<PAGE> 1
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 NO. 0-28196
WEBLINK WIRELESS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2575229
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3333 LEE PARKWAY, SUITE 100
DALLAS, TEXAS 75219
(Address of principal executive offices) (Zip code)
(214) 765-4000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report.)
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
----- -----
As of November 1, 2000, there were 42,546,289, 3,809,363, and 131,250 shares of
the registrant's class A, class B and class D common stock outstanding,
respectively. There were no shares of the registrant's class C common stock
outstanding at November 1, 2000.
<PAGE> 2
WEBLINK WIRELESS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1999
and September 30, 2000.........................................................................3
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 2000.......................................................4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 2000.......................................................5
Notes to Condensed Consolidated Financial Statements................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................20
Item 2. Changes in Securities and Use of Proceeds..........................................................20
Item 3. Defaults Upon Senior Securities....................................................................20
Item 4. Submission of Matters to a Vote of Security Holders................................................20
Item 5. Other Information..................................................................................20
Item 6. Exhibits and Reports on Form 8-K...................................................................20
</TABLE>
2
<PAGE> 3
WEBLINK WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, Sept. 30,
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,440 $ 10,479
Accounts receivable, net 39,857 35,416
Inventories 5,941 14,947
Product sold subject to right of return -- 4,711
Other current assets, net 7,657 8,041
------------ ------------
Total current assets 63,895 73,594
Property and equipment, net 245,596 222,378
Narrowband licenses, net 129,228 126,733
Other assets 13,211 17,075
------------ ------------
Total assets $ 451,930 $ 439,780
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 21,918 $ 31,858
Deferred revenue 54,836 40,475
Current maturities of long-term debt -- 23,000
Other current liabilities 24,772 30,822
------------ ------------
Total current liabilities 101,526 126,155
Long-term debt 538,185 477,240
Other long-term liabilities 659 172
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, $.0001 par value per share, 75,000,000 shares authorized
40,772,267 issued and 40,764,267 outstanding at December 31, 1999, and
46,475,900 shares
issued and 46,467,900 outstanding at September 30, 2000 4 5
Treasury stock, at cost, 8,000 shares at December 31, 1999 and
September 30, 2000 (68) (68)
Additional paid-in capital 229,847 349,641
Accumulated deficit (417,758) (493,923)
Stock subscriptions receivable (465) (244)
Deferred compensation -- (19,198)
------------ ------------
Total stockholders' (deficit) equity (188,440) (163,787)
------------ ------------
Total liabilities and stockholders' (deficit) equity $ 451,930 $ 439,780
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
WEBLINK WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Recurring revenues $ 66,360 $ 58,988 $ 195,764 $ 185,684
Network revenues -- 800 -- 3,707
Equipment revenues 20,908 12,761 49,006 43,085
------------ ------------ ------------ ------------
Total revenues 87,268 72,549 244,770 232,476
Cost of equipment sold 22,593 19,377 55,267 55,571
------------ ------------ ------------ ------------
64,675 53,172 189,503 176,905
Operating expenses:
Technical 19,492 14,789 58,650 48,581
General and administrative 20,254 18,027 60,704 57,364
Selling 12,008 13,354 37,906 38,705
Depreciation and amortization 19,962 19,821 57,689 59,150
Amortization of stock compensation -- 2,134 -- 6,400
------------ ------------ ------------ ------------
Total operating expenses 71,716 68,125 214,949 210,200
------------ ------------ ------------ ------------
Operating income (loss) (7,041) (14,953) (25,446) (33,295)
Other (income) expense:
Interest expense 16,722 16,075 48,177 48,968
Interest income (110) (160) (461) (1,057)
Gain on sale of Canadian affliate -- -- -- (3,331)
Other 590 92 1,632 612
------------ ------------ ------------ ------------
Total other (income) expense 17,202 16,007 49,348 45,192
------------ ------------ ------------ ------------
Loss before extraordinary item (24,243) (30,960) (74,794) (78,487)
Extraordinary item:
Gain from early extinguishment of debt -- -- -- 2,322
------------ ------------ ------------ ------------
Net loss $ (24,243) $ (30,960) $ (74,794) $ (76,165)
============ ============ ============ ============
Net loss per share:
(basic and diluted)
Loss before extraordinary item $ (0.60) $ (0.68) $ (1.85) $ (1.74)
Extraordinary gain -- -- -- 0.05
------------ ------------ ------------ ------------
Net loss $ (0.60) $ (0.68) $ (1.85) $ (1.69)
============ ============ ============ ============
Weighted average number
of shares outstanding
(basic and diluted) 40,525 46,441 40,435 45,189
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
WEBLINK WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 2000
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (74,794) $ (76,165)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Extraordinary gain -- (2,322)
Depreciation and amortization 57,689 59,150
Amortization of stock compensation -- 6,400
Provision for bad debts 5,352 7,426
Loss on sale of property and equipment -- 526
Gain on sale of Canadian affiliate -- (3,331)
Accretion of discount on senior discount notes 43,604 23,043
Amortization of deferred debt issuance costs 1,378 1,504
Utilization of Canadian roaming credits -- 576
Changes in certain assets and liabilities:
Increase in accounts receivable (18,586) (2,985)
(Increase) decrease in inventories 3,703 (9,006)
Increase in product sold subject to right of return -- (4,711)
(Increase) decrease in other current assets 1,724 (960)
(Increase) decrease in other assets 68 (1,065)
Increase (decrease) in accounts payable (4,845) 9,940
Decrease in deferred revenue (6,805) (14,361)
Increase in other current liabilities 2,007 6,050
------------ ------------
Net cash provided by (used in) operating activities 10,495 (291)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (35,397) (33,763)
Sale of short-term investments 1,000 --
Proceeds from the sale of property and equipment -- 51
Proceeds from the sale of Canadian affiliate -- 2,560
Other (42) (27)
------------ ------------
Net cash used in investing activities (34,439) (31,179)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock under
the stock option plan 529 8,288
Payments of stock subscriptions receivable 31 221
Deferred debt issuance costs (3,202) --
Borrowings under the Credit Facility 25,000 23,000
Borrowings on the vendor financing arrangement 539 --
Payments on the vendor financing arrangement (10,224) --
------------ ------------
Net cash provided by financing activities 12,673 31,509
------------ ------------
Net increase (decrease) in cash and cash equivalents (11,271) 39
Cash and cash equivalents, beginning of period 17,476 10,440
------------ ------------
Cash and cash equivalents, end of period $ 6,205 $ 10,479
============ ============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 2,178 $ 18,753
Taxes -- --
Supplemental schedule of noncash investing and financing activities:
Common stock issued in exchange for 11 1/4% Senior Subordinated
Discount Exchange Notes $ -- $ 81,005
Write-off of deferred debt issuance costs-11 1/4% Notes, net -- 1,148
Early extinguishment of 11 1/4% Senior Subordinated Discount Exchange Notes,
at accreted value -- 84,475
Equity conversion related to unconsolidated subsidiary -- 3,482
Phantom stock awards -- 25,598
Issuance of warrants to strategic partner -- 1,422
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
WEBLINK WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
1. GENERAL
The predecessor corporation of WebLink Wireless, Inc. ("WebLink") was
incorporated as a Delaware corporation on May 8, 1989, to provide wireless
messaging products and services, under the name PageMart, Inc. ("PageMart"). In
January 1995, PageMart effected a corporate reorganization pursuant to which
PageMart Nationwide, Inc., a Delaware corporation, became the holding company
parent of PageMart. In December 1995, the name of PageMart Nationwide, Inc. was
changed to PageMart Wireless, Inc. ("Wireless"). On January 28, 1998, PageMart
was merged into Wireless with Wireless as the surviving corporation. On December
1, 1999, the name of Wireless was changed to WebLink Wireless, Inc. WebLink and
its subsidiaries are referred to herein as the "Company." The consolidated
financial statements of the Company include the accounts of PageMart PCS, Inc.,
PageMart II, Inc., PageMart Operations, Inc., PageMart International, Inc. and
certain other direct and indirect subsidiaries of WebLink. Each of these
companies is a wholly-owned subsidiary of WebLink. PageMart PCS, Inc. holds
certain narrowband personal communications services licenses. PageMart II, Inc.
