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 June 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
______________ to _____________
Commission File Numbers 0-23232/1-14248
ARCH WIRELESS, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 31-1358569
(State of incorporation) (I.R.S. Employer Identification No.)
1800 WEST PARK DRIVE, SUITE 250
WESTBOROUGH, MASSACHUSETTS 01581
(address of principal executive offices) (Zip Code)
(508) 870-6700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months or for such shorter period that the Registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 182,434,590 shares of the
Company's Common Stock ($.01 par value) were outstanding as of August 10, 2001.
ARCH WIRELESS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
--------------------- ----
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of June 30, 2001
and December 31, 2000 3
Consolidated Condensed Statements of Operations for the
Three and Six Months Ended June 30, 2001 and 2000 4
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARCH WIRELESS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
June 30, December 31,
2001 2000
---- ----
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 39,811 $ 55,007
Accounts receivable, net 113,924 134,396
Inventories 2,294 2,163
Prepaid expenses and other 37,083 19,877
----------- -----------
Total current assets 193,112 211,443
----------- -----------
Property and equipment, at cost 1,476,508 1,442,072
Less accumulated depreciation and amortization (1,014,446) (444,650)
----------- -----------
Property and equipment, net 462,062 997,422
----------- -----------
Intangible and other assets, net 55,191 1,100,744
----------- -----------
$ 710,365 $ 2,309,609
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 1,585,736 $ 177,341
Accounts payable 57,751 55,282
Accrued restructuring 19,058 60,424
Accrued interest 28,200 39,140
Accrued expenses and other liabilities 143,297 165,459
----------- -----------
Total current liabilities 1,834,042 497,646
----------- -----------
Long-term debt 65,409 1,679,219
----------- -----------
Other long-term liabilities 65,286 74,509
----------- -----------
Deferred income taxes 3,994 121,994
----------- -----------
Redeemable convertible preferred stock 114,472 30,505
----------- -----------
Stockholders' equity (deficit):
Common stock-- $.01 par value 1,824 1,635
Additional paid-in capital 1,107,233 1,095,779
Accumulated other comprehensive income (439) (82)
Accumulated deficit (2,481,456) (1,191,596)
----------- -----------
Total stockholders' equity (deficit) (1,372,838) (94,264)
----------- -----------
$ 710,365 $ 2,309,609
=========== ===========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
ARCH WIRELESS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except share and per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 303,399 $ 187,852 $ 630,828 $ 377,847
Cost of products sold (11,120) (8,381) (22,631) (17,261)
------------- ------------- ------------- -------------
292,279 179,471 608,197 360,586
------------- ------------- ------------- -------------
Operating expenses:
Service, rental, and maintenance 76,504 37,839 157,547 76,954
Selling 38,968 24,333 75,624 49,378
General and administrative 98,525 55,362 207,202 109,296
Depreciation and amortization 1,220,886 89,882 1,467,974 180,589
------------- ------------- ------------- -------------
Total operating expenses 1,434,883 207,416 1,908,347 416,217
------------- ------------- ------------- -------------
Operating income (loss) (1,142,604) (27,945) (1,300,150) (55,631)
Interest expense, net (52,658) (35,399) (116,585) (76,699)
Other expense (8,319) (804) (16,529) (2,010)
------------- ------------- ------------- -------------
Income (loss) before income tax benefit,
extraordinary item and accounting change (1,203,581) (64,148) (1,433,264) (134,340)
Benefit from income taxes 82,500 -- 118,000 --
------------- ------------- ------------- -------------
Income (loss) before extraordinary item and
accounting change (1,121,081) (64,148) (1,315,264) (134,340)
Extraordinary gain from early
extinguishment of debt 19,273 44,436 34,229 52,051
Cumulative effect of accounting change -- -- (6,794) --
------------- ------------- ------------- -------------
Net income (loss) (1,101,808) (19,712) (1,287,829) (82,289)
Accretion of redeemable preferred stock -- (1,261) -- (1,261)
Preferred stock dividend (1,429) (573) (2,031) (1,135)
------------- ------------- ------------- -------------
Net income (loss) to common stockholders $ (1,103,237) $ (21,546) $ (1,289,860) $ (84,685)
============= ============= ============= =============
Basic/diluted net income (loss) per common
share before extraordinary charge and
accounting change $ (6.19) $ (1.01) $ (7.56) $ (2.26)
Extraordinary item per basic/diluted common
share 0.11 0.68 0.20 0.86
Cumulative effect of accounting change per
basic/diluted common share -- -- (0.04) --
------------- ------------- ------------- -------------
Basic/diluted net income (loss) per common
share $ (6.08) $ (0.33) $ (7.40) $ (1.40)
============= ============= ============= =============
Basic/diluted weighted average number of
common shares outstanding 181,425,387 65,794,673 174,348,947 60,555,685
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
ARCH WIRELESS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Six Months Ended
June 30,
2001 2000
---- ----
Net cash (used for) provided by operating activities $ (15,435) $ 53,006
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (71,483) (74,061)
Additions to intangible and other assets (3,181) (3,602)
Net proceeds from sale of FCC licenses 175,000 --
Acquisition of company, net of cash acquired 104 --
--------- ---------
Net cash provided by (used for) investing activities 100,440 (77,663)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 2,685 58,000
Repayment of long-term debt (178,111) (33,000)
Net proceeds from sale of preferred stock 75,000 --
Net proceeds from sale of common stock -- 354
--------- ---------
Net cash (used for) provided by financing activities (100,426) 25,354
--------- ---------
Effect of exchange rate changes on cash 225 --
--------- ---------
Net (decrease) increase in cash and cash equivalents (15,196) 697
Cash and cash equivalents, beginning of period 55,007 3,161
--------- ---------
Cash and cash equivalents, end of period $ 39,811 $ 3,858
========= =========
Supplemental disclosure:
Interest paid $ 99,071 $ 60,461
Accretion of discount on senior notes and assumed bank debt $ 21,083 $ 14,696
Issuance of common stock in exchange for debt $ 11,643 $ 155,624
Issuance of preferred stock in exchange for debt $ 6,936 $ 42,692
Accretion of redeemable preferred stock $ -- $ 1,261
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
ARCH WIRELESS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(a) Preparation of Interim Financial Statements - The consolidated
condensed financial statements of Arch Wireless, Inc. have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. The financial information included herein, other than the
consolidated condensed balance sheet as of December 31, 2000, has been prepared
by management without audit by independent accountants who do not express an
opinion thereon. The consolidated condensed balance sheet at December 31, 2000
has been derived from, but does not include all the disclosures contained in,
the audited consolidated financial statements for the year ended December 31,
2000. In the opinion of management, all of these unaudited statements include
all adjustments and accruals consisting only of normal recurring accrual
adjustments which are necessary for a fair presentation of the results of all
interim periods reported herein. These consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and accompanying notes included in Arch's Annual Report on Form
10-K/A for the year ended December 31, 2000. The results of operations for the
periods presented are not necessarily indicative of the results that may be
expected for a full year.
