UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO FORM 10-K ON
FORM 10-K/A
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 _____X_____ For the Fiscal Year Ended December 31, 2001
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934:
10 7/8% Senior Discount Notes due 2008 American Stock Exchange
(Title of Class) (Name of exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934:
Common Stock Par Value $.01 Per Share
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 13, 2002 was approximately $1,270,000.
The number of shares of Registrant's common stock outstanding on March 13, 2002
was 182,434,590.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected historical consolidated financial and
operating data of Arch for each of the five years ended December 31, 2001. The
selected financial and operating data as of December 31, 1997, 1998, 1999, 2000
and 2001 and for each of the five years ended December 31, 2001 have been
derived from Arch's audited consolidated financial statements and notes. The
following consolidated financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes set forth below.
The extraordinary item is an extraordinary gain or loss resulting from
prepayment of indebtedness. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Adjusted earnings before interest, income taxes, depreciation and
amortization, as determined by Arch, does not reflect interest, income taxes,
depreciation and amortization, other operating expenses, equity in loss of
affiliate and extraordinary items; consequently adjusted earnings before
interest, income taxes, depreciation and amortization may not necessarily be
comparable to similarly titled data of other wireless messaging companies.
Earnings before interest, income taxes, depreciation and amortization is
commonly used by analysts and investors as a principal measure of financial
performance in the wireless messaging industry. Adjusted earnings before
interest, income taxes, depreciation and amortization is also one of the primary
financial measures used to calculate whether Arch and its subsidiaries are in
compliance with financial covenants under their debt agreements. These
covenants, among other things, limit the ability of Arch and its subsidiaries
to: incur additional indebtedness, make investments, pay dividends, grant liens
on its assets, merge, sell or acquire assets, repurchase or redeem capital
stock, incur capital expenditures and prepay certain indebtedness. Earnings
before interest, income taxes, depreciation and amortization is also one of the
financial measures used by analysts to value Arch. Therefore Arch management
believes that the presentation of earnings before interest, income taxes,
depreciation and amortization provides relevant information to investors.
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Adjusted earnings before interest, income taxes, depreciation and
amortization margin is calculated by dividing Arch's adjusted earnings before
interest, income taxes, depreciation and amortization by total revenues less
cost of products sold. Earnings before interest, income taxes, depreciation and
amortization margin is a measure commonly used in the wireless messaging
industry as an indicator of the efficiency of a company's operating structure.
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YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- -----------
(dollars in thousands except per share amounts)
STATEMENTS OF OPERATIONS DATA:
Revenues............................................ $ 396,841 $ 413,635 $ 641,824 $ 851,082 $ 1,163,514
Operating expenses:
Cost of products sold (exclusive of items shown
separately below)............................... 29,158 29,953 34,954 35,861 42,301
Service, rental and maintenance (exclusive of items
shown separately below)......................... 79,836 80,782 132,400 182,993 306,256
Selling........................................... 51,474 49,132 84,249 107,208 138,341
General and administrative (exclusive of items
shown separately below)......................... 106,041 112,181 180,726 263,901 388,979
Depreciation and amortization..................... 232,347 221,316 309,434 500,831 1,584,482
Reorganization expense............................ -- -- -- -- 154,927
Other operating expenses.......................... -- 14,700 (2,200) 5,425 7,890
---------- ---------- ---------- ---------- -----------
Operating income (loss)............................. (102,015) (94,429) (97,739) (245,137) (1,459,662)
Interest and non-operating expenses, net............ (97,159) (104,213) (188,249) (169,252) (258,870)
Equity in loss of affiliate......................... (3,872) (5,689) (3,200) -- --
---------- ---------- ---------- ---------- -----------
Income (loss) before income tax benefit,
extraordinary items and accounting changes........ (203,046) (204,331) (289,188) (414,389) (1,718,532)
Income tax benefit.................................. 21,172 -- -- 46,006 121,994
---------- ---------- ---------- ---------- -----------
Income (loss) before extraordinary items and
accounting changes................................ (181,874) (204,331) (289,188) (368,383) (1,596,538)
Extraordinary items................................. -- (1,720) 6,963 58,603 34,229
Cumulative effect of accounting changes............. -- -- (3,361) (6,794)
---------- ---------- ---------- ---------- -----------
Net income (loss)................................... $ (181,874) $ (206,051)$ (285,586) $ (309,780)$(1,569,103)
========== ========== ========== ========== ===========
Basic/diluted income (loss) per common share before
extraordinary items and accounting changes........ $ (26.31) $ (29.34)$ (9.21) $ (4.86)$ (8.98)
Extraordinary items per basic/diluted common share.. -- (0.25) 0.22 0.76 0.19
Cumulative effect of accounting changes per
basic/diluted common share........................ -- -- (0.11) -- (0.04)
---------- ---------- ---------- ---------- ----------
Basic/diluted net income per common share........... $ (26.31) $ (29.59)$ (9.10) $ (4.10)$ (8.83)
========== ========== ========== ========== ==========
OTHER OPERATING DATA:
Capital expenditures, excluding acquisitions........ $ 102,769 $ 113,184 $ 113,651 $ 140,285 $ 109,485
Cash flows provided by operating activities......... $ 63,590 $ 83,380 $ 99,536 $ 32,325 $ 47,371
Cash flows provided by (used in) investing activities $ (102,769) $ (82,868)$ (627,166) $ (92,500)$ 65,619
Cash flows provided by (used in) financing activities $ 39,010 $ (2,207)$ 529,158 $ 111,996 $ (95,201)
Adjusted earnings before interest, income taxes,
depreciation and amortization..................... $ 130,332 $ 141,587 $ 209,495 $ 261,119 $ 287,637
Adjusted earnings before interest, income taxes,
depreciation and amortization margin.............. 35% 37% 35% 32% 26%
Units in service at end of period................... 3,890,000 4,276,000 6,949,000 11,894,000 8,500,000
AS OF DECEMBER 31,
---------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- -----------
BALANCE SHEET DATA: (dollars in thousands)
Current assets...................................... $ 51,025 $ 50,712 $ 85,303 $ 211,443 $ 244,453
Total assets........................................ 1,020,720 904,285 1,353,045 2,309,609 651,633
Long-term debt, less current maturities (1)......... 968,896 1,001,224 1,322,508 1,679,219 --
Liabilities subject to compromise (1)............... -- -- -- -- 2,096,280
Redeemable preferred stock (1)...................... -- -- 28,176 30,505 --
Stockholders' equity (deficit)...................... (33,255) (213,463) (245,735) (94,264) (1,656,911)
(1) On December 6, 2001, Arch and 20 of its domestic subsidiaries filed petitions for relief under chapter 11
of the United States Bankruptcy Code. In accordance with AICPA Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code," beginning in December 2001, Arch
classified substantially all pre-petition liabilities and its redeemable preferred stock of the Debtors as
"Liabilities Subject to Compromise" on the consolidated balance sheet. See Note 2 to the Consolidated
Financial Statements.
3
The following table reconciles net income to the presentation of adjusted
earnings before interest, income taxes, depreciation and amortization:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- -----------
(dollars in thousand)
Net income (loss)................................... $ (181,874) $ (206,051)$ (285,586) $ (309,780) $(1,569,103)
Interest and non-operating expenses, net............ 97,159 104,213 188,249 169,252 258,870
Income tax benefit.................................. (21,172) -- -- (46,006) (121,994)
Depreciation and amortization....................... 232,347 221,316 309,434 500,831 1,584,482
Reorganization expense.............................. -- -- -- -- 154,927
Other operating expenses............................ -- 14,700 (2,200) 5,425 7,890
Equity in loss of affiliate......................... 3,872 5,689 3,200 -- --
Extraordinary item.................................. -- 1,720 (6,963) (58,603) (34,229)
Cumulative effect of accounting change.............. -- -- 3,361 -- 6,794
---------- ---------- ---------- ---------- -----------
Adjusted earnings before interest, income taxes,
depreciation and amortization..................... $ 130,332 $ 141,587 $ 209,495 $ 261,119 $ 287,637
=========== =========== =========== =========== ===========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements and information
relating to Arch and its subsidiaries that are based on the beliefs of Arch's
management as well as assumptions made by and information currently available to
Arch's management. These statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. When used
herein, words such as "anticipate", "believe", "estimate", "expect", "intend"
and similar expressions, as they relate to Arch or its management, identify
forward-looking statements. Such statements reflect the current views of Arch
with respect to future events and are subject to certain risks, uncertainties
and assumptions, including but not limited to those factors set forth below
under the caption "Factors Affecting Future Operating Results". Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their respective dates. Arch
undertakes no obligation to update or revise any forward-looking statements. All
subsequent written or oral forward-looking statements attributable to Arch or
persons acting on behalf of Arch are expressly qualified in their entirety by
the discussion under "Factors Affecting Future Operating Results".
PETITION FOR RELIEF UNDER CHAPTER 11
Certain holders of 12 3/4% Senior Notes due 2007 of Arch Wireless
Communications, Inc. ("AWCI"), a wholly-owned subsidiary of Arch, filed an
involuntary petition against AWCI on November 9, 2001 under chapter 11 of the
U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of
Massachusetts, Western Division. On December 6, 2001, AWCI consented to the
involuntary petition and the bankruptcy court entered an order for relief with
respect to AWCI under chapter 11 of the Bankruptcy Code. Also on December 6,
2001, Arch and 19 of Arch's other wholly-owned, domestic subsidiaries, including
Arch Wireless Holdings, Inc. ("AWHI"), filed voluntary petitions for relief,
under chapter 11, with the bankruptcy court. These cases are being jointly
administered under the docket for Arch Wireless, Inc., et al., Case No.