and PageMart Operations, Inc. hold certain Federal Communications Commission
("FCC") licenses. Other than these licenses, the subsidiaries of WebLink have no
significant assets or liabilities.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and are in the form prescribed by
the Securities and Exchange Commission in instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The interim unaudited financial statements should be read
in conjunction with the audited financial statements of the Company for the year
ended December 31, 1999. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
3. REVENUE RECOGNITION
NETWORK REVENUES AND NONRECURRING ENGINEERING FEE
The Company has entered into agreements with Arch Communications Group,
Inc. ("Arch"), Metrocall, Inc. ("Metrocall") and Verizon Paging ("Verizon",
formerly known as AirTouch Paging). The agreements are organized into two
phases. Currently, Arch, Metrocall and Verizon are marketing their switch-based
wireless data services utilizing the Company's wireless data network. During the
second phase, Arch, Metrocall and Verizon will install their own networks
leveraging the Company's infrastructure and sites. Under these agreements, the
companies share certain capital and operating expenses, which will significantly
lower costs for those companies. Verizon elected to enter the second phase of
the agreement in a limited part of the United States in January of 2000. As part
of the agreements, the companies have agreed to pay a non-recurring engineering
fee ("NRE"), which represents access to WebLink's technology for constructing a
two-way wireless data network. This fee will be recognized by the Company on a
straight-line basis as network revenues over the period from the election date
for the second phase to the end of the contract. As part of the Verizon
agreement, the Company pays Verizon an NRE for the use of some of its sites,
which is recognized on a straight-line basis over a similar period as technical
expense.
Network revenues are comprised of: (1) NRE fees, (2) construction revenues
related to the installation of transmitting and receiving equipment and (3)
non-airtime service revenues.
SAB 101
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which currently must be adopted for the fourth quarter of 2000. SAB 101
provides additional guidance on revenue recognition as well as criteria for when
revenue is generally realized and earned and also requires the deferral of
incremental costs. The Company is currently completing its assessment of the
impact of SAB 101 and does not believe that SAB 101 will significantly affect
the Company.
EITF 00-14
In accordance with EITF 00-14 Accounting for Certain Sales Incentives
("EITF 00-14"), sales incentives incurred in prior periods will be reclassified
as a reduction in revenues from selling expense beginning in the fourth quarter
of 2000.
6
<PAGE> 7
SALES INCENTIVES AND REBATES
During the third quarter of 2000, the Company initiated its national retail
sales efforts for the new Motorola Talkabout T900 product. This sales program
includes certain sales incentives paid to retailers when the product is sold by
the retailer. These sales incentives, which result in a loss on the product, are
recorded as a reduction to equipment revenue in the period the products are
shipped to retailers, which is consistent with the recently released EITF 00-14.
However, due to the newness of this product and the nature of the arrangements
with national retailers, the Company is not recognizing revenue on these units
until the retailers sell them to consumers. Hence, equipment revenue received
from the retailer is recorded as deferred revenue until the device is sold to
the consumer. Likewise, product sold subject to the right of return by the
retailer is recorded as an asset until sale to the consumer. The Company
recorded $4.3 million of sales incentives for units held in retailers' inventory
at September 30, 2000. All consumer rebates are recorded upon activation by the
customer as a liability based on the Company's estimated redemption rate. The
liability is recognized as a reduction of airtime revenue over the service
period commitment.
4. EARNINGS PER SHARE
Net loss per share amounts reflected on the Condensed Consolidated
Statements of Operations are based upon the weighted average number of common
shares outstanding. Under the provisions of Statement of Financial Accounting
Standards No. 128 -- Earnings per Share, dilutive securities are excluded from
the calculation of earnings per share when there is a net loss because their
inclusion would be anti-dilutive. The securities listed below were not included
in the computation of dilutive loss per share for the three and nine months
ended September 30, 1999 and 2000, since the effect from the conversion would be
anti-dilutive.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
------------------ ------------------
<S> <C> <C>
Stock Options 5,613,640 6,678,726
Phantom Stock -- 1,075,000
Warrants 640,758 1,134,088
------------------ ------------------
6,254,398 8,887,814
================== ==================
</TABLE>
5. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
Effective November 15, 1995, WebLink International, Inc. (formerly PageMart
International, Inc.) purchased 200,000 shares of common stock of PageMart Canada
Limited ("PageMart Canada") which represented 20% of the ownership of PageMart
Canada. The remaining 800,000 shares were held by PageMart Canada Holding
Corporation ("Canada Holding"). Canada Holding was owned 50% (1,000,000 shares
of class A common stock) by third-party Canadian investors unrelated to WebLink
International, Inc. and 50% (1,000,000 shares of class B common stock) by
WebLink International, Inc. The common shares had identical economic rights, but
voting control of Canada Holding was held by the class A common stockholders as
the class A shares had two votes per share. The Company accounted for its
investments in PageMart Canada and Canada Holding under the equity method. Such
investments were included in Other Current Assets in the Condensed Consolidated
Balance Sheets.
On February 1, 2000, WebLink International, Inc. sold its investments in
PageMart Canada to Bell Mobility Paging Inc. ("Bell Mobility"), a wholly-owned
subsidiary of Bell Canada. WebLink International, Inc. received cash
consideration and Bell Mobility repaid certain intercompany liabilities by
providing Canadian roaming credits. The Canadian roaming credits are recorded at
present value using an 11 1/4% discount rate. A nonrecurring gain of
approximately $3.3 million was recognized on this transaction. The terms of the
sale established an exclusive 10-year network relationship with Bell Mobility as
the Canadian member of the Company's international network. Concurrently,
pursuant to the Agreement Among Stockholders of PageMart Canada dated July 28,
1995, 714,286 shares of class A common stock of WebLink were issued in exchange
for the 1,000,000 class A common shares held by the third-party Canadian
investors in Canada Holding.
6. LONG-TERM DEBT
In March 2000, the Company issued 3.8 million shares of its class A common
stock in exchange for $84.5 million accreted value ($115.9 million maturity
value) of the 11 1/4% Senior Subordinated Discount Exchange Notes due 2008 (the
"11 1/4% Notes"). The Company also wrote down approximately $1.1 million of net
deferred debt issuance costs. In connection with this transaction, the Company
recognized an extraordinary gain of $2.3 million related to the early retirement
of debt.
In September 2000, the March 1997 vendor financing agreement was amended to
reduce the amount of financing available through December 31, 2000 to $10
million.
The Company's $100 million credit facility with Bankers Trust Company and
Morgan Stanley Senior Funding, Inc. (the "Credit Facility") contains financial
covenants based on its traditional paging business. As wireless data emerges as
the Company's primary business, traditional paging units in service are
declining. Due to that decline, the Company expects that, after the close of the
fourth quarter of this year, it will not be in compliance
7
<PAGE> 8
with certain covenants in its Credit Facility related to the traditional paging
business. The Company has begun discussions with its banks to modify the
covenants to reflect more fully the importance of its wireless data business.
7. COMMITMENTS AND CONTINGENCIES
On September 29, 2000, the Company entered into a volume purchase agreement
with Glenayre Electronics, Inc. (the "Volume Purchase Agreement") for the
purchase or license of $20.8 million in wireless network infrastructure
equipment and software through December 31, 2001. This equipment and software
will allow the Company to expand its wireless data network capacity and increase
data speeds in the system enabling the Company to serve a larger base of
subscribers.
8. WARRANTS
In September 2000, the Company signed an agreement with Yahoo! Inc.
("Yahoo!"). Under the terms of the agreement, both companies will contribute
engineering resources and will collaborate technically to combine the Company's
nationwide packet data network with Yahoo!'s messaging and service network.
Yahoo! will feature the Company as a merchant in Yahoo! Shopping. The Company
will purchase online advertising to promote the sale of the Company's devices in
a campaign scheduled to run throughout the Yahoo! network over the course of the
next two years. The Company will sell Yahoo!-WebLink Wireless co-branded 2-way
devices. Yahoo! will receive revenue sharing in sales of such 2-way devices and
in sales of the Company's service.