Risks and Other Important Factors - Arch sustained net losses of $206.1
million, $285.6 million and $309.8 million for the years ended December 31,
1998, 1999 and 2000, respectively and net losses of $1.3 billion in the six
months ended June 30 , 2001. Arch's loss from operations for the six months
ended June 30, 2001 was $1.3 billion after recording an impairment charge of
$976.2 million on certain long-lived assets (see Note (b) below). In addition,
at June 30, 2001, Arch had an accumulated deficit of approximately $2.5 billion
and a deficit in working capital of $1.64 billion, including $1.59 billion of
debt classified as current liabilities because Arch is in default under
substantially all its indebtedness (see Note (c) below). The impairment charge
will result in lower depreciation and amortization expenses in future periods,
therefore Arch's losses from operations and net losses are expected to decrease
in the future. Arch cannot predict whether or when its operations will become
profitable.
Arch's operations require the availability of substantial funds to finance
the maintenance and development of its existing messaging operations and its
subscriber base and to enhance and expand its two-way messaging networks. Arch's
ability to borrow additional amounts in the future is dependent on Arch's
ability to restructure its existing debt as well as the availability of
financing in the capital markets.
Arch's ability to continue as a going concern is dependent upon its ability
to restructure its existing debt such that interest expense is substantially
reduced. In July 2001, Arch announced the withdrawal of its previously announced
proposal to restructure its outstanding debt. This withdrawal was due primarily
to lower than expected operating results in the second quarter of 2001. The
lower than anticipated operating results will negatively impact future operating
results and projected year-end liquidity and led to the withdrawal of Arch's
previous financial projections. These developments made the previously proposed
restructuring infeasible. Arch is updating its business plan and projections to
take into account its second quarter results. Arch also will evaluate its
restructuring options when this update is complete. These options include filing
for protection under Chapter 11 of the U.S. Bankruptcy Code. Arch cannot predict
whether it will be successful in its efforts. A failure to restructure its
existing debt such that interest expense is substantially reduced will have a
material adverse effect on the solvency of Arch.
Arch's financial results and lack of additional sources of liquidity
indicate that it may not be able to continue as a going concern unless it
restructures its existing debt such that interest expense is substantially
reduced. Furthermore, Arch is in default under its secured credit facility and
substantially all of its other indebtedness, except the indebtedness of its
Canadian subsidiary, due to nonpayment of approximately $8.3 million of interest
due on July 2, 2001 under the outstanding 12 3/4% senior notes of its subsidiary
(see Note (c) below). Arch is also subject to additional risks and uncertainties
including, but not limited to, changes in technology, subscriber turnover,
competition and business integration.
6
(b) Long-Lived Assets - In accordance with Statement of Financial
Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets To Be Disposed Of," Arch evaluates the
recoverability of the carrying value of its long-lived assets and certain
intangible assets based on estimated undiscounted cash flows to be generated
from each of such assets compared to the original estimates used in measuring
the assets. To the extent impairment is identified, Arch reduces the carrying
value of such impaired assets to fair value based on estimated discounted future
cash flows.
In July 2001, Arch determined that a reduction in the carrying value of
certain one-way paging equipment, computer equipment and intangible assets was
required, due to the facts and circumstances discussed in Note (a) above. As a
result, Arch recorded an impairment charge of $976.2 million, which is included
in depreciation and amortization expense in the statement of operations for the
three and six months ended June 30, 2001.
Intangible and Other Assets - Intangible and other assets, net of accumulated
amortization, are comprised of the following (in thousands):
June 30, December 31,
2001 2000
---- ----
Purchased Federal Communications Commission licenses....... $ 64 $ 451,431
Purchased subscriber lists................................. -- 412,015
Goodwill................................................... -- 163,027
Restricted cash............................................ 37,415 35,280
Deferred financing costs................................... 17,563 24,905
Other...................................................... 149 14,086
------------ ------------
$ 55,191 $ 1,100,744
============ ============
(c) Classification of Debt - Effective August 2, 2001, Arch Wireless
Communications, Inc. ("AWCI"), a subsidiary of Arch, is in default under the
indenture governing its 12 3/4% senior notes for nonpayment of interest due on
July 2, 2001. This default also constitutes a default under substantially all
indebtedness of Arch and its direct and indirect subsidiaries, except the
indebtedness of its Canadian subsidiary. Due to this default, Arch's lenders
currently have the right, if they so elect, to declare the entire amount of
principal and interest to be immediately due and payable, to seek foreclosure
upon Arch's assets, to file a bankruptcy petition against Arch or to pursue
other remedies. As a result, Arch has reclassified its debt to current
liabilities.