01-47330-HJB. Arch and its domestic subsidiaries (collectively, the "Debtors")
are operating their businesses and managing their property as
debtors-in-possession under the Bankruptcy Code.
Chapter 11 is the principal business reorganization chapter of the Bankruptcy
Code. Under chapter 11, a debtor is authorized to continue to operate its
business and to reorganize for the benefit of its creditors and stockholders. In
addition to permitting the rehabilitation of the Debtor, another goal of chapter
11 is to promote equality of treatment of creditors and equity security holders
of equal rank with respect to the restructuring of debt. In furtherance of these
two goals, upon the filing of a petition for reorganization under chapter 11,
the Bankruptcy Code generally provides for an automatic stay of substantially
all acts and proceedings against a debtor and its property, including all
attempts to collect claims or enforce liens that arose prior to the commencement
of the debtor's case under chapter 11. In addition, the debtors may reject or
assume pre-petition executory contracts and unexpired leases, and other parties
to contracts or leases that are rejected may assert rejection damage claims as
permitted by the Bankruptcy Code.
4
An official committee of unsecured creditors and a special subcommittee have
been appointed in the chapter 11 cases. In accordance with provisions of the
Bankruptcy Code, the official committee will have the right to be heard on all
matters that come before the bankruptcy court and the subcommittee will have the
right to be heard with respect to matters in which its interests diverge from
those of the official committee. In addition to the official committee and
subcommittee, a steering committee of Arch's secured bank lenders are
represented in the chapter 11 cases as an informal committee of secured note
holders representing the interests of the USAM noteholders.
Confirmation and consummation of a plan of reorganization are the principal
objectives of a chapter 11 reorganization case. A plan of reorganization sets
forth the means for satisfying claims against, and interests in, a debtor.
Confirmation of a plan requires, among other things, the affirmative vote of
creditors holding at least two-thirds in total dollar amount and more than
one-half in number of the allowed claims in each impaired class of claims that
vote on the plan, and two-thirds in amount of equity interests in each impaired
class of interests that vote on the plan. Section 1129(b) of the Bankruptcy
Code, commonly referred to as the "cramdown" provision, permits confirmation of
a plan of reorganization over the objection of one or more impaired classes
under certain circumstances. Confirmation of a plan of reorganization by a
bankruptcy court makes the plan binding upon the debtor, any issuer of
securities under the plan, any person acquiring property under the plan and any
creditor or equity security holder of the debtor. Subject to certain limited
exceptions, the confirmation order discharges the debtor from any debt that
arose prior to the effective date of the plan and substitutes the obligations
specified under the confirmed plan.
The Debtors filed an amended plan of reorganization with the bankruptcy court
on March 13, 2002. The plan provides for separate classes of claims and
interests for creditors and equity holders of each of the Debtors. The plan
proposes that the holders of AWCI's 9 1/2% Senior Notes due 2004 and AWCI's 14%
Senior Notes due 2004 and the lenders under AWHI's credit agreement
(collectively, the "Secured Creditors") will receive in the aggregate (1) $200
million of new 10% Senior Secured Notes due 2007 to be issued by AWHI; (2) $100
million of new 12% Senior Subordinated Secured Notes due 2009 to be issued by
AWHI; (3) 15,133,098 shares of new common stock to be issued by Arch; and (4)
100% of the cash available for distribution as detailed below. The unsecured
creditors of AWHI, including the deficiency claims of secured creditors, and its
subsidiaries will receive in the aggregate 3,600,000 shares of new common stock
to be issued by Arch, plus a distribution equal to the net proceeds collected
from potential avoidance and recovery actions under the Bankruptcy Code.
Unsecured creditors of Arch and its subsidiaries other than AWCI and AWHI and
its subsidiaries will receive no distribution. The unsecured creditors of AWCI,
including the deficiency claims of the secured creditors, will receive a pro
rata share of 66,902 shares of new common stock to be issued by Arch. Holders of
common and preferred equity interests will receive no distributions under the
plan and all equity interests in Arch will be cancelled. The plan also provides
for the creation of a management stock plan pursuant to which 1,200,000 shares
of new common stock will be distributable to management for a nominal price, one
third of which will vest on each of the first three anniversaries following the
effective date. Except for the shares of new common stock issuable pursuant to
the management stock plan, the new common stock to be issued to the secured and
unsecured creditors will constitute 100% of the outstanding common stock on the
effective date of the plan of reorganization. The cash available for
distribution to the Secured Creditors is an amount of cash equal to the amount
by which the Debtors' cash plus the amount of availability under a revolving
line of credit, if any, exceeds $45 million less administrative expense claims
reasonably expected to be payable for services provided and fees earned through
the closing of the transactions contemplated by the plan of reorganization.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of financial condition and results of
operations are based upon Arch's consolidated financial statements, which have
been prepared in conformity with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures. On an on-going basis,
Arch evaluates its estimates and assumptions, including but not limited to those
related to the impairment of long-lived assets, reserves for doubtful accounts,
revenue recognition and certain accrued liabilities. Arch bases its estimates on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
IMPAIRMENT OF 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 such assets. In assessing the recoverability of
these assets, Arch must project estimated enterprise-level cash flows which are
based on various operating assumptions such as average revenue per unit in
service, disconnect rates, sales productivity ratios and workforce productivity
5
ratios. Management develops these cash flow projections on a periodic basis and
continuously reviews the projections based on actual operating trends.
The projections assume that general economic conditions will continue
unchanged throughout the projection period and that their potential impact on
capital spending and revenues within each of our operating regions will not
fluctuate.
Projected revenues are based on our estimate of units in service and average
revenue per unit. Projected revenues assume a continued decline in traditional
messaging units in service throughout the projection period, which is partially
offset by growth of advanced messaging units in service.
Projected operating expenses are based upon historical experience and
expected market conditions adjusted to reflect an expected decrease in expenses
resulting from assumed synergies achieved from the integration of PageNet and
other cost saving initiatives resulting from a projected decline in total
revenue.
Arch recorded an impairment charge relating to its long-lived assets of
$976.2 million in the second quarter of 2001. If the cash flow estimates, or the
significant operating assumptions upon which they are based, change in the
future, Arch may be required to record additional impairment charges related to
its long-lived assets.
RESERVE FOR DOUBTFUL ACCOUNTS
Estimates are used in determining the reserve for doubtful accounts and are
based on historical collection experience, current trends and a percentage of
the accounts receivable aging categories. In determining these percentages Arch
reviews historical write-offs, including comparisons of write-offs to provisions
for doubtful accounts and as a percentage of revenues; Arch compares the ratio
of the reserve to gross receivables to historical levels and Arch monitors
collections amounts and statistics. Arch's reserve for doubtful accounts was
$42.0 million at December 31, 2001. While write-offs of customer accounts have
historically been within our expectations and the provisions established,
management cannot guarantee that Arch will continue to experience the same
write-off rates that it has in the past which could result in material
differences in the reserve for doubtful accounts and related provisions for
write-offs.
REVENUE RECOGNITION
Arch's revenue consists primarily of monthly service and lease revenues
charged to customers on a monthly, quarterly, semi-annual or annual basis.
Revenue also includes sales of messaging devices directly to customers,
resellers and third-party retail stores. Arch recognizes revenue over the period
the service is performed in accordance with SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 requires
that four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists, (2) delivery has occurred or
services rendered, (3) the fee is fixed and determinable, and (4) collectibility
is reasonably assured. Arch believes, relative to sales of one-way messaging
equipment, that all of these conditions are met and since the services are
deemed not to be essential to the sale of the equipment, product revenue is
recognized at the time of shipment.
Arch bundles the sale of two-way messaging equipment with the related service
and since, currently the sale of the service is essential to the functionality
of the device, Arch does not separately account for the sale of the device and
the service. Revenue and the related cost of sales are recognized over the
expected customer relationship, which is estimated to be two years. If the
assumed length of the customer relationship differed significantly or technology
advances resulted in the service being deemed not to be essential to the sale of
the device; the timing of revenue and expense amortization and the carrying
value of the related deferred revenue and cost could be materially affected.
However, Arch's net income or loss would not be materially affected since the
amount of revenue and expense amortized are substantially the same amount.
ACCRUED LIABILITIES
Arch incurs significant telephone expenses to support its messaging
infrastructure, call centers and office facilities. Telephone vendors generally
establish and bill accounts on a cycle basis and generally invoice Arch in
arrears for usage based charges. Due to the delay in receipt of invoices and the
cycle nature of these charges, Arch estimates telephone-related expenses on a
monthly basis based on a historical average of the past three payments on each
account. At December 31, 2001, accrued expenses and liabilities subject to
compromise include approximately $26 million in accrued telephone expenses.
Management currently believes the accrual for telephone charges is adequate, but
changes in certain conditions, such as network operating characteristics,
provision of more or less of certain services, office and call center
reconfigurations or significant changes in call volumes could result in the
recognition of more or less telephone-related expense.
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OVERVIEW
The following discussion and analysis should be read in conjunction with
Arch's consolidated financial statements and notes.
Arch derives the majority of its revenues from fixed monthly or other
periodic fees charged to subscribers for wireless messaging services. Such fees
are not generally dependent on usage. As long as a subscriber remains on
service, operating results benefit from the recurring payments of the fixed
periodic fees without incurrence of additional selling expenses. Excluding the
effect of definitional changes, Arch's average revenue per unit in service has
declined over the last three years for two principal reasons:
o primarily due to an increase in competition in certain of the markets in
which Arch operates, particularly competition from telephone, cellular and
PCS providers; and
o to a lesser extent, prior to 2001, an increase in the number of reseller
customers whose airtime is purchased at wholesale rates.