In conjunction with this agreement, the Company issued a warrant to Yahoo!
to purchase 500,000 shares of the Company's class A common stock at an exercise
price of $9.60 a share. The Company followed the accounting outlined in EITF
96-18, Accounting for Equity Investments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services and Statement
of Financial Accounting Standards No. 123 - Accounting for Stock-Based
Compensation, to account for the warrant. The warrant is separated into three
tranches. The first tranche is fully exercisable with respect to 200,000 shares
upon issuance. The second and third tranches become exercisable upon the
achievement of certain performance objectives. Due to the performance
characteristics of the second and third tranches and the contingent nature of
that performance, the fair value of the warrant associated with these shares can
not be presently assessed. Once the measurement date is attained, the shares
vesting under this warrant will be accounted for using variable plan accounting.
The first tranche was valued at $1.4 million using the Black-Scholes
option-pricing model and recorded as an intangible asset. As of September 30,
2000, approximately $40,000 was expensed as amortization expense in association
with the warrant for the period. The remainder of the amount capitalized will be
amortized over the remaining term of the agreement.
9. STOCK OPTION/STOCK PURCHASE PLANS
Effective January 3, 2000, the Board of Directors adopted and the
stockholders approved at the April 5, 2000 annual meeting, the WebLink Wireless,
Inc. 2000 Flexible Incentive Plan (the "Flexible Incentive Plan"). The Flexible
Incentive Plan provides for the grant of nonqualified and incentive stock
options, stock appreciation rights, restricted stock, performance awards,
dividend equivalent rights, phantom stock, and other awards of incentive
compensation to individuals, partnerships, corporations, joint ventures and any
other form of business organization (collectively, "Persons") who are
responsible for the management, growth and financial success of the Company,
including, without limitation, officers, directors, employees and consultants.
The purpose of the Flexible Incentive Plan is to strengthen the Company by
providing eligible Persons with the opportunity to acquire a proprietary
interest or increase their proprietary interest in the Company, thereby
providing a means of attracting desirable employees, directors, vendors and
consultants, and encouraging them to remain in the service of the Company.
Three million shares of common stock are currently reserved for issuance
under the Flexible Incentive Plan, subject to adjustment in the event of a
recapitalization, stock split, reverse stock split, dividend or other
distribution, reorganization, merger, consolidation, or other similar corporate
transaction.
On February 10, 2000, 1,075,000 shares of phantom stock were granted under
the Flexible Incentive Plan with a three year vesting period. The phantom stock
is payable in the Company's class A common stock at zero cost to the recipients.
Based on the closing market price of $23.8125 reported on The Nasdaq Stock
Market ("Nasdaq") on February 10, 2000, these grants have an aggregate market
value of $25.6 million. The compensation cost associated with the grants is
recorded as amortization of stock compensation over the vesting period.
Accordingly, $8.5 million will be incurred in each of 2000, 2001 and 2002 and
$2.1 million and $6.4 million was recognized for the three and nine months ended
September 30, 2000, respectively.
At the April 5, 2000 annual meeting of stockholders, a proposal to amend
the Company's Nonqualified Formula Stock Option Plan for Non-Employee Directors
("Director's Plan") to increase the maximum number of authorized shares of the
Company's common stock which may be issued under the Director's Plan by 200,000
to a total of 300,000 shares was adopted.
8
<PAGE> 9
10. COMPREHENSIVE INCOME (LOSS)
In January 1998, the Company adopted the Financial Accounting Standards
Board Statement No. 130 - Reporting Comprehensive Income, which establishes
standards for reporting comprehensive income and its components within the
financial statements. Comprehensive income is defined as all changes in the
equity of a business enterprise from transactions and other events and
circumstances, except those resulting from investments by owners and
distributions to owners. The Company's comprehensive income components are
immaterial for the three and nine months ended September 30, 1999 and 2000;
therefore, comprehensive income (loss) is the same as net income (loss) for both
periods.
11. RELATED PARTY TRANSACTION
The Company has entered into an agreement with the chairman and chief
executive officer providing that all obligations on his indebtedness totaling
approximately $178,000, including $15,000 of accrued interest, to the Company
will be suspended until and forgiven on January 3, 2001 if his employment has
not previously been terminated by the Company for cause or by the chairman for a
reason other than good reason (as defined in such agreement).
12. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 - Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). The Company adopted SFAS 131 for the fiscal year ending December 31,
1998. SFAS 131 establishes accounting standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
The Company's reportable segments are divisions that offer different
products and/or services. The Company reports segments based on these divisions,
as management makes operating decisions and assesses individual performances
based on the performance of these segments.
The Company has three reportable segments: Wireless Data, Traditional
Paging and International Divisions. Through its Wireless Data Division, the
Company offers two-way messaging and internet-based information services.
Through its Traditional Paging Division, the Company provides paging and other
one-way wireless messaging services to its subscribers. Through its
International Division, the Company provides messaging services in selected
countries on a seamless international network. The Company pursues international
opportunities through network affiliation agreements between the Company and the
owners of foreign networks.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies presented in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, except for the
allocation of equity and debt by division.
The Company has allocated equity and long-term debt between its Wireless
Data and Traditional Paging Divisions. The methodology the Company follows
results in the attribution of the proceeds of each offering based on the
specific capital and operating requirements of each division. Free cash flow
("Free Cash Flow"), defined as earnings (loss) before interest, taxes,
depreciation and amortization, and amortization of stock compensation
("EBITDA"), less capital expenditures, generated by a division is utilized to
reduce its respective debt allocation. As of September 30, 2000, $148.7 million
and $181.4 million of equity and $455.4 million and $44.8 million of long-term
debt have been allocated to Wireless Data and Traditional Paging, respectively.
For the nine months ended September 30, 2000, interest expense of $41.5 million
and $7.5 million was allocated to Wireless Data and Traditional Paging,
respectively.
The Wireless Data, Traditional Paging and International Divisions each
incur, and are charged, direct costs associated with their separate operations.
Common costs shared by the divisions are allocated based on the estimated
utilization of resources using various factors that attempt to mirror the true
economic cost of operating each division. Amortization of stock compensation is
allocated equally to the Wireless Data and Traditional Paging Divisions.
9
<PAGE> 10
The following table sets forth segment financial information related to the
Company's various operations (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------
(UNAUDITED)
TRADITIONAL
WIRELESS DATA PAGING INTERNATIONAL CONSOLIDATED
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 5,571 $ 81,601 $ 96 $ 87,268
Operating (loss) income (17,344) 10,404 (101) (7,041)
Interest expense 12,817 3,905 -- 16,722
Interest income 91 19 -- 110
Net (loss) income (30,070) 6,492 (665) (24,243)
EBITDA (7,954) 20,976 (101) 12,921
Total assets 329,662 136,569 2,866 469,097
Capital expenditures 7,645 4,257 -- 11,902
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------------------------------------------
(UNAUDITED)
TRADITIONAL
WIRELESS DATA PAGING INTERNATIONAL CONSOLIDATED
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 10,781 $ 61,739 $ 29 $ 72,549
Operating (loss) income (26,051) 11,255 (157) (14,953)
Interest expense 13,892 2,183 -- 16,075
Interest income 160 -- -- 160
Net (loss) income (39,817) 9,014 (157) (30,960)
EBITDA (14,143) 21,302 (157) 7,002
Total assets 300,995 138,394 391 439,780
Capital expenditures 11,499 1,056 -- 12,555
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------
(UNAUDITED)
TRADITIONAL
WIRELESS DATA PAGING INTERNATIONAL CONSOLIDATED
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 9,772 $ 234,638 $ 360 $ 244,770
Operating (loss) income (51,193) 26,118 (371) (25,446)
Interest expense 34,804 13,373 -- 48,177
Interest income 438 23 -- 461
Net (loss) income (85,559) 12,540 (1,775) (74,794)
EBITDA (25,950) 58,564 (371) 32,243
Total assets 329,662 136,569 2,866 469,097
Capital expenditures 21,768 13,629 -- 35,397
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------------------------------------------
(UNAUDITED)
TRADITIONAL
WIRELESS DATA PAGING INTERNATIONAL CONSOLIDATED
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 30,567 $ 201,742 $ 167 $ 232,476
Operating (loss) income (62,122) 29,317 (490) (33,295)
Interest expense 41,464 7,504 -- 48,968
Interest income 721 336 -- 1,057
(Loss) income before
extraordinary item (104,938) 27,118 (667) (78,487)
EBITDA (27,624) 60,369 (490) 32,255
Total assets 300,995 138,394 391 439,780
Capital expenditures 26,067 7,696 -- 33,763
</TABLE>
10
<PAGE> 11
13. SUBSEQUENT EVENT
On November 3, 2000, the Company filed with the Securities and Exchange
Commission a shelf registration statement on Form S-3 of 8,500,000 shares of its
class A convertible common stock. As of the date of filing this report, the
registration statement has not yet become effective. The Company filed the
registration statement to have registered shares available to significant
investors that may be interested in making long-term investments in the Company.