(d) Divisional Reorganization - As of June 30, 2001, 1,234 former Arch
and MobileMedia employees had been terminated due to the MobileMedia and PageNet
integrations and a previous divisional reorganization. Arch's restructuring
activity as of June 30, 2001 is as follows (in thousands):
Reserve Utilization
Balance at of
December 31, Reserve in Remaining
2000 2001 Reserve
---- ---- -------
Severance costs..................... $ 2,957 $ 2,911 $ 46
Lease obligation costs.............. 10,776 3,526 7,250
Other costs......................... 162 49 113
--------- --------- ---------
Total............................ $ 13,895 $ 6,486 $ 7,409
========= ========= =========
(e) PageNet Acquisition Reserve - As of June 30, 2001, 1,381 former
PageNet employees had been terminated. Arch's restructuring activity as of June
30, 2001 is as follows (in thousands):
7
Reserve Utilization
Balance at of
December 31, Reserve in Remaining
2000 2001 Reserve
---- ---- -------
Severance costs..................... $ 36,767 $ 30,231 $ 6,536
Lease obligation costs.............. 9,264 4,356 4,908
Other costs......................... 500 295 205
--------- --------- ---------
Total............................ $ 46,531 $ 34,882 $ 11,649
========= ========= =========
(f) Nextel Agreement - In January 2001, Arch agreed to sell its 900 MHz
SMR (Specialized Mobile Radio) licenses to Nextel Communications, Inc. Nextel
acquired the SMR licenses for an aggregate purchase price of $175 million and
invested approximately $75 million in a new equity issue, Arch series F 12%
redeemable cumulative junior preferred stock. The transaction was completed in
two stages. In February 2001, Nextel advanced $250 million in the form of a
secured loan in the principal amount of $175 million and an unsecured loan in
the principal amount of $75 million to a newly created, stand-alone Arch
subsidiary that held the SMR licenses pending regulatory approval of their
transfer. The new Arch subsidiary was not permitted to engage in
any business other than ownership and maintenance of the SMR licenses and did
not have any liability or obligation with respect to any of the debt obligations
of Arch or its subsidiaries. In May 2001, upon transfer of the SMR licenses to
Nextel, the principal amount of the secured loan was offset against the $175.0
million aggregate purchase price for the SMR licenses, and the principal amount
of the unsecured loan was exchanged for shares of series F preferred stock.
Accrued interest on the secured and unsecured loans was also paid in series F
preferred stock.
Arch acquired the SMR licenses as part of its acquisition of PageNet in
November 2000. In accordance with the purchase method of accounting, the SMR
licenses were recorded at their fair value of $175.0 million and were included
the Purchased Federal Communications Commission licenses balance in Note (b)
above.
(g) Debt Exchanged for Equity - In the first half of 2001, Arch issued
18,905,989 shares of Arch common stock in exchange for $50.8 million accreted
value ($51.0 million maturity value) of its senior discount notes. Arch recorded
an extraordinary gain of $34.2 million on the early extinguishment of debt as a
result of these transactions.
(h) Redeemable Series F Cumulative Junior Preferred Stock - In May
2001, in connection with the Nextel transactions discussed in Note (f) above,
Arch issued 793,219 shares of series F preferred stock. The series F preferred
stock: (i) is convertible into Arch common stock at a conversion price equal to
the then prevailing market price of the common stock per share, subject to
certain adjustments; (ii) bears dividends at an annual rate of 12.0%, (A)
payable quarterly in cash or, at Arch's option, through the issuance of shares
of Arch common stock valued at the then prevailing market price or (B) if not
paid quarterly, accumulating and payable upon redemption or conversion of the
series F preferred stock or liquidation of Arch; (iii) on the tenth anniversary
of the date of issuance, must be, at Arch's option, redeemed for cash or
converted into Arch common stock valued at the then prevailing market price of
Arch common stock, so long as the common stock remains listed on a national
securities exchange; (iv) is subject to redemption for cash or conversion into
Arch common stock at Arch's option in certain circumstances; (v) in the event of
a "Change of Control" as defined, requires Arch, at its option, to redeem the
series F preferred stock for cash or convert such shares into Arch common stock
valued at the then prevailing market price of Arch common stock, with such cash
redemption or conversion being at a price equal to 101% of the sum of the
original purchase price plus accumulated dividends; (vi) limits certain mergers
or asset sales by Arch; and (vii) has certain voting and preemptive rights.
(i) Derivative Instruments and Hedging Activities - In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 requires that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value
and that changes in the derivative's fair value be recognized in earnings. Arch
adopted this standard effective January 1, 2001. Arch has not designated any of
8
the outstanding derivatives as a hedge under SFAS No. 133. The initial
application of SFAS No. 133 resulted in a $6.8 million charge, which was
reported as the cumulative effect of a change in accounting principle. This
charge represents the impact of initially recording the derivatives at fair
value as of January 1, 2001. The changes in fair value of the derivative
instruments will be recognized in other expense. Arch recorded other expense of
approximately $4.8 million related to the changes in fair value of the
derivatives during the six months ended June 30, 2001.
(j) Segment Reporting - Arch has determined that it has three reportable
segments: traditional paging operations, two-way messaging operations and
international operations. Management makes operating decisions and assesses
individual performances based on the performance of these segments. The
traditional paging operations consist of the provision of paging and other
one-way wireless messaging services to Arch's U.S. customers. Two-way messaging
operations consist of the provision of two-way wireless messaging services to
Arch's U.S. customers. International operations consist of the operations of
Arch's Canadian subsidiary.
Each of these segments incur, and are charged, direct costs associated with
their separate operations. Common costs shared by the traditional paging and
two-way messaging operations are allocated based on the estimated utilization of
resources using various factors that attempt to mirror the true economic cost of
operating each segment.
Arch did not begin to market and sell its two-way messaging products on a
commercial scale until August 2000. Arch's Canadian subsidiary was acquired in
November 2000 in the PageNet acquisition. Prior to 2000, substantially all of
Arch's operations were traditional paging operations. The following tables
present segment financial information related to Arch's segments for the periods
indicated (in thousands):
Traditional Two-way Messaging International
Three Months Ended June 30, 2001 Paging Operations Operations Operations Consolidated
-------------------------------- ----------------- ---------- ---------- ------------
Revenues............................... $ 276,221 $ 22,324 $ 4,854 $ 303,399
Depreciation and amortization expense.. 1,167,851 13,951 39,084 1,220,886
Operating income (loss)................ (1,083,596) (20,583) (38,425) (1,142,604)
Adjusted EBITDA(1)..................... 84,254 (6,632) 660 78,282
Total assets........................... 464,406 226,451 19,508 710,365
Capital expenditures................... 26,674 18,796 687 46,157
Three Months Ended June 30, 2000
--------------------------------
Revenues............................... $ 187,710 $ 142 $ -- $ 187,852
Depreciation and amortization expense.. 89,692 190 -- 89,882
Operating income (loss)................ (25,797) (2,148) -- (27,945)
Adjusted EBITDA(1)..................... 63,895 (1,958) -- 61,937
Total assets........................... 1,240,765 10,461 -- 1,251,226
Capital expenditures................... 34,158 10,651 -- 44,809
Six Months Ended June 30, 2001
------------------------------
Revenues............................... $ 581,487 $ 39,571 $ 9,770 $ 630,828
Depreciation and amortization expense.. 1,396,025 27,825 44,124 1,467,974
Operating income (loss)................ (1,215,269) (42,165) (42,716) (1,300,150)
Adjusted EBITDA(1)..................... 180,755 (14,340) 1,409 167,824
Total assets........................... 464,406 226,451 19,508 710,365
Capital expenditures................... 43,944 29,133 1,587 74,664
Six Months Ended June 30, 2000
------------------------------
Revenues............................... $ 377,705 $ 142 $ -- $ 377,847
Depreciation and amortization expense.. 180,399 190 -- 180,589
Operating income (loss)................ (50,862) (4,769) -- (55,631)
Adjusted EBITDA(1)..................... 129,537 (4,579) -- 124,958
Total assets........................... 1,240,765 10,461 -- 1,251,226
Capital expenditures................... 67,012 10,651 -- 77,663
9
(1) Adjusted earnings before interest, income taxes, depreciation and
amortization, as determined by Arch, does not reflect interest, income
taxes, depreciation and amortization, restructuring charges, equity in loss
of affiliate or extraordinary items; consequently adjusted earnings before
interest, income taxes, depreciation and amortization may not necessarily
be comparable to similarly titled data of other wireless messaging
companies. Earnings before interest, income taxes, depreciation and
amortization should not be construed as an alternative to operating income
or cash flows from operating activities as determined in accordance with
generally accepted accounting principles or as a measure of liquidity.
