Financial Data Schedule.
* Filed herewith