Proceeds from any offerings will be used for general corporate purposes,
primarily to fund operations and capital expenditures, and a portion may be used
to pay interest.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the results of operations and financial
condition of the Company for the three and nine months ended September 30, 1999
and 2000. This discussion should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and the Notes thereto included
elsewhere in this report.
The form 10-Q contains statements that constitute forward-looking
statements. In addition to statements that speak to a time in the future, such
as projections of net subscriber additions and capital expenditures, the words
"estimate," "project," "plan," "expect," "believe" and similar expressions are
intended to identify forward-looking statements. Readers are cautioned that such
forward-looking statements involve risks and uncertainties, and are subject to
change based on various important factors. The factors set forth in other
filings with the Securities and Exchange Commission, as well as the following
factors, could affect the Company's financial performance and could cause actual
results for 2000 and beyond to differ materially from those expressed in any
such forward-looking statements: economic conditions and consumer confidence
generally in the United States; the ability of the Company to manage its high
outstanding indebtedness; the impact of technological change in the
telecommunications industry; the future cost and availability of network
infrastructure and subscriber devices; the impact of competition and pricing of
paging and wireless data services; the timely market acceptance of new products
and services such as two-way messaging; change in regulation by the Federal
Communications Commission ("FCC") and various state regulatory agencies; and the
potential technical problems relating to the Company's wireless data network.
There is no assurance that the Company will be able to amend its Credit Facility
or, if covenant noncompliance occurs, borrow additional amounts or be subject to
early repayment of the outstanding debt under the Credit Facility.
GENERAL
Through its Wireless Data Division, the Company has constructed and
operates a wireless data network which covers approximately 90% of the U.S.
population. The Company has incurred significant capital expenditures and
expects to incur additional capital expenditures and operating losses associated
with the implementation and deployment of its wireless data services. Management
does not expect the Wireless Data Division to generate positive EBITDA (defined
below) until 2001. Through its Traditional Paging Division, the Company provides
paging and other one-way wireless messaging services to its subscribers.
EBITDA represents earnings (loss) before interest, taxes, depreciation and
amortization, and amortization of stock compensation. EBITDA is a financial
measure commonly used in the Company's industry. EBITDA is not derived pursuant
to generally accepted accounting principles ("GAAP"), and therefore should not
be construed as an alternative to operating income, as an alternative to cash
flows from operating activities (as determined in accordance with GAAP) or as a
measure of liquidity. The calculation of EBITDA does not include commitments of
the Company for capital expenditures and payment of debt and should not be
deemed to represent funds available to the Company. The Company's definition of
EBITDA may not be comparable to similarly titled measures used by other
companies.
The Company sells or leases wireless messaging end-user devices to
subscribers, retailers and resellers. The Company earns recurring revenues from
subscribers in the form of fixed periodic fees and incurs substantial operating
expenses in offering its services, including technical, customer service, and
general and administrative expenses.
Since commencing operations in 1990, the Company has invested heavily in
its wireless communications network and administrative infrastructure in order
to establish nationwide coverage, sales offices in major metropolitan areas,
centralized customer service call centers and administrative support functions.
The Company incurs substantial fixed operating costs related to its wireless
communications infrastructure, which is designed to serve a larger subscriber
base than the Company currently serves in order to accommodate growth. In
addition, the Company incurs costs associated with each new subscriber addition.
The Company sustained consolidated operating losses in each year of operations
from inception through 1997. Although the Company recognized a $2.5 million
operating profit in 1998, the Company sustained an aggregate $32.9 million
operating loss from 1997 through 1999 and a $15.0 million and $33.3 million
operating loss for the three and nine months ended September 30, 2000,
respectively. The Wireless Data Division generated operating losses in 1997,
1998, 1999 and the three and nine
11
<PAGE> 12
months ended September 30, 2000 and management expects this trend to continue
into 2001. In the third quarter of 1997, the Company began generating operating
profits in its Traditional Paging Division and management expects this trend to
continue through 2001. Nevertheless, the Company expects to incur consolidated
operating losses through 2001.
The Company's strategy is to expand its wireless data subscriber base to
increase profitability and cash flow through greater utilization of its
nationwide wireless communications network. From the introduction of wireless
data services in December 1998 to September 30, 2000, the number of wireless
data units in service increased to 227,864. None of the Company's growth is
attributable to acquisitions. The Company intends to achieve unit growth by
promoting its wireless data services through its direct sales force, national
retail distribution channels, private brand strategic alliances with
telecommunication companies and wireless data network alliances with companies
such as Arch, Metrocall and Verizon.
The Company has historically sold, rather than leased, substantially all
subscriber units used by its subscribers. As a result, the Company has had much
less capital invested in subscriber units than other carriers since it has
recouped a substantial portion of subscriber unit costs upon sale to
subscribers, retailers and resellers. This has resulted in significantly lower
capital expenditures and depreciation expense than if the Company had leased
units to its subscribers. In addition, the Company's retail distribution
strategy results in the recognition of expenses associated with subscriber unit
sales and other sales and marketing expenses in advance of new subscribers being
added to the base and generating revenues due to the inventory carried by
retailers. However, the Company expects to lease a larger proportion of its
wireless data subscriber units because of the high cost of wireless data
subscriber units compared to traditional paging units. In 1999 and the nine
months ended September 30, 2000, the Company's capital expenditures for
subscriber units has increased as the result of the Company's increased leased
units in wireless data services.
The Company sells and leases its subscriber units through the following
distribution channels: (i) private brand strategic alliances and wireless data
network alliances through its Carrier Services Strategic Business Unit ("SBU"),
(ii) third party local resellers through its Reseller SBU, (iii) national and
regional retail stores through its National Retail SBU and (iv) direct sales
through its Field Sales and National Accounts SBU's. At September 30, 2000, 41%
of the Company's domestic units in service originated from the Carrier Services
SBU, 24% from the Reseller SBU, 21% from the National Retail SBU and 14% from
the Field Sales and the National Accounts SBU's. In the third quarter of 1998,
the Company announced the formation of its Wireless Control Systems (formerly
Telemetry) SBU. This SBU began generating recurring revenues in the third
quarter of 2000 with the sale of its first units in July. The Wireless Control
Systems SBU is expected to become an increasingly important part of the
Company's net additions over the next several years.
For competitive and marketing reasons, the Company generally sells each new
unit to retailers for less than its acquisition cost. The Company's accounting
practices result in the loss on sale of equipment being recorded at the time a
unit is shipped to the retailer. Units sold by the Company during a given month
may exceed units activated and in service due to inventory stocking and
distribution strategies of retailers.