Amounts reflected as earnings before interest, income taxes, depreciation
and amortization or adjusted earnings before interest, income taxes,
depreciation and amortization are not necessarily available for
discretionary use as a result of restrictions imposed by the terms of
existing indebtedness or limitations imposed by applicable law upon the
payment of dividends or distributions, among other things.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause Arch's actual results to
differ materially from those indicated or suggested by such forward-looking
statements. These factors include, without limitation, those set forth below
under the caption "Factors Affecting Future Operating Results".
RESULTS OF OPERATIONS
Revenues increased to $303.4 million, a 61.5% increase, and $630.8 million, a
67.0% increase, for the three and six months ended June 30, 2001, respectively,
from $187.9 million and $377.8 million for the three and six months ended June
30, 2000, respectively, as the number of units in service increased from 6.7
million at June 30, 2000 to 10.2 million at June 30, 2001 due to the PageNet
acquisition in November 2000. Net revenues (revenues less cost of products sold)
increased to $292.3 million, a 62.9% increase, and $608.2 million, a 68.7%
increase, for the three and six months ended June 30, 2001, respectively, from
$179.5 million and $360.6 million for the corresponding periods in 2000.
Revenues and net revenues in the three and six months ended June 30, 2000 and
2001 were adversely affected by (1) the declining demand for traditional paging
services and (2) subscriber cancellations, which led to a decrease of 875,000
and 1,659,000 units in service for the three and six months ended June 30, 2001,
respectively.
For the three and six months ended June 30, 2001, two-way messaging revenues
were $22.3 million, 7.4% of total revenue, and $39.6 million, 6.3% of total
revenue, respectively. Two-way messaging net revenues were $19.0 million, 6.5%
of total net revenue, and $33.5 million, 5.5% of total net revenue,
respectively. The Company did not begin to sell its two-way messaging products
and services on a commercial scale until August 2000. Two-way units in service
increased from 400 at June 30, 2000 to 282,000 at June 30, 2001.
Revenues consist primarily of recurring revenues associated with the
provision of messaging services, rental of leased units and product sales.
Product sales represented less than 10% of total revenues for the three and six
months ended June 30, 2000 and 2001. Arch does not differentiate between service
and rental revenues.
Arch believes the demand for traditional messaging services declined in 1999
and 2000 and in the first half of 2001, and will continue to decline in the
foreseeable future. Arch believes that any element of future growth in the
wireless messaging industry will be attributable to two-way messaging and
information services. As a result, Arch expects to continue to experience
significant declines of units in service during 2001, as Arch's addition of
two-way messaging subscribers will likely be exceeded by its loss of traditional
messaging subscribers.
Service, rental and maintenance expenses, which consist primarily of
telephone, third party carrier fees, site rental expenses and repairs and
maintenance expenses, increased to $76.5 million, or 26.2% of net revenues, and
$157.5 million, or 25.9% of net revenues, in the three and six months ended June
30, 2001, respectively, from $37.8 million, or 21.1% of net revenues, and $77.0
million, or 21.3% of net revenues in the corresponding periods in 2000. The
10
increase was due to the acquisition of PageNet in November 2000. For the three
and six months ended June 30, 2001, there were $11.5 million and $22.6 million,
respectively, of service, rental and maintenance expenses associated with the
provision of two-way messaging and information services, compared to $1.0
million and $2.2 million, respectively, for the three and six months ended June
30, 2000.
Selling expenses increased to $39.0 million, or 13.3% of net revenues, and
$75.6 million, or 12.4% of net revenues, for the three and six months ended June
30, 2001, respectively, from $24.3 million, or 13.6% of net revenues, and $49.4
million, or 13.7% of net revenues, for the corresponding periods in 2000. The
increase in dollar amount was due to the acquisition of PageNet. Selling
expenses related to two-way messaging and information services were $9.7 million
and $16.8 million for the three and six months ended June 30, 2001,
respectively, compared to $49 thousand for the six months ended June 30, 2000.
General and administrative expenses increased to $98.5 million, or 33.7% of
net revenues, and $207.2 million, or 34.1% of net revenues, for the three and
six months ended June 30, 2001, respectively, from $55.4 million, or 30.8% of
net revenues, and $109.3 million, or 30.3% of net revenues for the corresponding
periods in 2000. The increase was due to increased headcount, administrative and
facility costs associated with PageNet. General and administrative expenses
associated with the provision of two-way messaging and information services were
$4.4 million and $8.4 million in the three and six months ended June 30, 2001,
respectively, compared to $1.2 million and $2.4 million in the corresponding
periods in 2000.
Depreciation and amortization expenses increased to $1,220.9 million and
$1,468.0 million in the three and six months ended June 30, 2001, respectively,
from $89.9 million and $180.6 million in the three and six months ended June 30,
2000. The increase was principally due to a $976.2 million impairment charge,
recorded in June 2001, related to certain one-way paging equipment, computer
equipment and intangible assets. See Note (b) to the Consolidated Condensed
Financial Statements. The remaining increase in these expenses reflects the
acquisition of PageNet.