The reduction in average revenue per unit in service resulting from these
trends was offset by the reduction of expenses so that margins were improving
until Arch's merger in June 1999 with MobileMedia which resulted in redundant
management and administrative headcount. While the integration of Arch and
MobileMedia's operations is complete, the consummation of the PageNet merger in
November 2000 also resulted in redundant management and administrative
headcount. During 2001, the integration of Arch and PageNet's operations reduced
this redundant headcount and as of December 2001 the integration of PageNet's
operations was substantially complete.
Arch has achieved significant growth in units in service and adjusted
earnings before interest, income taxes, depreciation and amortization through
acquisitions and, prior to 1999, internal growth. During 1999, units in service
decreased by 89,000 units, excluding the addition of subscribers from the
MobileMedia acquisition. As a result of the MobileMedia and PageNet acquisitions
units in service were adjusted to eliminate intercompany accounts and to reflect
a common definition of units in service. During 2000, units in service decreased
by 2,073,000 units, 888,000 due to subscriber cancellations and 1,185,000 due to
definitional changes, excluding the addition of subscribers from the PageNet
acquisition. During 2001, units in service decreased by an additional 3,394,000
units due to subscriber cancellations. Arch believes it will experience a
substantial net decline in the number of units in service during 2002 as the
number of two-way messaging subscribers added will be substantially less than
the number of traditional messaging subscribers lost. Arch's ability to compete
against telephone, cellular and PCS providers providing two-way messaging
services is as yet unproven.
From January 1, 1999 through December 31, 2001, Arch's total number of units
in service grew from 4.3 million to 8.5 million units entirely due to the
MobileMedia and PageNet acquisitions offset by subscriber cancellations. Arch's
total revenues have increased from $641.8 million in the year ended December 31,
1999 to $851.1 million in the year ended December 31, 2000 and to $1,163.5
million in the year ended December 31, 2001. Arch had net losses of $285.6
million, $309.8 million and $1,569.1 million in the years ended December 31,
1999, 2000 and 2001, respectively, as a result of significant depreciation and
amortization expenses related to acquired and developed assets, including an
impairment charge of $976.2 million on certain long-lived assets in 2001, and
interest charges associated with indebtedness. As its subscriber base has grown,
Arch's adjusted earnings before interest, income taxes, depreciation and
amortization has increased from $209.5 million in the year ended December 31,
1999 to $261.1 million in the year ended December 31, 2000 and to $287.6 million
in the year ended December 31, 2001.
Earnings before interest, income taxes, depreciation and amortization is a
commonly used measure of financial performance in the wireless messaging
industry. Adjusted earnings before interest, income taxes, depreciation and
amortization is one of the financial measures used to calculate whether Arch and
its subsidiaries are in compliance with covenants under their respective debt
agreements. Adjusted 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. One of Arch's financial objectives is to
increase its adjusted earnings before interest, income taxes, depreciation and
amortization, since this is a significant source of funds for servicing
indebtedness and for investment in continued growth, including the purchase of
messaging devices, messaging system equipment, construction and expansion of
messaging systems and possible acquisitions. Adjusted earnings before interest,
income taxes, depreciation and amortization, as determined by Arch, may not
necessarily be comparable to similarly titled data of other wireless messaging
companies. Amounts reflected as 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 or future
indebtedness, including the repayment of such indebtedness or the payment of
associated interest, limitations imposed by applicable law upon the payment of
dividends or distributions or capital expenditure requirements.
7
PAGENET MERGER
On November 10, 2000, Arch completed its acquisition of PageNet for $1.35
billion consisting of 89,896,907 shares of Arch common stock valued at $263.4
million, the assumption of liabilities of $1.06 billion and $27.6 million of
transaction costs. In the merger, each outstanding share of PageNet's common
stock was exchanged for 0.04796505 shares of Arch's common stock.
During the fourth quarter of 2000, Arch management commenced the development
of plans to integrate PageNet operations, including the elimination of redundant
headcount and facilities. Integration of PageNet's operations was substantially
complete by December 31, 2001. Since Arch anticipated a net reduction of
approximately 50% of PageNet's workforce and the closing of certain facilities,
it established a $76.0 million acquisition reserve which was included as part of
the purchase price of PageNet. The initial acquisition reserve consisted of
approximately:
o $66.1 million for employee severance;
o $9.4 million for lease obligations and terminations; and
o $0.5 million of other costs.
The PageNet acquisition reserve activity during 2001 was as follows (in
thousands):
Balance at Reserve
December 31, Adjustment Amounts Remaining
2000 in 2001 Paid Reserve
---- ------- ---- -------
Severance costs......... $ 36,765 $ 10,900 $ 46,071 $ 1,594
Lease obligation costs.. 9,264 11,062 10,306 10,020
Other costs............. 500 -- 350 150
-------- -------- -------- --------
Total................... $ 46,529 $ 21,962 $ 56,727 $ 11,764
======== ======== ======== ========
The remaining reserve balance at December 31, 2001 has been included in
liabilities subject to compromise on the Consolidated Balance Sheet and in
accordance with SOP 90-7 has not been adjusted to reflect the potential
reductions due to rejecting the underlying leases pursuant to Arch's chapter 11
bankruptcy proceedings.
MOBILEMEDIA MERGER
In June 1999, Arch acquired MobileMedia Communications, Inc. Arch acquired
MobileMedia for a combination of cash and Arch securities, as follows:
o Arch paid approximately $479.0 million in cash to secured creditors of
MobileMedia;
o Arch paid a total of $37.6 million of fees, expenses and other debts;
o Arch issued 4,781,656 shares of its common stock to unsecured creditors of
MobileMedia;
o Arch issued 36,207,265 additional shares of its common stock to unsecured
creditors of MobileMedia and Arch stockholders for a total purchase price
of $217.2 million; and
Subsidiaries of Arch also borrowed a total of $320.8 million to help fund the
MobileMedia acquisition.
8
RESULTS OF OPERATIONS
The following table presents certain items from Arch's consolidated
statements of operations as a percentage of net revenues and certain other
information for the periods indicated (dollars in thousands except per unit
data):
YEAR ENDED DECEMBER 31,
-------------------------
1999 2000 2001
---- ---- ----
Total revenues 105.8% 104.4% 103.8%
Cost of products sold (5.8) (4.4) (3.8)
----- ----- -----
Net revenues 100.0 100.0 100.0
Operating expenses:
Service, rental and maintenance 21.8 22.4 27.3
Selling 13.9 13.1 12.3
General and administrative 29.8 32.4 34.7
Depreciation and amortization 51.0 61.4 141.3
Other operating expenses (0.4) 0.7 14.5
----- ----- -----
Operating income (loss) (16.1)% (30.0)% (130.1)%
===== ===== =====
Net income (loss) (47.1)% (38.0)% (139.9)%
===== ===== =====
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Revenues increased to $1,163.5 million, a 36.7% increase, in 2001 from $851.1
million in 2000 reflecting a full year of the results of the acquired PageNet
operations, offset by the decline in units in service from 11.9 million at
December 31, 2000 to 8.5 million at December 31, 2001. Net revenues (revenues
less cost of products sold) increased to $1,121.2 million, a 37.5% increase, in
2001 from $815.2 million in 2000. Revenues and net revenues in 2000 and 2001
were adversely affected by the declining demand for traditional paging services
which led to subscriber cancellations of 3,394,000 units in service in 2001.
Two-way messaging revenues increased to $101.4 million, 8.7% of total
revenue, in 2001 from $9.4 million, 1.1% of total revenue, in 2000. Two-way
messaging net revenues increased to $85.6 million, 7.6% of total net revenue, in
2001 from $9.4 million, 1.2% of total net revenues, in 2000. 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 158,000 at December
31, 2000 to 324,000 at December 31, 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 in 2000 and 2001. Arch
does not differentiate between service and rental revenues.
Arch believes the demand for traditional messaging services declined in 2000
and in 2001, and will continue to decline in the foreseeable future. Arch
believes that future growth in the wireless messaging industry, if any, 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 2002, as Arch's addition of two-way messaging subscribers will 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 $306.3 million, or 27.3% of net revenues, in
2001 from $183.0 million, or 22.4% of net revenues in 2000. The increase in
dollar amount was due to the acquisition of PageNet in November 2000. Since many
of these costs are fixed in the short term, Arch has not been able to reduce its
service, rental and maintenance expenses at the same rate of decline as units in
service and net revenues, resulting in an increase as a percentage of net
revenues. For 2001, there were $46.1 million of service, rental and maintenance
expenses associated with the provision of two-way messaging and information
services, compared to $12.3 million in 2000. This increase is due to the
inclusion of a full year of PageNet operations in 2001.
Selling expenses increased to $138.3 million, or 12.3% of net revenues, in
2001 from $107.2 million, or 13.2% of net revenues, 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 $32.0 million in 2001 compared
to $6.5 million in 2000. This increase was due to a full year of advanced
messaging sales in 2001 compared to five months in 2000.
9
General and administrative expenses increased to $389.0 million, or 34.7% of
net revenues, in 2001 from $263.9 million, or 32.4% of net revenues in 2000. The
increase was due to increased headcount, administrative and facility costs
associated with PageNet operations and increased accounts receivable loss
provisions offset by various cost savings initiatives. These initiatives
included workforce reductions, facilities closures and operating division
consolidations which resulted in annualized savings of approximately $144
million. The accounts receivable loss provisions increased to $56.9 million in
2001 from $33 million in 2000, due primarily to a full year of PageNet
operations. General and administrative expenses associated with the provision of
two-way messaging and information services were $14.4 million in 2001 compared
to $6.9 million in 2000.