The Company derives its recurring revenue primarily from fixed periodic
fees for services. Consequently, the Company's ability to recoup its initial
selling and marketing costs, to meet operating expenses and to achieve
profitability is dependent on the average length of time that each customer
continues to utilize the Company's service, as operating results benefit from
the recurring payments of the fixed fees without the incurrence of additional
selling expenses by the Company. Conversely, operating results are adversely
affected by customer disconnections. Each month a percentage of the Company's
existing customers have their service terminated for a variety of reasons,
including failure to pay for service, dissatisfaction with service, and
switching to a competing service provider. The Company's average monthly
disconnection rates for the years ended December 31, 1997, 1998 and 1999 were
2.5%, 3.2% and 3.1%, respectively. For the three months ended September 30, 1999
and 2000, the Company's average disconnection rates were 3.0% and 3.6%,
respectively. Average monthly disconnect rates are calculated by dividing (a)
the sum of (i) the subscriber disconnections from each of the Carrier Services
SBU's strategic alliance partners, to the extent that each partner has net
disconnections, (ii) net subscriber disconnections from the local reseller
channel, taken as a whole and (iii) subscriber disconnections from all national
retail and direct sales channels, by (b) the total number of units in service at
the beginning of the period. Disconnect rates are stated as the monthly average
of each period presented.
Approximately 85% of the Company's average revenue per unit ("ARPU") is
attributable to fixed fees for airtime, coverage options and features. The
remainder is dependent on usage. Management anticipates that the Company's
consolidated ARPU will increase as subscriber additions in the Wireless Data
Division increase, since wireless data services yield a significantly higher
ARPU than traditional paging services. Management anticipates that the Company's
Traditional Paging Division's ARPU will remain constant or decline slightly in
the foreseeable future.
The Company will be adopting SAB 101 and EITF 00-14 in the fourth quarter
of 2000. The Company is currently completing its assessment of the impact of SAB
101 and EITF 00-14 and does not believe they will significantly affect the
Company (see Note 3 to the Condensed Consolidated Financial Statements of the
Company).
12
<PAGE> 13
RESULTS OF OPERATIONS
WIRELESS DATA DIVISION
The Company's Wireless Data Division is expected to fuel the growth of the
Company in the future. Nationwide coverage was first offered on December 15,
1998 with coverage to 70% of the U.S. population. When the wireless data network
was substantially completed in April 1999, approximately 90% of the U.S.
population was covered. The following discussion analyzes the results of this
division's operations, unless otherwise indicated.
Units in Service
The Company had 49,001 units in service as of September 30, 1999 compared
to 227,864 as of September 30, 2000. The Company received its first shipments of
full two-way wireless data devices in February 2000, contributing to the 32,722
net subscriber additions reported in the first quarter of 2000 and the 52,512
net subscriber additions for the second quarter of 2000. The Company began
receiving shipments of the Motorola Talkabout T900's in June 2000. The T900
contributed significantly to the 81,055 net subscriber additions for the third
quarter of 2000. The Company expects that wireless data net subscriber additions
will increase to approximately 110,000 in the fourth quarter of 2000 and to
approximately 600,000 in 2001.
Revenues
Revenues for the three and nine months ended September 30, 1999 were $5.6
million and $9.8 million, respectively, compared to $10.8 million and $30.6
million for the three and nine months ended September 30, 2000, respectively.
Recurring revenues for the same periods were $1.8 million, $2.7 million, $6.8
million and $15.8 million, respectively. Revenues from equipment sales for the
same periods were $3.8 million, $7.1 million, $3.2 million and $11.1 million,
respectively. In the first quarter of 2000, Verizon elected to enter the second
phase of their network affiliation agreement with the Company and in the second
quarter of 2000, the Company completed the construction of a custom network for
the U. S. Department of Energy. For the three and nine months ended September
30, 2000, network revenues of $0.8 million and $3.7 million, respectively, were
recognized. Network revenues are comprised of: (1) non-recurring engineering
fees; (2) construction revenues related to the installation of transmitting and
receiving equipment; and (3) non-airtime service revenues. The Company did not
recognize any comparable revenue for the three and nine months ended September
30, 1999. ARPU was $16.44 for the three months ended September 30, 1999 compared
to $12.04 for the three months ended September 30, 2000. Management expects
Wireless Data ARPU to vary somewhat throughout 2000 as long as high growth
results in a high percentage of the customer base being added in a quarter.
During the third quarter of 2000, the Company initiated its national retail
sales efforts for the new T900. This sales program includes certain sales
incentives paid to retailers when the product is sold by the retailer. These
sales incentives, which result in a loss on the product, are recorded as a
reduction to equipment revenue in the period the products are shipped to
retailers, which is consistent with the recently released EITF 00-14. However,
due to the newness of this product and the nature of the arrangements with
national retailers, the Company is not recognizing revenue on these units until
the retailers sell them to consumers. Hence, equipment revenue received from the
retailer is recorded as deferred revenue until the device is sold to the
consumer. Likewise, product sold subject to the right of return by the retailer
is recorded as an asset until sale to the consumer. The Company recorded $4.3
million of sales incentives for units held in retailers' inventory at September
30, 2000. All consumer rebates are recorded upon activation by the customer as a
liability based on the Company's estimated redemption rate. The liability is
recognized as a reduction of airtime revenue over the service period commitment.
Cost of Equipment Sold
The cost of equipment sold for the three and nine months ended September
30, 1999 was $3.7 million and $7.4 million, respectively, compared to $9.1
million and $18.2 million for the three and nine months ended September 30,
2000, respectively. Management expects a larger proportion of new wireless data
units will be leased, rather than sold, resulting in lower cost of equipment
sold, higher capital expenditures and higher depreciation expense.
Operating Expenses
Technical expenses were $6.8 million and $20.3 million for the three and
nine months ended September 30, 1999, respectively, compared to $7.7 million and
$22.6 million for the three and nine months ended September 30, 2000,
respectively. Management expects technical costs to increase in 2000 as the
Company plans to add transmitters and receivers to improve and expand its
coverage.
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) for the three
and nine months ended September 30, 1999 and 2000 were $1.4 million, $3.9
million, $3.3 million and $6.0 million, respectively. As the number of wireless
data units in service grows, additional resources must be allocated to support
those customers, some of which will be shifted from the Traditional Paging
Division. This is expected to cause an increase in general and administrative
expenses in the Wireless Data Division.
13
<PAGE> 14
Selling expenses for the three and nine months ended September 30, 1999
were $1.5 million and $4.2 million, respectively, compared to $4.8 million and
$11.4 million for the three and nine months ended September 30, 2000,
respectively. Management expects to aggressively market wireless data services,
and selling expenses are expected to increase as a result. If market growth
warrants, selling expenses may increase significantly in the future.
Depreciation and amortization was $9.4 million and $25.2 million for the
three and nine months ended September 30, 1999, respectively, compared to $10.8
million and $31.3 million for the three and nine months ended September 30,
2000, respectively. The nationwide buildout of the Company's wireless data
network was substantially completed in April 1999. As a result, the Company
recorded higher depreciation expense in the first, second and third quarters of
2000.
TRADITIONAL PAGING DIVISION
The Company provides domestic one-way paging services in its Traditional
Paging Division. This division is a mature business requiring only a maintenance
level of capital investment and producing EBITDA, operating income and net
income. Management expects EBITDA from this division to decline over time. The
following discussion analyzes the results of this division's operations, unless
otherwise indicated.
Units in Service
Units in service from domestic one-way paging operations were 2,622,530 and
2,105,282 as of September 30, 1999 and 2000, respectively. In addition, PageMart
Canada's units in service were 66,238 at September 30, 1999. As a result of its
ownership interest in PageMart Canada, the Company's proportional share of the
units in service of PageMart Canada was 39,743 units at September 30, 1999. On
February 1, 2000, the Company sold its ownership interest in PageMart Canada;
therefore, the Company no longer reports a proportional share of the units in
service of PageMart Canada (see Note 5 to the Condensed Consolidated Financial
Statements of the Company).
The Company's one-way operations experienced a net decrease of 175,373
units in service in the third quarter of 2000, which reflects the general market
for traditional paging. This continues a trend from 1999. Management believes
there is a declining market for traditional one-way paging services, and demand
appears to be shifting to the higher quality and greater benefits of wireless
data services. Therefore, management expects net subscriber losses to continue
through at least 2001.