Operating losses were $1,142.6 million and $1,300.2 million for the three and
six months ended June 30, 2001, respectively, compared to $27.9 million and
$55.6 million in the three and six months ended June 30, 2000, respectively, as
a result of the factors outlined above.
Net interest expense increased to $52.7 million and $116.6 million for the
three and six months ended June 30, 2001, respectively, from $35.4 million and
$76.7 million for the corresponding periods in 2000. The increase was
principally attributable to an increase in Arch's outstanding debt due to the
PageNet acquisition. Interest expense for the six months ended June 30, 2000 and
2001 included approximately $14.7 million and $21.1 million, respectively, of
accretion on assumed bank debt and Arch's senior debt, the payment of which was
deferred.
Other expense increased to $8.3 million and $16.5 million for the three and
six months ended June 30, 2001, respectively, from $804 thousand and $2.0
million for the three and six months ended June 30, 2000. In 2001, other expense
includes a $4.8 million charge resulting from the application of SFAS No. 133
(See Note (i) to the Consolidated Condensed Financial Statements) and a $7.5
million charge resulting from the write-off of a note receivable from Vast
Solutions, Inc., which filed for bankruptcy in April 2001.
For the three and six months ended June 30, 2001, Arch recognized
extraordinary gains of $19.3 million and $34.2 million, respectively, on the
retirement of debt exchanged for Arch stock. For the three and six months ended
June 30, 2000, Arch recognized extraordinary gains of $44.4 million and $52.1
million, respectively, on the retirement of debt exchanged for Arch stock.
Arch recognized an income tax benefit of $82.5 million and $118.0 million for
the three and six months ended June 30, 2001, respectively. The benefit
represented the tax benefit of operating losses incurred subsequent to the
acquisition of PageNet, which were available to offset deferred tax liabilities
arising from the PageNet acquisition.
On January 1, 2001, Arch adopted SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized in earnings. Initial application of SFAS No. 133 resulted in a $6.8
million charge in the quarter ended March 31, 2001, which was reported as the
11
cumulative effect of a change in accounting principle. This charge represents
the impact of initially recording the derivatives at fair value as of January 1,
2001.
Net loss increased to $1,101.8 million and $1,287.8 million for the three and
six months ended June 30, 2001, from $19.7 million and $82.3 for the
corresponding periods in 2000, as a result of the factors outlined above.
LIQUIDITY AND CAPITAL RESOURCES
Arch is evaluating options to restructure its debt in light of its inability
to make required principal and interest payments under its secured credit
facility and outstanding notes. These options include filing for protection
under Chapter 11 of the U.S. Bankruptcy Code. Arch's inability to pay arises
primarily from the lack of sufficient cash flow from operations. Arch is in
default under its secured credit facility and substantially all of its other
indebtedness, except the indebtedness of its Canadian subsidiary. The defaults
result from the nonpayment of approximately $14.2 million of interest as of
August 10, 2001. Arch's lenders currently have the right, if they so elect, to
declare the entire amount of principal and interest, approximately $1.8 billion
as of the date of the filing of this report, to be immediately due and payable.
CASH FLOW
Arch's business strategy requires the availability of substantial funds to
finance capital expenditures for messaging devices and system equipment and to
service debt. Arch's net cash flows from operating, investing and financing
activities for the six months ended June 30, 2001 and 2000 are as follows:
Six Months Ended June 30,
2001 2000
---- ----
Net cash (used in) provided by operating activities............. $ (15.4) $ 53.0
Net cash provided by (used in) investing activities............. $ 100.4 $ (77.7)
Net cash (used in) provided by financing activities............. $ (100.4) $ 25.4
Investing activities in 2001 included cash inflow of $175.0 million for
specialized mobile radio licenses sold to Nextel offset by $74.6 of capital
expenditures. Financing activities in 2001 include an investment of $75.0
million by Nextel in Arch series F preferred stock and borrowings by Arch's
Canadian subsidiary of approximately $2.7 million, offset by the repayment of
$178.1 million of long-term debt, including $175.2 million under the secured
credit facility.
Investing activities in 2000 consisted only of capital expenditures.
Financing activities in 2000 included net borrowings of $25.0 million and the
sale of $354 thousand of Arch common stock.
CAPITAL EXPENDITURES AND COMMITMENTS
Arch's capital expenditures decreased from $77.7 million for the six months
ended June 30, 2000 to $74.6 million for the six months ended June 30, 2001.
These capital expenditures primarily include the purchase of wireless messaging
devices, system and transmission equipment, information systems and capitalized
financing costs. Arch generally has funded its capital expenditures with net
cash provided by operating activities and the incurrence of debt. Arch estimates
that capital expenditures for 2001 will be approximately $130 million. Assuming
that its indebtedness is appropriately restructured such that interest expense
is substantially reduced, Arch believes that it will have sufficient cash
available from operations and the proceeds of the Nextel transaction, as
described below, to fund its capital expenditures for the remainder of the year.
SOURCES OF FUNDS
Sale of SMR Licenses
In January 2001, Arch announced an agreement with Nextel Communications, Inc.
to sell its Specialized Mobile Radio (SMR) licenses to Nextel for an aggregate
purchase price of $175 million. Concurrent with this transaction, Nextel agreed
to invest approximately $75 million in Arch series F preferred stock.
Pursuant to these transactions, in February 2001, Nextel advanced $250
million to Arch in the form of a $175 million loan, which was secured by a lien
on certain of the assets of the Arch subsidiary which owned the SMR licenses and
by a guaranty from another Arch subsidiary, and a $75 million unsecured loan.
12
Upon receipt of regulatory approvals in May 2001, the SMR licenses were
transferred to Nextel and the principal amount of the secured loan was offset
against the $175 million aggregate purchase price for the SMR licenses, and the
principal amount of the unsecured loan was exchanged for shares of Arch series F
preferred stock. Accrued interest on these loans was also paid in shares of
series F preferred stock.
Arch used $175.2 million of the proceeds from these transactions to prepay
all required 2001 amortization payments under its senior credit facility. The
remaining $74.8 million of proceeds is available for working capital purposes.
At June 30, 2001, Arch had approximately $39.8 million of cash on hand and no
additional borrowing capacity under its senior credit facility.