Depreciation and amortization expense increased to $1,584.5 million in 2001
from $500.8 million in 2000. The increase was principally due to a $976.2
million impairment charge, recorded in June 2001, related to certain one-way
messaging equipment, computer equipment and intangible assets. This charge was
determined based upon management's projections of future cash flows. Since the
future undiscounted cash flows did not exceed the carrying value of the
long-lived assets, an impairment existed. The fair value of the assets was
determined based on a discounted cash flow analysis and the difference in
carrying value and fair value resulted in the charge. See Note 4 to the
Consolidated Financial Statements. The remaining increase in these expenses
reflects the acquisition of PageNet.
Other operating expenses in 2001 consisted of $154.9 million of
reorganization costs, $5.9 million associated with Arch's prior recapitalization
plan which was subsequently withdrawn and $2.0 million of restructuring charges.
The reorganization costs include the accretion of $133.8 million of debt
discounts, the write off of $11.8 million of deferred financing fees and $9.3
million of professional and other fees associated with the bankruptcy filing. In
2000, other operating expenses consisted solely of restructuring costs. See
Notes 2 and 11 to the Consolidated Financial Statements.
Operating losses were $1,459.7 million in 2001 compared to $245.1 million in
2000 as a result of the factors outlined above.
Net interest expense increased to $226.9 million in 2001 from $166.2 million
in 2000. The increase was principally attributable to an increase in Arch's
outstanding debt due to the PageNet acquisition partially offset by lower
interest rates during 2001. Interest expense for 2000 and 2001 included
approximately $28.3 million and $37.2 million, respectively, of accretion on
assumed bank debt and Arch's senior debt, the payment of which was deferred.
Other expense increased to $31.9 million in 2001 from $3.1 million in 2000.
In 2001, other expense included a $15.0 million charge related to changes in the
market value of certain interest rate swaps which have not been designated as a
hedge for accounting purposes and a $7.5 million charge resulting from the
write-off of a note receivable from Vast Solutions, Inc., which filed for
bankruptcy in April 2001.
In 2000 and 2001, Arch recognized extraordinary gains of $58.6 million and
$34.2 million, respectively, on the retirement of debt exchanged for Arch stock.
Arch recognized an income tax benefit of $46.0 million and $122.0 million in
2000 and 2001, respectively. The benefit represented the tax benefit of
operating losses incurred subsequent to the acquisition of PageNet, which were
available to offset deferred tax liabilities arising from the PageNet
acquisition.
On January 1, 2001, Arch adopted SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized in earnings. Initial application of SFAS No. 133 resulted in a $6.8
million charge in the quarter ended March 31, 2001, which was reported as the
cumulative effect of a change in accounting principle. This charge represents
the impact of initially recording the derivatives at fair value as of January 1,
2001. All of Arch's derivative instruments were terminated during 2001.
Net loss increased to $1,569.1 million in 2001 from $309.8 million in 2000,
as a result of the factors outlined above.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Revenues increased to $851.1 million, a 32.6% increase, in 2000 from $641.8
million in 1999 as the number of units in service increased from 6.9 million at
December 31, 1999 to 11.9 million at December 31, 2000 due to the PageNet
acquisition in November 2000. Net revenues (revenues less cost of products sold)
increased to $815.2 million, a 34.3% increase, at December 31, 2000 from $606.9
million at December 31 1999. Revenues and net revenues in 1999 and 2000 were
adversely affected by (1) the declining demand for traditional messaging
services and (2) subscriber cancellations which led to a decrease of 888,000
units in service for the year ended December 31, 2000.
Product sales represented less than 10% of total service, rental and
maintenance revenues in 2000 and 1999.
10
Service, rental and maintenance expenses, increased to $183.0 million, or
22.4% of net revenues, in 2000 from $132.4 million, or 21.8% of net revenues, in
1999. Approximately half of this increase was due to the acquisition of PageNet
in November 2000. The remaining increase was primarily due to a full year of
expenses for the provision of alphanumeric and nationwide messaging services to
a higher percentage of customers which resulted from the MobileMedia acquisition
in June 1999. In 2000, there was $12.3 million of service, rental and
maintenance expenses associated with the provision of two-way messaging and
information services.
Selling expenses increased to $107.2 million, or 13.2% of net revenues, in
2000 from $84.2 million, or 13.9% of net revenues, in 1999. Approximately
one-third of this increase in dollar amount was due to the acquisition of
PageNet. The remaining increase in dollar amount was primarily due to a full
year of increased headcount associated with the MobileMedia acquisition. Selling
expenses related to two-way messaging and information services were $6.5 million
in 2000.
General and administrative expenses increased to $263.9 million, or 32.4% of
net revenues, in 2000 from $180.7 million, or 29.8% of net revenues, in 1999.
Approximately one-third of the increase was due to increased headcount,
administrative and facility costs associated with the PageNet operations. The
remaining increase was primarily due to a full year of increased headcount,
administrative and facility costs associated with MobileMedia. General and
administrative expenses associated with the provision of two-way messaging and
information services were $6.9 million in 2000.
Depreciation and amortization expenses increased to $500.8 million in 2000
from $309.4 million in 1999. The increase in these expenses principally
reflected the acquisition of PageNet and a full year of depreciation and
amortization of the assets purchased in the MobileMedia acquisition. This
increase also included $19.3 and $103.5 million of incremental depreciation and
amortization expense, respectively, as a result of reducing the remaining lives
on messaging equipment and certain intangible assets.
Operating losses were $245.1 million in 2000 compared to $97.7 million in
1999, as a result of the factors outlined above.
Net interest expense increased to $166.2 million in 2000 from $143.0 million
in 1999. The increase was principally attributable to an increase in Arch's
outstanding debt due to the MobileMedia and PageNet acquisitions. Interest
expense for 1999 and 2000 included approximately $41.6 million and $28.3
million, respectively, of accreted interest on Arch's senior debt, the payment
of which was deferred.
In 2000 and 1999, Arch recognized extraordinary gains of $58.6 million and
$7.0 million, respectively, on the retirement of debt exchanged for Arch stock.
Arch recognized an income tax benefit of $46.0 million in 2000. 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.
Net loss increased to $309.8 million in 2000 from $285.6 million in 1999, as
a result of the factors outlined above.
LIQUIDITY AND CAPITAL RESOURCES
As noted earlier, Arch, and substantially all of its domestic subsidiaries,
filed for chapter 11 bankruptcy protection on December 6, 2001 and subsequently
entered into a debtor-in-possession credit facility (see "Sources of Funds").
The matters discussed under this caption "Liquidity and Capital Resources," to
the extent that they relate to future events or expectations, may be
significantly affected by the chapter 11 reorganization. The proceedings
relating to the chapter 11 case involve, or result in, various restrictions on
Arch's activities, limitations on financings, the need to obtain bankruptcy
court approval for various matters and uncertainty as to relationships with
venders, suppliers, customers and others with whom Arch may conduct or seek to
conduct business. At December 31, 2001, Arch had $72.2 million in cash and cash
equivalents. As more fully described below under the heading "Capital
Expenditures and Commitments - Cash Collateral Stipulation," Arch is required to
repay certain amounts to the secured lenders on a monthly basis. In addition,
the plan of reorganization filed on January 15, 2002, as amended on March 13,
2002, proposes that Arch will repay the secured creditors to the extent the cash
balance plus available borrowings under a revolving credit facility, if any,
less a reserve for reasonable anticipated administrative expenses exceeds $45
million.
Arch's business requires the availability of substantial funds to finance
capital expenditures for subscriber equipment and network system equipment and
to service debt once Arch emerges from chapter 11.
11
Arch's net cash flows from operating, investing and financing activities for
the periods indicated in the table below are as follows:
YEAR ENDED DECEMBER 31,
1999 2000 2001
---- ---- ----
(dollars in millions)
Net cash provided by operating activities.................................. $ 99.5 $ 32.3 $ 47.4
Net cash (used in) provided by investing activities........................ $ (627.2) $ (92.5) $ 65.6
Net cash provided by (used in) financing activities........................ $ 529.2 $ 112.0 $ (95.2)
Investing activities in 2001 included a cash inflow of $175 million from the
sale of FCC licenses. Investing activities in 1999 and 2000 included a cash
outflow of $516.6 million and a cash inflow of $47.8 million for the
acquisitions of MobileMedia and PageNet, respectively. Financing activities in
2001 included cash repayments of debt of $178.1 million offset by proceeds from
the sale of preferred stock of $75 million. Financing activities in 2000
included borrowings of $175.0 million offset by cash repayments of debt of $63.6
million. Financing activities in 1999 included $217.2 million from the sale of
common stock to unsecured creditors of MobileMedia and borrowings of $320.8
million in connection with the acquisition of MobileMedia as described above.
CAPITAL EXPENDITURES AND COMMITMENTS
Arch has operating leases for office and transmitting sites with lease terms
ranging from one month to approximately fifty years. Minimum annual lease
payments on operating leases having initial or remaining noncancellable lease
terms in excess of one year during the years 2002 through 2006 are $104.8
million, $55.8 million, $43.6 million, $32.7 million and $23.0 million,
respectively. Excluding acquisitions of wireless messaging businesses, Arch's
capital expenditures were $113.7 million in 1999, $140.3 million in 2000 and
$109.5 million in 2001. To date, Arch generally has funded its capital
expenditures with net cash provided by operating activities and the incurrence
of debt.
Arch's 2001 capital expenditures primarily involved the purchase of wireless
messaging devices, system and transmission equipment and information systems.