Revenues
Total revenues for the three and nine months ended September 30, 1999 and
2000 were $81.6 million, $234.6 million, $61.7 million and $201.7 million,
respectively. Recurring revenues for airtime, voice mail and other services for
the same periods were $64.5 million, $193.1 million, $52.2 million and $169.9
million, respectively. The decrease in recurring revenue is due primarily to the
declining number of subscriber units. Recurring revenues for the first nine
months of 2000 were favorably affected by the recognition of $4.4 million of
one-time revenues associated with the revision of estimates. Revenues from
equipment sales for the three and nine months ended September 30, 1999 and 2000
were $17.1 million, $41.6 million, $9.5 million and $31.8 million, respectively.
The decrease in equipment revenue in the third quarter is due primarily to a
decrease in the average unit sales price resulting from sales of the PerComm
Odyssey pager. In the second quarter, the Company began selling the $29 PerComm
Odyssey pager to national retail stores across the country. The remainder of the
decline is due to the decrease in demand for traditional paging devices.
The Company's ARPU was $8.30 and $7.94 in the third quarters of 1999 and
2000, respectively. This decrease is principally due to a decrease in
subscribers in the National Retail distribution channel, which generally has a
higher ARPU. Management expects ARPU to remain constant or decline somewhat in
the foreseeable future with variations from changes in distribution and product
mix.
Cost of Equipment Sold
The cost of equipment sold for the three and nine months ended September
30, 1999 and 2000 was $18.8 million, $47.7 million, $10.3 million and $37.0
million, respectively. The decrease in 2000 was chiefly due to the decrease in
the cost of subscriber devices. Cost of equipment sold was favorably affected by
a $1.1 million change in inventory valuation allowance during the three months
ended September 30, 2000. The Company expects subscriber device costs to
decrease throughout 2000. The loss on equipment sold (equipment revenue less
cost of equipment sold) is recognized when subscriber devices are shipped to the
retailers, before the devices are placed into service. The Company has
historically sold rather than leased the majority of devices.
Operating Expenses
Technical expenses were $12.7 million, $38.4 million, $7.1 million and
$26.0 million, respectively, for the three and nine months ended September 30,
1999 and 2000. The decrease in 2000 was due in part to the decrease in the
subscriber base and the maturation of operations. Additionally, management
expects on-going technical expenses to
14
<PAGE> 15
slowly decline as resources are transferred to the Wireless Data Division. Based
on an average monthly cost per unit in service, technical expenses were $1.63
and $1.08 for the three months ended September 30, 1999 and 2000, and $1.63 and
$1.24 for the nine months ended September 30, 1999 and 2000, respectively.
During the third quarter of 2000, the Traditional Paging Division's
technical expenses were favorably affected by a $3.7 million reduction related
to the effect on interconnection arrangements with local exchange carriers of
the Telecommunications Act of 1996 and associated FCC and court rulings. The
Company does not expect any future reductions in technical expense related to
the interconnection arrangements. The total reduction for the nine months ended
September 30, 2000 was $7.3 million.
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) for the three
and nine months ended September 30, 1999 and 2000 were $18.8 million, $56.8
million, $14.7 million and $51.3 million, respectively. The decrease was largely
due to increased operating efficiencies and the transfer of resources to the
Wireless Data Division. General and administrative expenses were favorably
affected by $2.1 million of non-recurring items during the three months ended
September 30, 2000. On an average cost per month per unit in service basis,
general and administrative expenses were $2.42 and $2.23 for the three months
ended September 30, 1999 and 2000, and $2.41 and $2.45 for the nine months ended
September 30, 1999 and 2000, respectively.
Selling expenses for the three and nine months ended September 30, 1999 and
2000 were $10.3 million, $33.2 million, $8.4 million and $27.0 million,
respectively. The decrease is the result of the maturation of operations.
Management expects selling expenses to remain relatively constant in the near
future. During the three and nine months ended September 30, 1999 and 2000, the
Company incurred $156,000, $468,000, $124,000 and $290,000, respectively, in
selling expenses associated with international operations.
Depreciation and amortization for the three and nine months ended September
30, 1999 and 2000 was $10.6 million, $32.4 million, $9.0 million and $27.9
million, respectively. The decrease resulted from the spending of only
maintenance levels in capital expenditures. Depreciation and amortization should
decline over the next few years. As an average cost per month per unit in
service, depreciation and amortization was $1.36 and $1.38 for the three and
nine months ended September 30, 1999, and $1.36 and $1.33 for the three and nine
months ended September 30, 2000, respectively.
CONSOLIDATED
Amortization of Stock Compensation
On February 10, 2000, 1,075,000 shares of Phantom Stock were granted under
the Flexible Incentive Plan with a three year vesting period. Based on the
closing market price of $23.8125 reported on Nasdaq on February 10, 2000, these
grants have an aggregate market value of $25.6 million. The compensation cost
associated with the grants is recorded as amortization of stock compensation
over the vesting period. Accordingly, $8.5 million will be incurred in each of
2000, 2001 and 2002 and $2.1 million and $6.4 million was recognized for the
three and nine months ended September 30, 2000, respectively.
Interest Expense
Consolidated interest expense increased from $48.2 million for the nine
months ended September 30, 1999 to $49.0 million for the nine months ended
September 30, 2000 and decreased from $16.7 million for the three months ended
September 30, 1999 to $16.1 million for the three months ended September 30,
2000. The increase in the nine month period was the result of the increased
interest related to the 15% Senior Discount Exchange Notes due 2005 (the "15%
Notes"), and the $100 million Credit Facility with Bankers Trust Company and
Morgan Stanley Senior Funding, Inc. (the "Credit Facility") offset somewhat by
decreased interest related to the conversion of $84.5 million accreted value of
11 1/4% Notes into equity. The slight decrease from the three month period
ending September 30, 1999 to the three month period ending September 30, 2000 is
due primarily to the decreased interest related to the 11 1/4 Notes conversion.
For the three and nine months ended September 30, 1999 and 2000, respectively,
interest expense related to the 15% Notes was $7.3 million, $21.0 million, $8.0
million and $23.9 million; to the 11 1/4% Notes, $8.2 million, $24.0 million,
$6.7 million and $21.3 million; to a vendor financing arrangement, $32,000,
$384,000, $0 and $0, and to the Credit Facility, $1.1 million, $2.4 million,
$1.4 million and $3.7 million.
Net Loss
The Company sustained a consolidated loss for the three and nine months
ended September 30, 1999 of $24.2 million and $74.8 million, respectively. For
the three and nine months ended September 30, 2000, the Company sustained a
consolidated net loss before an extraordinary item of $31.0 million and $78.5
million, respectively, including a $3.3 million gain recognized from the sale of
the Company's investment in its Canadian affiliate in the first quarter (see
Note 5 to the Condensed Consolidated Financial Statements of the Company). A
one-time extraordinary gain of $2.3 million was recognized in the first quarter
of 2000 in conjunction with the early retirement of $84.5 million accreted value
of the 11 1/4% Notes. Including the extraordinary item, the Company's
consolidated net loss was $31.0 million and $76.2 million for the three and nine
months ended September 30, 2000, respectively.
15
<PAGE> 16
Divisional Allocations
The Company has allocated equity and long-term debt between its Wireless
Data and Traditional Paging Divisions. The methodology the Company follows
results in the attribution of the proceeds of each offering based on the
specific capital and operating requirements of each division. Free Cash Flow,
defined as EBITDA less capital expenditures ("Free Cash Flow"), generated by a
division is utilized to reduce its respective debt allocation. As of September
30, 2000, $148.7 million and $181.4 million of equity and $455.4 million and
$44.8 million of long-term debt has been allocated to the Wireless Data and
Traditional Paging Divisions, respectively.
The Wireless Data, Traditional Paging and International Divisions each
incur, and are charged, direct costs associated with their separate operations.
Common costs shared by the divisions are allocated based on the estimated
utilization of resources using various factors that attempt to mirror the true
economic cost of operating each division. Amortization of stock compensation is
allocated equally to the Wireless Data and Traditional Paging Divisions.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The tables below set forth management's presentation of the results of the
Wireless Data and Traditional Paging Divisions' operations and other data on a
quarterly basis for the six most recent fiscal quarters. This presentation
should be read in conjunction with the Condensed Consolidated Financial
Statements of the Company and the Notes thereto included elsewhere in this
report and the Company's quarterly reports on Form 10-Q for the corresponding
periods below, and should not be considered in isolation or as an alternative to
results of operations that are presented in accordance with GAAP.