Arch believes that based on its current cash position and projected
requirements, it will have sufficient cash to fund operations through December
31, 2001, provided Arch defers interest payments due on its outstanding
indebtedness. However, Arch is in default under its secured credit facility and
outstanding notes. See Note (c) to the Consolidated Condensed Financial
Statements. Arch's ability to borrow in the future will depend, in part, on its
ability to continue to increase its adjusted earnings before interest, income
taxes, depreciation and amortization.
Equity Issued in Exchange for Debt
In the first half of 2001, Arch issued 18,905,989 shares of Arch common stock
in exchange for $50.8 million accreted value ($51.0 million maturity value) of
its 10 7/8% senior discount notes. See note (g) to the consolidated condensed
financial statements.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The following important factors, among others, could cause Arch's actual
operating results to differ materially from those indicated or suggested by
forward-looking statements made in this Form 10-Q or presented elsewhere by
Arch's management from time to time.
Unless Arch succeeds in restructuring its outstanding indebtedness, it will not
be able to continue as a going concern.
Arch's ability to continue as a going concern is dependent upon its ability
to restructure its existing debt such that interest expense is substantially
reduced. In July 2001, Arch announced the withdrawal of its previously announced
proposal to restructure its outstanding debt. This withdrawal was due primarily
to lower than expected operating results in the second quarter of 2001. The
lower than anticipated operating results will negatively impact future operating
results and projected year-end liquidity and led to the withdrawal of Arch's
previous financial projections. These developments made the previously proposed
restructuring infeasible. Arch is updating its business plan and projections to
take into account its second quarter results. Arch also will evaluate its
restructuring options when this update is complete. These options include filing
for protection under Chapter 11 of the U.S. Bankruptcy Code. Arch cannot predict
whether it will be successful in its efforts. A failure to restructure its
existing debt such that interest expense is substantially reduced will have a
material adverse effect on the solvency of Arch.
Arch's financial results and lack of additional sources of liquidity indicate
that it will not be able to continue as a going concern unless it restructures
its existing debt such that interest expense is substantially reduced.
Furthermore, Arch is in default under its secured credit facility and
substantially all of its other indebtedness except the indebtedness of its
Canadian subsidiary, due to nonpayment of approximately $8.3 million of
interest. Due to this default, Arch's lenders currently have the right, if they
so elect, to declare the entire amount of principal and interest to be
immediately due and payable, to seek foreclosure upon Arch's assets, to file a
bankruptcy petition against Arch or to pursue other remedies. Any of these
developments would have a material adverse effect on Arch's business operations,
liquidity, cash flows and ability to continue as a going concern. Arch is
currently leveraged to a substantial degree. Arch's ratio of total debt to
latest three month annualized adjusted earnings before interest, income taxes,
depreciation and amortization was 5.6 to 1 as of June 30, 2001. Adjusted
earnings before interest, income taxes, depreciation and amortization is not a
measure defined by generally accepted accounting principles and should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles. Adjusted earnings
13
before interest, income taxes, depreciation and amortization, as determined by
Arch, may not necessarily be comparable to similarly titled data of other
wireless messaging companies.
Arch's current debt structure:
o requires Arch to make interest payments and scheduled repayments of
principal of approximately $1.4 billion through June 2006; and
o impairs Arch's ability to obtain additional financing necessary for
working capital, capital expenditures or other purposes on acceptable
terms, if at all.
Recent declines in Arch's units in service are likely to continue or even
accelerate; this trend is likely to impair Arch's financial results.
For the three months ended December 31, 2000, Arch experienced a decrease of
1,502,000 units in service; 504,000 due to subscriber cancellations and 998,000
due to definitional changes. For the three months ended March 31, 2001 and the
three months ended June 30, 2001, respectively, Arch experienced further
decreases of 784,000 and 875,000 units in service due to subscriber
cancellations. Arch believes the demand for traditional messaging services
declined in 2000 and will continue to decline in the following years and that
future growth in the wireless messaging industry will be attributable to two-way
messaging and information services. As a result, Arch expects to continue to
experience significant declines of units in service for the foreseeable future
as Arch's addition of two-way messaging subscribers will likely be exceeded by
its loss of traditional messaging subscribers.
Cancellation of units in service can significantly affect the results of
operations of wireless messaging service providers. The sale and marketing costs
associated with attracting new subscribers are substantial compared to the costs
of providing service to existing customers. Because the wireless messaging
business is characterized by high fixed costs, cancellations directly and
adversely affect earnings before interest, income taxes, depreciation and
amortization. Primarily as a result of the decline in its one-way messaging
operations, Arch recorded an impairment charge of $976.2 million in the carrying
value of certain one-way paging equipment, computer equipment and intangible
assets during the second quarter of 2001.
Competition from larger telephone, cellular and PCS companies is intensifying
and may reduce Arch's revenues and adjusted earnings before interest, income
taxes, depreciation and amortization.
Wireless messaging companies like Arch, whose units in service have been
declining, increasingly compete for market share against large telephone,
cellular and PCS providers like AT&T Wireless, Cingular, MCI/WorldCom, Sprint
PCS, Verizon and Nextel. Arch will also compete with other messaging companies
that continue to offer traditional and two-way messaging services. Some
competitors possess greater financial, technical and other resources than those
available to Arch. If any of such competitors were to devote additional
resources to their wireless messaging business or focus on Arch's historical
business segments, they could secure Arch's customers and reduce demand for its
products. This could materially reduce Arch's revenues and earnings before
interest, income taxes, depreciation and amortization and have a material
adverse effect on earnings before interest, income taxes, depreciation and
amortization.
The future growth and profitability of Arch depends on the success of its
two-way messaging services. However, mobile, cellular and PCS telephone
companies have introduced phones and services with substantially the same
features and functions as the two-way messaging products and services provided
by Arch, and have priced such devices and services competitively.
Arch's two-way messaging services compete with other available mobile
wireless services, which have already demonstrated high levels of market
acceptance, including cellular, PCS and other mobile phone services. Many of
these other mobile wireless phone services now include wireless messaging as an
adjunct service or may replace two-way messaging services entirely. It is less
expensive for an end user to enhance a cellular, PCS or other mobile phone with
modest data capability than to use both a mobile phone and a pager. This is
because the nationwide cellular, PCS and other mobile phone carriers have
subsidized the purchase of mobile phones more heavily and because prices for
mobile wireless services have been declining rapidly. In addition, the
availability of coverage for these services has increased, making the two types
of service and product offerings more comparable. Thus, companies other than
14
Arch seeking to provide wireless messaging services may be able to bring their
products to market faster or in packages of products that consumers and
businesses find more valuable than those to be provided by Arch. If this occurs,
Arch's market share will erode and financial operations will be impaired.