Arch estimates that capital expenditures for 2002-2003 will be approximately
$100 million per year. These expenditures will be used primarily for subscriber
equipment, network infrastructure, information systems and expansion of Arch's
two-way messaging network. However, the actual amount of capital required by
Arch will depend on a number of factors, including; subscriber growth, the type
of products and services demanded by customers, service revenues, and the nature
and timing of Arch's strategy to enhance its two-way messaging networks.
Cash Collateral Stipulation
In connection with the bankruptcy filing, if the aggregate average daily cash
balance for any fiscal month exceeds $45 million, Arch is required to pay the
pre-petition secured lenders such excess less amounts due under the DIP credit
facility, provided, however, that after such payment the aggregate cash balance
shall not be less than $45 million. Such cash payment is to be applied to the
outstanding principal amount of the pre-petition secured debt. During the first
two months of 2002, Arch made payments of $42.6 million to the pre-petition
secured lenders.
SOURCES OF FUNDS
DIP Credit Facility
In connection with the bankruptcy filing, Arch obtained a $50 million
debtor-in-possession credit facility from a group of lenders led by Toronto
Dominion (Texas), Inc. which expires the earlier of December 5, 2002 or the
effective date of a confirmed plan of reorganization. Arch's availability under
this facility is the lesser of $50 million or a calculated borrowing base, which
is derived based on eligible accounts receivable, as defined in the agreement.
Availability at December 31, 2001 was approximately $30 million. The interest
rate is LIBOR plus 3.25% or the bank's base rate plus 2.25%, if outstanding
borrowings are less than $25 million. If outstanding borrowings are greater than
$25 million, the interest rate is LIBOR plus 4% or the bank's base rate plus 3%.
The facility has a commitment fee of 0.5% per annum on unused portions, payable
monthly, and a quarterly collateral agent fee of $25,000. There were no
borrowings outstanding under the facility at December 31, 2001. This facility is
secured by a first priority security interest in all of the pre-petition and
post-petition assets of the Debtors and is entitled to super priority expense of
administration in the bankruptcy proceeding.
The DIP credit facility contains restrictions that limit, among other things,
Arch's operating subsidiaries' ability to:
o declare dividends or redeem or repurchase capital stock;
12
o prepay, redeem or purchase debt;
o incur liens and engage in sale/leaseback transactions;
o make loans and investments;
o incur indebtedness and contingent obligations;
o amend or otherwise alter debt instruments and other material agreements;
o engage in mergers, consolidations, acquisitions and asset sales;
o alter its lines of business or accounting methods.
In addition, the DIP credit facility requires Arch and its subsidiaries to
meet certain financial covenants, including minimum earnings before interest,
income taxes, depreciation and amortization, minimum direct units in service,
minimum service revenue and maximum capital expenditures. As of December 31,
2001, Arch and its operating subsidiaries were in compliance with the covenants
of the DIP credit facility.
Sale of SMR Licenses
In January 2001, Arch announced an agreement with Nextel Communications, Inc.
to sell its Specialized Mobile Radio ("SMR") licenses to Nextel for an aggregate
purchase price of $175 million. Concurrent with this transaction, Nextel agreed
to invest $75 million in Arch Series F 12% Redeemable Cumulative Junior
Preferred Stock.
Pursuant to these transactions, in February 2001, Nextel advanced $250
million to Arch in the form of a $175 million loan secured by a pledge of the
shares of the Arch subsidiary which owned the SMR licenses, and a $75 million
unsecured loan. Upon receipt of regulatory approvals, the SMR licenses were
transferred to Nextel and the principal amount of the $175 million loan was
satisfied in consideration for such transfer, and the principal amount of the
$75 million unsecured loan together with interest due on both loans was
exchanged for shares of Arch Series F Preferred stock.
Arch used $175.2 million of the proceeds from these transactions to prepay
all required 2001 amortization payments under its senior credit facility. The
remaining $74.8 million of proceeds, was available for working capital purposes.
Credit Facility
At December 31, 2001, an Arch subsidiary had a senior credit facility in the
amount of $1,119.6 million consisting of (1) a $122.5 million Tranche A reducing
revolving facility, (2) a $64.1 million Tranche B term loan, (3) a $662.7
million Tranche B-1 term loan and (4) a $270.3 million Tranche C term loan. As a
result of the chapter 11 cases, Arch has classified all of this debt as
liabilities subject to compromise on the Consolidated Balance Sheet.
Adequacy of Capital Resources
As discussed above, Arch and its domestic subsidiaries are operating their
businesses as debtors-in-possession under chapter 11 of the bankruptcy code. In
addition to the cash requirements necessary to fund ongoing operations, Arch
anticipates that it will incur significant professional fees and other
restructuring costs in connection with the chapter 11 case and the restructuring
of its business operations. However, based on current and anticipated levels of
operations, and efforts to effectively manage working capital, Arch anticipates
that its cash flow from operations, together with cash on hand will be adequate
to meet its anticipated cash requirements during the pendency of the chapter 11
case and, following confirmation and consummation of the plan of reorganization,
for the foreseeable future.
In the event that cash flows are not sufficient to meet future cash
requirements, Arch may be required to reduce planned capital expenditures, sell
assets or seek additional financing. Arch can provide no assurances that
reductions in planned capital expenditures or proceeds from asset sales would be
sufficient to cover shortfalls in available cash or that additional financing
would be available or, if available, offered on acceptable terms.
INFLATION
Inflation has not had a material effect on Arch's operations to date. Systems
equipment and operating costs have not increased in price and the price of
wireless messaging devices have tended to decline in recent years. This
reduction in costs has generally been reflected in lower prices charged to
subscribers who purchase their wireless messaging devices. Arch's general
operating expenses, such as salaries, employee benefits and occupancy costs, are
subject to normal inflationary pressures.
13
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-K or presented elsewhere by
Arch's management from time to time.
Arch's plan of reorganization may not be confirmed by the bankruptcy court;
confirmation is essential for Arch to continue its operations.
Our bankruptcy filing could present us with additional challenges, including:
possible problems with our relationships with our creditors, customers,
suppliers and employees; our ability to attract and retain key employees; and
the ability to confirm and implement the plan of reorganization.
There are numerous factors that may prevent confirmation of the plan,
including the rejection of the plan by the various classes of claims and
interest holders. There are no assurances that a plan of reorganization will be
confirmed which is necessary and essential for us to continue our operations.
The plan that we filed with the bankruptcy court on January 15, 2002, as amended
on March 11, 2002, provides, among other things, that shareholders and unsecured
creditors of Arch will receive no distribution under the plan. As a result, each
of these classes of creditors and equity holders is deemed to have rejected the
plan. In order to obtain confirmation of the plan, Arch and its domestic
subsidiaries will have to employ the cramdown provisions of the Bankruptcy Code.
While Arch believes that the plan meets the cramdown requirements, Arch expects
that certain unsecured creditor groups will oppose confirmation of the plan.
Recent declines in Arch's units in service may continue or even accelerate; this
trend may impair Arch's financial results.
In 1999, Arch experienced a decrease of 89,000 units in service, excluding
the addition of subscribers from the MobileMedia acquisition. During 2000, units
in service decreased by 2,073,000 units, 888,000 due to subscriber cancellations
and 1,185,000 due to definitional changes, excluding the addition of subscribers
from the PageNet acquisition. During 2001, units in service decreased by an
additional 3,394,000 units due to subscriber cancellations. Arch believes the
traditional messaging industry did not grow during 1999, the demand for
traditional messaging services declined in 2000 and 2001 and will continue to
decline in the following years and that future growth in the wireless messaging
industry, if any, 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 and revenue during 2002 as Arch's addition of
two-way messaging subscribers will 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.
Because Arch depends on Motorola for pagers, on Glenayre for other equipment and
on a limited number of vendors for satellite transmission and a concentration of
vendors for site leases. Arch's operations may be disrupted if it is unable to
obtain equipment or services from them in the future.
Arch does not manufacture any of the equipment customers need to take
advantage of its services. It is dependent primarily on Motorola, Inc. to obtain
sufficient equipment inventory for new subscribers and replacement needs and on
Glenayre Electronics, Inc. for sufficient terminals and transmitters to meet its
expansion and replacement requirements. Both Motorola and Glenayre have publicly
announced their intentions to discontinue the production of messaging devices
and network equipment. Arch has entered into a supply agreement with Motorola
pursuant to which Motorola will supply Arch with a sufficient number of
messaging devices to meet expected inventory requirements through September 30,
2002. In February 2002, Motorola announced that Multitone Electronics will
assume Motorola's role in the messaging industry as a provider of the devices
deployed by Arch. Following a transition period estimated to last approximately
nine months, Multitone will continue the manufacture of POCSAG, FLEX and ReFLEX
protocol-based devices used to provide Arch's one way and two way messaging
services. In addition, Arch has entered into development agreements with certain
other vendors to obtain alternative sources of messaging devices and network
equipment. Significant delays in developing these alternative sources could lead
to disruptions in operations and adverse financial consequences. There can be no
assurance that Arch will be able to secure alternative sources of messaging
devices and network equipment.
Approximately 35% of Arch's lease payments for tower sites are made to two
site lease lessors. Arch is currently negotiating amendments to these and other
long term lease arrangements with these and other lessors. There can be no
assurances that these negotiations will result in amendments to existing lease
arrangements that will allow Arch to reduce future lease payments as a result of
Arch's efforts to reduce the number of tower sites it leases through
rationalization of Arch's existing messaging networks. If no agreement is
reached, there could be a material adverse effect on Arch's ability to reduce
its future operating costs.
14
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.