WIRELESS DATA DIVISION
<TABLE>
<CAPTION>
==========================================================================
THREE MONTHS ENDED
--------------------------------------------------------------------------
Jun. 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1999 1999 1999 2000 2000 2000
--------- --------- --------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Recurring revenues $ 675 $ 1,811 $ 2,809 $ 4,049 $ 4,939 $ 6,768
Network revenues -- -- -- 654 2,253 800
Equipment revenues 2,873 3,760 806 2,296 5,595 3,213
--------- --------- --------- --------- --------- ---------
3,548 5,571 3,615 6,999 12,787 10,781
Cost of equipment sold 3,053 3,725 942 2,486 6,662 9,050
--------- --------- --------- --------- --------- ---------
Net revenues 495 1,846 2,673 4,513 6,125 1,731
Technical expenses 7,297 6,818 6,736 7,077 7,764 7,713
General and administrative 1,270 1,445 1,804 1,307 1,383 3,329
expenses
Selling expenses 1,481 1,537 1,927 2,730 3,858 4,832
Depreciation and amortization 8,128 9,390 9,951 10,059 10,398 10,841
Amortization of stock compensation -- -- -- 1,067 1,066 1,067
--------- --------- --------- --------- --------- ---------
Operating loss (EBIT) $ (17,681) $ (17,344) $ (17,745) $ (17,727) $ (18,344) $ (26,051)
========= ========= ========= ========= ========= =========
EBITDA(1) $ (9,553) $ (7,954) $ (7,794) $ (6,601) $ (6,880) $ (14,143)(3)
========= ========= ========= ========= ========= =========
Other data:
Ending units in service 24,416 49,001 61,575 94,297 146,809 227,864
ARPU(2) $ 15.69 $ 16.44 $ 16.94 $ 17.32 $ 13.66 $ 12.04
</TABLE>
----------
(1) Earnings (loss) before interest, taxes, depreciation and amortization,
and amortization of stock compensation.
(2) Calculated by dividing recurring revenues for the quarter by the
simple average number of units in service during that quarter. Stated
as the monthly average for the quarter.
(3) Excluding $4.3 million of sale incentives for units held in retailers'
inventory, EBITDA would have been $9.8 million for the quarter.
16
<PAGE> 17
TRADITIONAL PAGING DIVISION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1999 1999 1999 2000 2000 2000
---------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Recurring revenues $ 64,006 $ 64,549 $ 62,029 $ 58,964 $ 58,744 $ 52,220
Equipment revenues 16,329 17,052 14,514 11,416 10,879 9,519
---------- ---------- ---------- ---------- ---------- ----------
80,335 81,601 76,543 70,380 69,623 61,739
Cost of equipment sold 18,556 18,827 15,656 12,626 14,115 10,265
---------- ---------- ---------- ---------- ---------- ----------
Net revenues 61,779 62,774 60,887 57,754 55,508 51,474
Technical expenses 13,146 12,674 11,229 9,654 9,297 7,076
General and administrative 18,102 18,809 18,211 18,448 18,199 14,698
expenses
Selling expenses 10,346 10,315 10,411 9,734 8,863 8,398
Depreciation and amortization 10,949 10,572 10,507 9,439 9,433 8,980
Amortization of stock compensation -- -- -- 1,067 1,066 1,067
---------- ---------- ---------- ---------- ---------- ----------
Operating income (EBIT) $ 9,236 $ 10,404 $ 10,529 $ 9,412 $ 8,650 $ 11,255
========== ========== ========== ========== ========== ==========
EBITDA(1) $ 20,185 $ 20,976 $ 21,036 $ 19,918(4) $ 19,149(5) $ 21,302(6)
========== ========== ========== ========== ========== ==========
Other data:
Ending units in service 2,564,053 2,622,530 2,559,353 2,387,444 2,280,655 2,105,282
ARPU(2) $ 8.38 $ 8.30 $ 7.98 $ 7.95 $ 8.39 $ 7.94
</TABLE>
----------
(1) Earnings (loss) before interest, taxes, depreciation and amortization,
and amortization of stock compensation.
(2) Calculated by dividing recurring revenues for the quarter by the
simple average number of units in service during that quarter. Stated
as the monthly average for the quarter.
(3) Excluding $4.3 million of sale incentives for units held in retailers'
inventory, EBITDA would have been $9.8 million for the quarter.
(4) Excluding certain comparable items to those listed in footnote (5),
EBITDA would have been $17.7 million for the quarter.
(5) Excluding one-time revenues, reductions in technical expense
associated with the Telecommunications Act of 1996, and the increased
equipment losses associated with the PerComm launch, EBITDA would have
been $14.8 million for the quarter.
(6) Excluding reductions in technical expense associated with the
Telecommunications Act and associated FCC and court rulings and
certain other one-time items, EBITDA would have been $14.4 million for
the quarter.
SEASONALITY
Device usage is slightly higher during the spring and summer months, which
is reflected in higher incremental usage fees earned by the Company. The
Company's retail sales are generally subject to seasonal fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have historically required substantial capital
investment for the development and installation of its wireless communications
network, the procurement of subscriber units and expansion into new and in
existing markets. To date, these investments by the Company have been funded by
the proceeds from the issuance of common stock, preferred stock, long-term debt,
as well as borrowings under bank and vendor financing arrangements.
Capital expenditures were $35.4 million and $33.8 million for the nine
months ended September 30, 1999 and 2000, respectively. In September 2000, the
Company signed a Volume Purchase Agreement in which the Company committed to
purchase or license of $20.8 million of network infrastructure equipment and
software through December 31, 2001. (See Note 7 to the Condensed Consolidated
Financial Statements of the Company.) The Company committed to purchase $40
million in network infrastructure equipment and ReFLEX25 wireless data
subscriber units from Motorola from December 1, 1995 to June 30, 2001. The
Company fully met the Motorola commitment by the first quarter of 2000.
The Company's net cash provided by operating activities for the nine months
ended September 30, 1999 was $10.5 million and net cash used in operating
activities for the nine months ended September 30, 2000 was $291,000. Net cash
used in investing activities for the same periods was $34.4 million and $31.2
million, respectively, and was primarily for capital expenditures. Net cash
provided by financing activities for the same periods was $12.7 million and
$31.5 million, respectively. Cash provided by financing activities in 1999
resulted primarily from the borrowing of $25.0 million under the Company's
Credit Facility. Cash provided by financing activities in 2000 primarily
resulted from the proceeds received from the issuance of common stock under the
Company's stock option plan and $23.0 million in borrowings under the Company's
Credit Facility.
17
<PAGE> 18
The 11 1/4% Notes, which are unsecured senior subordinated obligations of
the Company, mature in 2008 and were issued at a substantial discount from their
principal amount at maturity. In March 2000, the Company issued 3.8 million
shares of its class A common stock in exchange for $84.5 million accreted value
($115.9 million maturity value) of the 11 1/4% Notes. The accretion of original
issue discount on the 11 1/4% Notes will cause an increase in indebtedness,
after the exchange transaction, from September 30, 2000 to February 1, 2003 of
$71.2 million. From and after August 1, 2003, interest on the 11 1/4% Notes will
be payable semiannually, in cash.
The 15% Notes, which are unsecured senior obligations of the Company,
mature in 2005 and were issued at a substantial discount from their principal
amount at maturity. The 15% Notes were fully accreted by February 1, 2000. From
and after August 1, 2000, interest on the 15% Notes are payable semiannually, in
cash.
In March 1997, the Company entered into a vendor financing arrangement with
an infrastructure vendor (the "Vendor Financing Arrangement"), providing for the
financing of infrastructure and other equipment over a period of 60 months. In
September 2000, the maximum aggregate amount available was amended from $30
million to $10 million. Borrowings under the Vendor Financing Arrangement are
available until December 31, 2000 and are secured by the equipment purchased.
The interest rate applicable to such financing is equal to the sum of 7% and the
London interbank offered rate ("LIBOR") as published in The Wall Street Journal
for three-month maturities or the sum of 4.25% and the U.S. prime rate of
interest as published in The Wall Street Journal. As of September 30, 2000, the
Company had no outstanding balance under the Vendor Financing Arrangement, but
it expects to borrow approximately $10 million by December 31, 2000.