Arch may need additional capital to expand its business and will need to
restructure existing debt, which could be difficult to achieve. Failure to
obtain additional capital may preclude Arch from developing or enhancing its
products, taking advantage of future opportunities, growing its business or
responding to competitive pressures.
Arch's business strategy requires substantial funds to be available to
finance the continued development and future growth and expansion of its
operations, including the development and implementation of two-way messaging
services. Arch's future capital requirements will depend on factors that
include:
o subscriber growth;
o the type of wireless messaging devices and services demanded by customers;
o technological developments;
o competitive conditions;
o the nature and timing of Arch's strategy for developing technical
resources to provide two-way messaging services; and
o acquisition strategies and opportunities.
Revenues and operating results may fluctuate, leading to fluctuations in trading
prices and possible liquidity problems.
Arch believes that future fluctuations in its revenues and operating results
may occur due to many factors, particularly the decreased demand for traditional
messaging services and the uncertain market for two-way messaging services.
Arch's current and planned expenses and debt repayment levels, are to a large
extent, fixed in the short term, and are based in part on past expectations as
to future revenues and cash flow growth. Arch may be unable to adjust spending
in a timely manner to compensate for any past or future revenue or cash flow
shortfall. It is possible that, due to these fluctuations, Arch's revenue, cash
flow or operating results may not meet the expectations of securities analysts
or investors.
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. However, the impairment charge recorded in June
2001 will result in lower depreciation and amortization expenses in future
periods therefore Arch's net losses are expected to decrease in the future. Many
of the factors that will determine whether or not Arch attains profitability are
inherently difficult to predict. These include the decreased demand for
traditional messaging services and the uncertain market for two-way messaging
services which compete against services offered by telephone, cellular and PCS
providers, new service developments and technological change.
Obsolescence in company-owned units may impose additional costs on Arch.
Technological change may adversely affect the value of the units owned by
Arch that are leased to its subscribers. If Arch's current subscribers request
more technologically advanced units, including two-way messaging devices, Arch
could incur additional inventory costs and capital expenditures if required to
replace units leased to its subscribers within a short period of time. Such
additional costs or capital expenditures could have a material adverse effect on
Arch's results of operations.
Because Arch depends on Motorola for devices and on Glenayre for other
equipment, Arch's operations may be disrupted if it is unable to obtain
equipment from them in the future.
Arch does not manufacture any of the equipment customers need to take
advantage of its services. It is dependent primarily on Motorola, Inc. to obtain
sufficient equipment inventory for new subscribers and replacement needs and on
Glenayre Electronics, Inc. for sufficient terminals and transmitters to meet its
15
expansion and replacement requirements. Significant delays in obtaining any of
this equipment, could lead to disruptions in operations and adverse financial
consequences. Arch's purchase agreement with Motorola for messaging devices
expires on October 1, 2001. There can be no assurance that the agreement with
Motorola for messaging devices will be renewed or, if renewed, that the renewed
agreement will be on terms and conditions as favorable to Arch as those under
the current agreement.
On March 21, 2001, Arch entered into an agreement with Glenayre, under which
Glenayre agreed to develop and license to Arch, under a perpetual, enterprise
wide license, software to enable Arch to upgrade its two-way network to
significantly increase network capacity and reduce latency. On June 8, 2001,
Glenayre announced plans to discontinue operations of its wireless messaging
business unit, but, in accordance with its contractual commitments, would
complete development of the network technology that is the subject of the
agreement with Arch. On June 29, 2001, Glenayre sent Arch a notice claiming that
Arch was in default of the agreement for failure to reimburse Glenayre for
certain sales taxes which Glenayre allegedly paid in connection with the
agreement. Arch disputes that it is obligated to reimburse Glenayre for the full
amount claimed and withheld the disputed portion of the payment. Glenayre sent a
subsequent letter on July 29, 2001, purporting to terminate the agreement with
Arch. Arch disputes that the termination was effective, but nevertheless,
reserving its rights, paid Glenayre the full amount claimed by it. Arch believes
that the agreement continues in full force and effect. Arch does not know if
Glenayre believes that the agreement was effectively terminated. If Glenayre
maintains the position that the contract is terminated, and ceases to perform,
the resulting disruption in Arch's business could have a material adverse affect
on Arch's results of operations.
Arch relies on third parties to provide satellite transmission for some
aspects of its wireless messaging services. To the extent there are satellite
outages or if satellite coverage is impaired in other ways, Arch may experience
a loss of service until such time as satellite coverage is restored, which could
have a material adverse effect due to customer complaints.
Challenges involved in integrating PageNet's operations with those of Arch may
strain Arch's capacities and may prevent the combined company from achieving
intended synergies.
Arch may not be able to successfully finish integrating PageNet's operations.
The combination of the two companies will require, among other things,
coordination of administrative, sales and marketing, customer billing and
services distribution, accounting and finance functions and conversion of
information and management systems. The difficulties of such integration will
initially be increased by the need to coordinate geographically separate
organizations and to integrate personnel with disparate business backgrounds and
corporate cultures and by the fact that PageNet had previously suspended a
significant restructuring of its own operations.
The integration process could cause the disruption of the activities of the
two businesses that are being combined. Arch may not be able to retain key
employees of PageNet. The process of integrating the businesses of Arch and
PageNet may require a disproportionate amount of time and attention of Arch's
management and financial and other resources of Arch. Even if integrated in a
timely manner, there is no assurance that Arch will operate smoothly or that it
will fulfill management's objective of achieving cost reductions and synergies.
Restrictions under debt instruments prevent Arch from declaring dividends,
incurring or repaying debt, making acquisitions, altering lines of business or
taking actions which its management may consider beneficial.
Various debt instruments impose operating and financial restrictions on Arch.
Arch's credit facility requires various operating subsidiaries to maintain
specified financial ratios, including a maximum leverage ratio, a minimum
interest coverage ratio, a minimum debt service coverage ratio and a minimum
fixed charge coverage ratio. It also limits or restricts, among other things,
Arch's operating subsidiaries' ability to:
o declare dividends or repurchase capital stock;
o incur or pay back indebtedness;
o engage in mergers, consolidations, acquisitions and asset sales; or
o alter its lines of business or accounting methods, even though these
actions would otherwise benefit Arch.