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 faces competition from other messaging providers in all markets in which
it operates, as well as from cellular and PCS telephone companies. Providers of
mobile wireless phone services now include wireless messaging as an adjunct
service to voice services. In addition, the availability of coverage for mobile
phone services has increased, making the two types of service and product
offerings more comparable. Thus, cellular and PCS companies seeking to provide
wireless messaging services may be able to bring their products to market
faster, at lower prices or in packages of products that consumers and businesses
find more valuable than those provided by Arch. In addition, many of these
competitors, particularly cellular and PCS phone companies, possess greater
financial, technical and other resources than those available to Arch.
Arch may need additional capital to expand or operate its business which could
be difficult to obtain. Failure to obtain additional capital may preclude Arch
from developing or enhancing its products, taking advantage of future
opportunities, growing its business or responding to competitive pressures.
The amount of capital required by Arch will depend on a number of factors,
including:
o subscriber growth;
o the type of wireless messaging devices and services demanded by customers;
o service revenues;
o technological developments;
o marketing and sales expenses and o competitive conditions.
The funds to finance Arch's future capital needs are expected to be generated
from operations. No assurance can be given that Arch will be able to generate
sufficient cash flow to finance its future capital needs. If cash flow from
operations is not sufficient, no assurance can be given that additional equity
or debt financing will be available to Arch when needed on acceptable terms, if
at all.
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.
RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Arch adopted the requirements of SFAS No. 142 effective January 1,
2002. SFAS No. 142 requires companies to test all goodwill for impairment and to
cease amortization of this asset. Arch did not have any goodwill on its balance
sheet as of January 1, 2002 and therefore the adoption of SFAS No. 142 had no
impact on Arch's results of operations or financial condition.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-lived Assets." Adoption of this standard is required no
later than the first quarter of 2002. Arch is evaluating the impact of adoption
of this standard and has not yet determined the effect of adoption on its
financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 14(a)(1) and (2) are
included in this Report beginning on Page F-1.
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Consolidated Balance Sheets as of December 31, 2000 and 2001
Consolidated Statements of Operations for Each of the Three Years
in the Period Ended December 31, 2001
Consolidated Statements of Stockholders' Equity (Deficit) for Each
of the Three Years in the Period Ended December 31, 2001
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended December 31, 2001
Notes to Consolidated Financial Statements
(c) Exhibits
The exhibits listed in the accompanying index to exhibits are
filed as part of this annual report on Form 10-K.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ARCH WIRELESS, INC.
By: /S/ J. ROY POTTLE
----------------------------------
J. Roy Pottle
Executive Vice President and Chief
Financial Officer (principal
financial officer and principal
accounting officer)
June 13, 2002
17
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants.................................................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001 ............................................... F-3
Consolidated Statements of Operations for Each of the Three Years in the Period Ended
December 31, 2001........................................................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for Each of the Three Years in
the Period Ended December 31, 2001....................................................................... F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended
December 31, 2001........................................................................................ F-6
Notes to Consolidated Financial Statements.................................................................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Arch Wireless, Inc.:
We have audited the accompanying consolidated balance sheets of Arch Wireless,
Inc. (a Delaware corporation) (the "Company") and subsidiaries as of December
31, 2000, as restated (see Note 14), and 2001, and the related consolidated
statements of operations, stockholders' equity (deficit), as restated (see Note
14), and cash flows for each of the three years in the period ended December 31,
2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Arch Wireless, Inc. and subsidiaries as of December 31, 2000, as restated (see
Note 14), and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, on December 6, 2001, the Company and substantially all of
its domestic subsidiaries voluntarily filed for protection under Chapter 11 of
the United States Bankruptcy Code, which raises substantial doubt about the
Company's ability to continue as a going concern in its present form.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As explained in Note 1 to the financial statements, effective January 1, 2001,
the Company changed its method of accounting for derivative instrument and
hedging activities in accordance with Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities".
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 7, 2002 (except
for the matter discussed in
Note 15 as to which the date
is May 29, 2002)
F-2
ARCH WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
2000 2001
----------- -----------
RESTATED
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 55,007 $ 72,200
Accounts receivable (less reserves of $62,918 and $41,987 in 2000 and
2001, respectively) ............................................... 134,396 90,158
Inventories ......................................................... 2,163 939
Restricted cash ..................................................... -- 34,579
Prepaid expenses and other .......................................... 19,877 46,577
----------- -----------
Total current assets .............................................. 211,443 244,453
----------- -----------
Property and equipment, at cost:
Land, buildings and improvements .................................... 36,334 38,254
Messaging and computer equipment .................................... 1,347,468 1,341,391
Furniture, fixtures and vehicles .................................... 58,270 58,118
----------- -----------
1,442,072 1,437,763
Less accumulated depreciation and amortization ...................... 444,650 1,031,741
----------- -----------
Property and equipment, net ......................................... 997,422 406,022
----------- -----------
Intangible and other assets (less accumulated amortization of $697,446
and $1,518,461 in 2000 and 2001, respectively) ...................... 1,100,744 1,158
----------- -----------
$ 2,309,609 $ 651,633
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Current maturities of long-term debt ............................ $ 177,341 $ 67,271
Accounts payable ................................................ 55,282 9,028
Accrued restructuring charges ................................... 60,424 --
Accrued expenses ................................................ 102,959 66,459
Accrued interest ................................................ 39,140 4
Customer deposits ............................................... 18,273 10,677
Deferred revenue ................................................ 44,227 43,842
----------- -----------
Total current liabilities ..................................... 497,646 197,281
----------- -----------
Long-term debt, less current maturities ............................ 1,679,219 --
----------- -----------
Other long-term liabilities ........................................ 74,509 14,983
----------- -----------
Deferred income taxes .............................................. 121,994 --
----------- -----------
Liabilities subject to compromise ...................................... -- 2,096,280
----------- -----------
Commitments and contingencies
Redeemable preferred stock ............................................. 30,505 --
----------- -----------
Stockholders' equity (deficit):
Common stock--$.01 par value, authorized 320,000,000 shares, issued
and outstanding: 161,536,656 and 182,434,590 shares in 2000 and
2001, respectively ................................................ 1,615 1,824
Class B common stock--$.01 par value, authorized 10,000,000 shares;
issued and outstanding: 1,991,945 and no shares in 2000 and 2001,
respectively ...................................................... 20 --
Additional paid-in capital .......................................... 1,095,779 1,107,233
Accumulated other comprehensive income .............................. (82) 1,991
Accumulated deficit ................................................. (1,191,596) (2,767,959)
----------- -----------
Total stockholders' equity (deficit) .............................. (94,264) (1,656,911)
----------- -----------
$ 2,309,609 $ 651,633
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
ARCH WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Years Ended December 31,
1999 2000 2001
---- ---- ----
Revenues .............................................. $ 641,824 $ 851,082 $ 1,163,514
Operating expenses:
Cost of products sold (exclusive of items shown
separately below) ................................ 34,954 35,861 42,301
Service, rental and maintenance (exclusive of items
shown separately below) .......................... 132,400 182,993 306,256
Selling ............................................ 84,249 107,208 138,341
General and administrative (exclusive of items
shown separately below) .......................... 180,726 263,901 388,979
Depreciation and amortization ...................... 309,434 500,831 1,584,482
Reorganization expense ............................. -- -- 154,927
Other operating expenses ........................... (2,200) 5,425 7,890
------------- ------------- -------------
Total operating expenses ......................... 739,563 1,096,219 2,623,176
------------- ------------- -------------
Operating income (loss) ............................... (97,739) (245,137) (1,459,662)
Interest expense (2001 unrecorded contractual interest
$12,963) ............................................ (144,924) (167,621) (230,318)
Interest income ....................................... 1,896 1,451 3,371
Other expense ......................................... (45,221) (3,082) (31,923)
Equity in loss of affiliate ........................... (3,200) -- --
------------- ------------- -------------
Income (loss) before income tax benefit, extraordinary
items and cumulative effect of changes in
accounting principle ............................... (289,188) (414,389) (1,718,532)
Benefit from income taxes ............................. -- 46,006 121,994
------------- ------------- -------------
Income (loss) before extraordinary items and
cumulative effect of changes in accounting principle (289,188) (368,383) (1,596,538)
Extraordinary gain (loss) from early extinguishment of
debt ............................................... 6,963 58,603 34,229
Cumulative effect of changes in accounting principle .. (3,361) -- (6,794)
------------- ------------- -------------
Net income (loss) ..................................... (285,586) (309,780) (1,569,103)
Accretion of redeemable preferred stock ............... -- (4,223) --
Preferred stock dividend .............................. (2,146) (2,329) (7,260)
------------- ------------- -------------
Net income (loss) applicable to common stockholders ... $ (287,732) $ (316,332) $ (1,576,363)