In March 1999, the Company entered into the Credit Facility which provides
for $75 million of multi-draw term loans (the "Term Loans") and $25 million of
revolving loans (the "Revolving Loans") with a maturity date of June 30, 2003.
On March 24, 1999, the Company borrowed $25 million in Term Loans under the
Credit Facility, of which approximately $12 million was used to repay amounts
outstanding under the Vendor Financing Arrangement and to fund the fees and
expenses of the Credit Facility. In the third quarter of 2000, the Company
borrowed an additional $23 million to pay the interest due on the 15% Notes and
support general operations. As of September 30, 2000, total availability under
the Credit Facility was $100 million, of which $48 million was outstanding in
the form of Term Loans. The Credit Facility bears interest at the U.S. prime
rate plus 2.75% or at LIBOR plus 3.75%. The weighted average interest rate on
the amounts borrowed for the period from January 1, 2000 to September 30, 2000
was 10.35%. The commitment to lend additional amounts under the Term Loans
expires December 31, 2000 and under the Revolving Loans expires June 30, 2003.
As of September 30, 2000, the Company's indebtedness was $244.9 million
under the 11 1/4% Notes, $207.3 million under the 15% Notes and $48 million
under the Credit Facility.
The indentures under which the 15% Notes and the 11 1/4% Notes were issued,
the Vendor Financing Arrangement and the Credit Facility contain certain
restrictive covenants that, among other things, limit the ability of the Company
to incur indebtedness, pay dividends, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets, enter
into leases and engage in mergers and consolidations, and the Credit Facility
requires the Company to maintain certain operating and financial performance
measures and limits the ability of the Company to make capital expenditures.
Some of the financial covenants in the Credit Facility are based on the
Company's traditional paging business. As wireless data emerges as the Company's
primary business, traditional paging units in service are declining. Due to that
decline, the Company expects that, after the end of the fourth quarter of this
year, it will not be in compliance with the covenants related to the traditional
paging business. The Company has begun discussions with its banks to modify the
covenants to reflect the emergence of wireless data as the Company's primary
business and the decline in traditional paging units. The Company believes it
will be successful in doing so, but there is no assurance that the Company will
be able to amend the Credit Facility or, if covenant noncompliance occurs,
borrow additional amounts or not be subject to early repayment of the
outstanding debt under the Credit Facility.
For 1999, the Company reported $45.4 million of consolidated EBITDA and
$45.7 million of consolidated capital expenditures. The Company expects that its
traditional paging operations will generate EBITDA at a declining rate over at
least the next couple of years, which will be used primarily to help fund its
wireless data operations for the next few years. The Company cannot assure that
its traditional paging operations will continue to generate EBITDA or that its
consolidated operations will become profitable or continue to generate positive
EBITDA. If the Company cannot achieve operating profitability or continue to
generate EBITDA, the Company may not be able to fund its operations or make
required debt service payments.
In addition to funding its operating losses, the Company expects to require
at least $75 million for capital expenditures, including expenditures for
subscriber units leased to customers and for infrastructure equipment the
Company is committed to purchase, for the five quarters ending December 31,
2001. More capital expenditures may be required if the Company participates in
auctions for additional frequency licenses. The 15% Notes require cash payments
of interest in the amount of $15.5 million in both February 2001 and in August
2001.
18
<PAGE> 19
As of September 30, 2000, the Company had approximately $10.5 million in
cash and cash equivalents. At September 30, 2000, additional borrowings
available under the Vendor Financing Arrangement were $10 million and under the
Credit Facility were $52 million. The Company expects to borrow further on its
Credit Facility and the Vendor Financing Arrangement in the final quarter of
this year. The Company anticipates that its cash balance and amounts available
under the Vendor Financing Arrangement and Credit Facility, combined with the
Free Cash Flow from the Company's Traditional Paging Division, will be
sufficient to fund the Company's consolidated operations, capital expenditures
and all cash interest costs through 2000. The Company has filed a shelf
registration statement for 8.5 million of its common securities with the
Securities and Exchange Commission on November 3, 2000. The Company anticipates
that the sale of these equity securities will commence in the fourth quarter or
early next year. The registration statement has not yet become effective. The
commitment to lend additional amounts under the Vendor Financing Arrangement and
under the $75 million of Term Loans expires December 31, 2000. The Company has
begun discussions with its banks to extend the period within which Term Loans
can be drawn down. The Company believes it will be successful in doing so but no
assurance may be given.
From time to time, the Company will selectively consider potential
opportunities to make acquisitions intended to enhance its strategic position in
the wireless messaging industry. If the Company were to pursue any such
acquisitions, the Company would expect to obtain any necessary financing through
additional borrowings and/or equity financing and would need to successfully
integrate the acquired business into the existing operations.
Future revenues, costs, product mix and new product acceptance are all
influenced by a number of factors which are inherently uncertain and difficult
to predict. Therefore, no assurance can be given that financing for such
investments will be available. No assurance can be given that the Company's
strategy will be implemented as currently planned or that the Company's
operations will generate positive cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's investment policy requires investments in high-quality
investment grade securities including obligations of the U.S. Government
guaranteed by the United States of America, money market deposits and corporate
commercial paper. The Company typically invests its surplus cash in these types
of securities for periods of relatively short duration. Although the Company is
exposed to market risk related to changes in short-term interest rates on these
investments, the Company manages these risks by closely monitoring market
interest rates and the duration of its investments. Due to the short-term
duration and the limited dollar amounts exposed to market interest rates,
management believes that fluctuations in short-term interest rates will not have
a material adverse effect on the Company's results of operations. The Company
does not enter into financial investments for speculation or trading purposes
and is not a party to any financial or commodity derivatives.
The Credit Facility bears interest at the U.S. prime rate plus 2.75% or at
LIBOR plus 3.75%. Therefore, the Credit Facility is subject to short-term
interest rate risk. At September 30, 2000, the balance outstanding under the
Credit Facility was $48.0 million. Consequently, a 100 basis point increase in
the U.S. prime rate or LIBOR would result in a $480,000 increase in interest
expense over a twelve month period.
19
<PAGE> 20
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the normal course of
business. In management's opinion, the ultimate outcome of these lawsuits will
not have a material adverse effect on the results of operations or financial
condition of the Company.
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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed on the accompanying index to exhibits are filed as part
of this quarterly report.
(b) Reports on Form 8-K
None
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEBLINK WIRELESS, INC.
NOVEMBER 14, 2000 BY: /s/ JOHN D. BELETIC
------------------------------------
JOHN D. BELETIC
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NOVEMBER 14, 2000 BY: /s/ JOHN R. HAUGE
-------------------------------------
JOHN R. HAUGE
VICE PRESIDENT, FINANCE
CHIEF FINANCIAL OFFICER AND TREASURER
(PRINCIPAL FINANCIAL AND CHIEF
ACCOUNTING OFFICER)
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1* Volume Purchase Agreement dated as of September 29,
2000 between the Company and Glenayre Electronics,
Inc.
10.2* Amendment No. 3 to Promissory Note and Security
Agreement dated as of September 15, 2000 between the
Company and Glenayre Electronics, Inc.
10.3* Warrant to Purchase up to 500,000 shares of class A
convertible common stock of WebLink Wireless, Inc.
dated as of September 11, 2000 between the Company
and Yahoo!, Inc.
10.4* Amended and Restated Agreement Among Certain
Shareholders of WebLink Wireless, Inc. dated as of
June 8, 2000.
11.1* Statement regarding computation of per share earnings
(loss) for the three months ended September 30, 2000
11.2* Statement regarding computation of per share earnings
(loss) for the three months ended September 30, 1999
11.3* Statement regarding computation of per share earnings
(loss) for the nine months ended September 30, 2000
11.4* Statement regarding computation of per share
earnings (loss) for the nine months ended September
30, 1999
12.1* Computation of ratio of earnings to fixed charges
27.1* Financial Data Schedule
</TABLE>
* Filed herewith