16
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 Arch's long-term debt is subject to fixed rates of interest
or interest rate protection. In the event that the interest rate on Arch's
non-fixed rate debt fluctuates by 10% in either direction, Arch believes the
impact on its results of operations would be immaterial. Arch transacts
infrequently in foreign currency and therefore is not exposed to significant
foreign currency market risk.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Arch, from time to time, is involved in lawsuits arising in the normal course
of business. Arch believes that its currently pending lawsuits will not have a
material adverse effect on its financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As reported in the quarterly report for the three months ended March 31,
2001, Arch issued and sold 1,015,000 shares of its series F 12% redeemable
cumulative junior preferred stock to AWI Spectrum Co., LLC, an indirect
subsidiary of Arch, in connection with the sale of the SMR licenses to Nextel
Communications, Inc. discussed in Item 2 of Part I of this report under the
caption "Liquidity and Capital Resources--Sources of Funds." In May 2001, AWI
Spectrum Co., LLC delivered to Nextel (1) 43,219 shares of series F preferred
stock in satisfaction of the accrued interest on the secured loan issued in
connection with the sale and (2) 750,000 shares of series F preferred stock in
satisfaction of the principal amount and accrued interest under the unsecured
loan issued in connection with the sale.
The shares of series F preferred stock were offered and sold without
registration under the Securities Act of 1933 in reliance on the exemptions
provided by Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On July 2, 2001, Arch Wireless Communications, Inc. ("AWCI"), a subsidiary of
Arch, announced that it was deferring an interest payment of approximately
$8,287,500 which was due on July 2, 2001 under AWCI's outstanding 12 3/4% Senior
Notes due 2007. AWCI also announced that if it did not pay the interest payment
within 30 days, it would be in default under the indenture governing the 12 3/4%
notes, which would also then constitute a default under substantially all
indebtedness of Arch and its direct and indirect subsidiaries.
On July 12, 2001, both AWCI and Arch Wireless Holdings, Inc., a subsidiary of
AWCI, received letters from The Bank of New York, acting in its capacity as
administrative agent under that Third Amended and Restated Credit Agreement,
dated as of March 23, 2000. In these letters, the Bank stated its belief that
AWCI was in default under the indenture on the date that AWCI failed to pay the
interest payment (July 2, 2001) and that, as a result, an event of default under
the credit agreement occurred on July 2, 2001 and is continuing. Arch
disagrees with the Bank's conclusion that AWCI was in default under the
indenture on July 2, 2001. However, since AWCI did not make the interest payment
within 30 days of July 2, 2001, the Company is in default under substantially
all its indebtedness, except the indebtedness of its Canadian subsidiary.
17
On August 2, 2001, AWCI announced that it had deferred an interest payment of
approximately $5,937,500 which was due on August 1, 2001 under AWCI's 9 1/2%
Senior Notes due 2004.
As of the date of the filing of this report, the total arrearage relating to
these defaults is approximately $14.2 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 15, 2001, the following proposals were voted on at the Annual Meeting
of Stockholders:
Broker
Proposal For Against Abstain Nonvotes
-------- --- ------- ------- --------
1.To elect three directors of Arch for the ensuing years
C. Edward Baker 146,996,106 -- 2,294,262 --
R. Schorr Berman 146,977,170 -- 2,280,198 --
John Kornreich 1,862,300 -- -- --
2. To approve an amendment to Arch's certificate of
incorporation increasing the number of shares of
common stock authorized for issuance from 300,000,000
to 500,000,000 shares. 102,432,196 4,373,010 269,160 42,189,463
3. To approve an amendment to Arch's certificate of
incorporation reclassifying Arch's class B common
stock as common stock. 105,260,970 1,685,399 127,997 42,189,463
4. To increase the number of shares of common stock
authorized for issuance under Arch's 2000 stock
incentive plan from 6,000,000 to 29,800,000 shares. 88,559,879 18,390,687 123,800 --
5. To increase the number of shares of common stock
authorized for issuance under Arch's 1999 employee
stock purchase plan from 1,500,000 to 4,500,000
shares. 99,832,079 7,090,090 152,197 --
6. To ratify the appointment by Arch's board of
directors of Arthur Andersen LLP as Arch's
independent public accountants for the fiscal year
ending December 31, 2001. 146,709,775 2,472,123 81,931 --
In addition to the three directors above who were elected at the meeting, the
terms of the following directors continued after the meeting: H. Sean Mathis,
John B. Saynor, John A. Shane, Gregg R. Daugherty, John H. Gutfreund and Allan
L. Rayfield.
18
ITEM 5. OTHER INFORMATION
Stockholder Proposals for 2002 Annual Meeting
As set forth in the Company's Proxy Statement for its 2001 Annual Meeting of
Stockholders, stockholder proposals submitted pursuant to Rule 14a-8 under the
Exchange Act for inclusion in the Company's proxy materials for its 2002 Annual
Meeting of Stockholders must be received by the Secretary of the Company at the
principal offices of the Company no later than December 10, 2001.
In addition, the Company's By-laws require that the Company be given advance
notice of stockholder nominations for election to the Company's Board of
Directors and of other matters which stockholders wish to present for action at
an annual meeting of stockholders (other than matters included in the Company's
proxy statement in accordance with Rule 14a-8). The required notice must be made
in writing and delivered or mailed to the Secretary of the Company at the
principal offices of the Company, and received not less than 80 days prior to
the 2001 Annual Meeting; provided, however, that if less than 90 days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, such nomination shall have been mailed or delivered to the
Secretary not later than the close of business on the 10th day following the
date on which the notice of the meeting was mailed or such public disclosure was
made, whichever occurs first. The 2002 Annual Meeting is currently expected to
be held on May 14, 2002. Assuming that this date does not change, in order to
comply with the time periods set forth in the Company's By-Laws, appropriate
notice would need to be provided no later than February 22, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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 May 30, 2001 (reporting the
completion by Arch of the sale of SMR licenses to Nextel
Communications, Inc.), filed June 13, 2001.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q for the quarter ended June
30, 2001, to be signed on its behalf by the undersigned thereunto duly
authorized.
ARCH WIRELESS, INC.
Dated: August 14 , 2001 By: /s/ J. Roy Pottle
------------------------------
J. Roy Pottle
Executive Vice President and
Chief Financial Officer