============= ============= =============
Basic/diluted income (loss) per common share before
extraordinary item and cumulative effect of changes
in accounting principle ............................ $ (9.21) $ (4.86) $ (8.98)
Extraordinary gain (loss) from early extinguishment of
debt per basic/diluted common share ................ 0.22 0.76 0.19
Cumulative effect of changes in accounting principle
per basic/diluted common share ..................... (0.11) -- (0.04)
------------- ------------- -------------
Basic/diluted net income (loss) per common share ...... $ (9.10) $ (4.10) $ (8.83)
============= ============= =============
Basic/diluted weighted average number of common shares
outstanding ........................................ 31,603,410 77,122,659 178,424,997
============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ARCH WIRELESS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
RESTATED
Accumulated Total
Class B Additional Other Stockholders'
Common Common Paid-in Comprehensive Accumulated Equity
Stock Stock Capital Income Deficit (Deficit)
----- ----- ------- ------ ------- -----------
Balance, December 31, 1998............... $ 71 $ -- $ 352,191 $ -- $ (591,755) $ (239,493)
Net loss.............................. -- -- -- -- (285,586) (285,586)
Issuance of 30,847,004 shares of
common stock and 5,360,261 of Class
B common stock in rights offering... 308 54 216,881 -- -- 217,243
Issuance of 4,781,656 shares of
common stock to acquire company..... 48 -- 20,035 -- -- 20,083
Shares to be issued in connection
with the Benbow settlement.......... -- -- 22,836 -- -- 22,836
Issuance of 3,136,665 shares of
common stock in exchange for debt... 31 -- 21,106 -- -- 21,137
Issuance of 34,217 shares of common
stock under Arch's employee stock
purchase plan....................... -- -- 191 -- -- 191
Conversion of Class B common stock
into common stock................... 14 (14) -- -- -- --
Preferred stock dividend.............. -- -- -- -- (2,146) (2,146)
------- ------- ---------- ----------- ----------- -----------
Balance, December 31, 1999............... 472 40 633,240 -- (879,487) (245,735)
Net loss.............................. -- -- -- -- (309,780) (309,780)
Foreign currency translation
adjustments......................... -- -- -- (82) -- (82)
-----------
Total comprehensive loss............ (309,862)
Issuance of 89,896,907 shares of
common stock to acquire company..... 899 -- 262,499 -- -- 263,398
Issuance of 12,468,632 shares of
common stock in exchange for debt... 125 -- 156,851 -- -- 156,976
Issuance of 6,613,180 shares of
common stock in exchange for
redeemable preferred stock.......... 66 -- 46,849 -- -- 46,915
Issuance of 2,856,721 shares of
common stock in connection with the
Benbow settlement................... 28 -- (28) -- -- --
Issuance of 459,133 shares of common
stock under Arch's employee stock
purchase plan....................... 5 -- 570 -- -- 575
Exercise of Warrants to purchase
2,364 shares of common stock........ -- -- 21 -- -- 21
Conversion of Class B common stock
into common stock................... 20 (20) -- -- -- --
Preferred stock accretion............. -- -- (4,223) -- -- (4,223)
Preferred stock dividend.............. -- -- -- -- (2,329) (2,329)
------- ------- ---------- ----------- ----------- -----------
Balance, December 31, 2000............... 1,615 20 1,095,779 (82) (1,191,596) (94,264)
Net loss.............................. -- -- -- -- (1,569,103) (1,569,103)
Foreign currency translation
adjustments......................... -- -- -- 2,073 -- 2,073
-----------
Total comprehensive loss............ (1,567,030)
Issuance of 18,905,989 shares of
common stock in exchange for debt... 189 -- 11,454 -- -- 11,643
Conversion of Class B common stock
into common stock................... 20 (20) -- -- -- --
Preferred stock dividend.............. -- -- -- -- (7,260) (7,260)
------- ------- ---------- ----------- ----------- -----------
Balance, December 31, 2001............... $ 1,824 $ -- $1,107,233 $ 1,991 $(2,767,959) $(1,656,911)
======= ======= ========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ARCH WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
1999 2000 2001
---- ---- ----
Cash flows from operating activities:
Net income (loss) .................................... $ (285,586) $ (309,780) $(1,569,103)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ...................... 309,434 500,831 1,584,482
Non-cash reorganization costs ...................... -- -- 145,584
Deferred income tax benefit ........................ -- (46,006) (121,994)
Extraordinary loss (gain) from early extinguishment (6,963) (58,603) (34,229)
of debt
Cumulative effect of accounting change ............. 3,361 -- 6,794
Equity in loss of affiliate ........................ 3,200 -- --
Accretion of discount on long-term debt ............ 41,566 28,277 37,202
Other non-cash interest expense .................... 2,904 2,361 6,936
Gain on tower site sale ............................ (1,871) (1,983) (3,120)
Write-off of note receivable ....................... -- -- 7,500
Write-off of N-PCS investments ..................... 37,498 -- --
Loss on sale of FCC licenses ....................... -- -- 2,435
Accounts receivable loss provision ................. 15,265 33,015 56,913
Changes in assets and liabilities, net of effect
from acquisitions of companies:
Accounts receivable ............................. (18,369) (41,129) (12,777)
Inventories ..................................... 1,728 7,381 1,211
Prepaid expenses and other ...................... 7,000 6,944 (26,088)
Accounts payable and accrued expenses ........... (2,986) (74,550) (27,266)
Customer deposits and deferred revenue .......... (7,554) (8,495) (7,925)
Other long-term liabilities ..................... 909 (5,938) 816
----------- ----------- -----------
Net cash provided by operating activities ............... 99,536 32,325 47,371
----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment, net ............. (95,208) (127,833) (105,993)
Additions to intangible and other assets ............. (18,443) (12,452) (3,492)
Sale of FCC licenses ................................. -- -- 175,000
Net proceeds from tower site sale .................... 3,046 -- --
Acquisition of companies, net of cash acquired ....... (516,561) 47,785 104
----------- ----------- -----------
Net cash (used for) provided by investing activities .... (627,166) (92,500) 65,619
----------- ----------- -----------
Cash flows from financing activities:
Issuance of long-term debt ........................... 473,783 174,960 7,910
Repayment of long-term debt .......................... (162,059) (63,560) (178,111)
Net proceeds from sale of preferred stock ............ -- -- 75,000
Net proceeds from sale of common stock ............... 217,434 596 --
----------- ----------- -----------
Net cash provided by (used in) financing activities ..... 529,158 111,996 (95,201)
----------- ----------- -----------
Effect of exchange rate changes on cash ................. -- 25 (596)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents .... 1,528 51,846 17,193
Cash and cash equivalents, beginning of period .......... 1,633 3,161 55,007
----------- ----------- -----------
Cash and cash equivalents, end of period ................ $ 3,161 $ 55,007 $ 72,200
=========== =========== ===========
Supplemental disclosure:
Interest paid ........................................ $ 91,151 $ 128,155 $ 115,773
=========== =========== ===========
Reorganization expenses paid ......................... $ -- $ -- $ 8,336
=========== =========== ===========
Issuance of common stock for acquisitions of companies $ 20,083 $ 263,398 $ --
=========== =========== ===========
Liabilities assumed in acquisitions of companies ..... $ 134,429 $ 1,059,431 $ --
=========== =========== ===========
Issuance of common stock for debt .................... $ 21,137 $ 156,976 $ 11,643
=========== =========== ===========
Issuance of preferred stock for debt ................. $ -- $ -- $ 6,936
=========== =========== ===========
Issuance of common stock for redeemable preferred
stock ........................................... $ -- $ 46,915 $ --
=========== =========== ===========
Conversion of Class B common stock into common stock . $ 14 $ 20 $ 20
=========== =========== ===========
Preferred stock dividend ............................. $ 2,146 $ 2,329 $ 7,260
=========== =========== ===========
Accretion of redeemable preferred stock .............. $ -- $ 4,223 $ --
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
ARCH WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization--Arch Wireless, Inc. ("Arch" or the "Company") is a leading
provider of wireless messaging and information services in the United States.
Currently, Arch primarily provides traditional messaging services, which enable
subscribers to receive messages on their messaging devices composed entirely of
numbers, such as a phone number, or on some messaging devices, numbers and
letters, which enable subscribers to receive text messages. Arch also markets
and sells advanced wireless messaging services that enable subscribers to send
and receive wireless email messages to other wireless messaging devices
(including pagers and personal digital assistants or PDAs) and to personal
computers. Arch also offers wireless information services, such as stock quotes,
news, voice mail, personalized greeting, message storage and retrieval,
equipment loss protection and equipment maintenance to both traditional and
advanced messaging customers. These services are commonly referred to as
wireless messaging and information services.
Risks and Other Important Factors--Arch sustained net losses of $285.6
million, $309.8 million and $1.6 billion for the years ended December 31, 1999,
2000 and 2001, respectively. Arch's loss from operations for the year ended
December 31, 2001 was $1.5 billion which includes an impairment charge of $976.2
million on certain long-lived assets (see Note 4) and reorganization costs of
$154.9 million associated with Arch's filings for protection under chapter 11 of
the U.S. Bankruptcy Code (see Note 2). In addition, at December 31, 2001, Arch
had an accumulated deficit of approximately $2.8 billion. The impairment charge
will result in lower depreciation and amortization expenses in future periods.
Arch cannot predict whether or when its operations will become profitable.
Arch is also subject to additional risks and uncertainties including, but not
limited to, changes in technology, business integration, competition, government
regulation and subscriber turnover.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Bankruptcy-Related Financial Reporting--These financial statements have been
prepared in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"). Substantially all of the
Company's pre-petition debt is now in default. The accompanying Consolidated
Financial Statements present Arch's pre-petition debt under the caption
"Liabilities Subject to Compromise." This includes debt under the pre-petition
credit facility and senior notes, preferred stock and other liabilities. As
required by SOP 90-7, the Company has recorded the pre-petition debt instruments
at the allowed amount, as defined by SOP 90-7. Accordingly, the Company
accelerated the accretion of its debt discounts and recorded an expense of
approximately $133.8 million during December 2001, which is included in other
operating expenses in the Consolidated Statement of Operations. Other operating
expenses also includes the write off of $11.8 million of deferred financing
costs and $9.3 million of professional fees and other expenses directly related
to the bankruptcy filing.
Arch has prepared the consolidated financial statements on a going-concern
basis of accounting. This basis of accounting contemplates continuity of
operations, realization of assets and liquidation of liabilities (with the
exception of pre-petition liabilities as described above) in the normal course
of business. Arch believes this is the appropriate basis of accounting as
management anticipates successful completion of the chapter 11 reorganization.
Upon successful completion and subsequent emergence from chapter 11, Arch will
restate its assets and liabilities, in accordance with SOP 90-7, on the
fresh-start basis of accounting which requires recording the assets on a fair
value basis similar to those required by SFAS No. 141 "Business Combinations."
If operating, market or other conditions were to change significantly and the
proposed reorganization was not successful, it is possible that Arch's financial
statements would be required to be presented on a liquidation basis of
accounting. This basis of accounting would result in the carrying value of
assets being restated to estimated forced liquidation proceeds, which could be
significantly different than the current carrying value of the long-lived
assets.
F-7
Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures. On an on-going
basis, Arch evaluates its estimates and assumptions, including but not limited
to those related to the impairment of long-lived assets, reserves for doubtful
accounts, revenue recognition and certain accrued liabilities. Arch bases its
estimates on historical experience and various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Impairment of 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 such assets. In assessing the recoverability of these assets, Arch must
project estimated enterprise-level cash flows which are based on various
operating assumptions such as average revenue per unit in service, disconnect
rates, sales productivity rates and workforce productivity ratios. Management
develops these cash flow projections on a periodic basis and continuously
reviews the projections based on actual operating trends. The aggregate
undiscounted cash flows are compared to the assets' current book value. To the
extent impairment is identified, Arch reduces the carrying value of such
impaired assets to fair value based on estimated discounted future cash flows.
Arch recorded an impairment charge of $976.2 million in the second quarter of
2001 (see Note 4).
Revenue Recognition--Arch's revenue consists primarily of service, lease and
maintenance revenues charged to customers on a monthly, quarterly, semi-annual
or annual basis. Revenue also includes sales of messaging devices directly to
customers, resellers and third-party retail stores. Arch recognizes revenue over
the period the service is performed. On December 3, 1999, the Securities and
Exchange Commission released Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101 requires that four
basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred or services
rendered, (3) the fee is fixed and determinable, and (4) collectibility is
reasonably assured. Arch believes, relative to sales of one-way messaging
equipment, that all of these conditions are met and since the services are
deemed not to be essential to the sale of the equipment, product revenue is
recognized at the time of shipment.
Arch bundles the sale of two-way messaging equipment with the related service
and since, currently the sale of the service is essential to the functionality
of the device, Arch does not separately account for the sale of the device and
the service. Revenue and the related cost of sales are recognized over the
expected customer relationship, which is estimated to be two years. If the
assumed length of the customer relationship differed significantly or technology
advances resulted in the service being deemed not to be essential to the sale of
the device; the timing of revenue and expense amortization and the carrying
value of the related deferred revenue and cost could be materially affected.
Cash Equivalents--Cash equivalents include short-term, interest-bearing
instruments purchased with remaining maturities of three months or less.
Inventories--Inventories consist of new messaging devices, which are held
primarily for resale. Inventories are stated at the lower of cost or market,
with cost determined on a first-in, first-out basis.
F-8
Property and Equipment--Leased messaging devices sold or otherwise retired
are removed from the accounts at their net book value using the first-in,
first-out method. Property and equipment is stated at cost and is depreciated
using the straight-line method over the following estimated useful lives:
Estimated
Asset Classification Useful Life
-------------------- -----------
Buildings and improvements................................. 20 Years
Leasehold improvements..................................... Lease Term
Messaging devices.......................................... 2 Years
Messaging and computer equipment........................... 3-8 Years
Furniture and fixtures..................................... 5 Years
Vehicles................................................... 3 Years
Depreciation and amortization expense related to property and equipment totaled
$144.9 million, $211.8 million and $696.8 million (including $447.4 million of
the impairment charge -- see Note 4) for the years ended December 31, 1999, 2000
and 2001, respectively.
On October 1, 2000, Arch revised the estimated depreciable life of its
subscriber equipment from three to two years. The change in useful life resulted
from Arch's expectations regarding future usage periods for subscriber devices
considering current and projected technological advances and customer desires
for new messaging technology. As a result of this change depreciation expense
increased approximately $19.3 million in the fourth quarter of 2000.
On July 1, 2001, Arch revised the estimated depreciable life of certain of
its messaging and computer equipment from eight to five years. This change in
useful life resulted from Arch's expectations regarding future usage periods for
this equipment considering current and future technological advances. As a
result of this change, depreciation expense increased approximately $12.4
million in the second half of 2001.
Fair Value of Financial Instruments--Arch's financial instruments, as defined
under SFAS No. 107 "Disclosures about Fair Value of Financial Instruments",
include its cash, restricted cash and debt financing. The fair value of cash and
restricted cash is equal to the carrying value at December 31, 2000 and 2001.
The fair value of the debt is included in Note 5.
Derivative Instruments and Hedging Activities-- In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized in earnings. Arch adopted this standard effective January 1, 2001.
Arch has not designated any of the outstanding derivatives as a hedge under SFAS
No. 133. The initial application of SFAS No. 133 resulted in a $6.8 million
charge, which was reported as the cumulative effect of a change in accounting
principle. This charge represents the impact of initially recording the
derivatives at fair value as of January 1, 2001. The changes in fair value of
the derivative instruments during 2001 of approximately $15.0 million have been
recognized in other expense. All of Arch's derivative instruments were
terminated during 2001.
Basic/Diluted Net Income (Loss) Per Common Share--Basic net income (loss) per
common share is based on the weighted average number of common shares
outstanding. Shares of stock issuable pursuant to stock options and warrants and
upon conversion of the subordinated debentures or the Series C Preferred Stock
have not been considered, as their effect would be anti-dilutive and thus
diluted net income (loss) per common share is the same as basic net income
(loss) per common share. The following dilutive effect of potential common
shares was excluded from the calculation of dilutive weighted average shares
outstanding (in thousands):
Years Ended December 31,
1999 2000 2001
---- ---- ----
Options and warrants.............. 18,491 24,601 6,166
Series C preferred stock.......... 1,720 1,862 2,005
Convertible debt.................. 89 19 19
F-9
New Accounting Pronouncements--In July 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Arch adopted the requirements of SFAS No. 142 effective January 1,
2002. SFAS No. 142 requires companies to test all goodwill for impairment and to
cease amortization of this asset. Arch did not have any goodwill on its balance
sheet as of January 1, 2002 and therefore the adoption of SFAS No. 142 will have
no impact on Arch's results of operations or financial condition.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-lived Assets." Adoption of this standard is required no
later than the first quarter of 2002. Arch is evaluating the impact of adoption
of this standard and has not yet determined the effect of adoption on its
financial statements.
2. Petition for Relief Under Chapter 11
Certain holders of 12 3/4% Senior Notes due 2007 of Arch Wireless
Communications, Inc. ("AWCI"), a wholly-owned subsidiary of Arch, filed an
involuntary petition against AWCI on November 9, 2001 under chapter 11 of the
U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of
Massachusetts, Western Division. On December 6, 2001, AWCI consented to the
involuntary petition and the bankruptcy court entered an order for relief with
respect to AWCI under chapter 11 of the Bankruptcy Code. Also on December 6,
2001, Arch and 19 of Arch's other wholly-owned, domestic subsidiaries, including
Arch Wireless Holdings, Inc. ("AWHI"), filed voluntary petitions for relief,
under chapter 11, with the bankruptcy court. These cases are being jointly
administered under the docket for Arch Wireless, Inc., et al., Case No.
01-47330-HJB. Arch and its domestic subsidiaries (collectively, the "Debtors")
are operating their businesses and managing their property as
debtors-in-possession under the Bankruptcy Code.
Chapter 11 is the principal business reorganization chapter of the Bankruptcy
Code. Under chapter 11, a debtor is authorized to continue to operate its
business and to reorganize its business for the benefit of its creditors and
stockholders. In addition to permitting the rehabilitation of the Debtor,
another goal of chapter 11 is to promote equality of treatment of creditors and
equity security holders of equal rank with respect to the restructuring of debt.
In furtherance of these two goals, upon the filing of a petition for
reorganization under chapter 11, the Bankruptcy Code generally provides for an
automatic stay of substantially all acts and proceedings against a debtor and
its property, including all attempts to collect claims or enforce liens that
arose prior to the commencement of the debtor's case under chapter 11. In
addition, the debtors may reject or assume pre-petition executory contracts and
unexpired leases, and other parties to contracts or leases that are rejected may
assert rejection damage claims as permitted by the Bankruptcy Code.
An official committee of unsecured creditors and a special subcommittee have
been appointed in the chapter 11 cases and, in accordance with provisions of the
Bankruptcy Code. The official committee will have the right to be heard on all
matters that come before the bankruptcy court and the subcommittee will have the
right to be heard with respect to matters in which its interests diverge from
those of the official committee. In addition to the official committee and
subcommittee, a steering committee of Arch's secured bank lenders are
represented in the chapter 11 cases as is an informal committee of secured note
holders representing the interests of the USAM noteholders.
Confirmation and consummation of a plan of reorganization are the principal
objectives of a chapter 11 reorganization case. A plan of reorganization sets
forth the means for satisfying claims against, and interests in, a debtor.
Confirmation of a plan requires, among other things, the affirmative vote of
creditors holding at least two-thirds in total dollar amount and more than
one-half in number of the allowed claims in each impaired class of claims that
vote on the plan, and two-thirds in amount of equity interests in each impaired
class of interests that vote on the plan. Section 1129(b) of the Bankruptcy
Code, commonly referred to as the "cramdown" provision, permits confirmation of
a plan of reorganization over the objection of one or more impaired classes
under certain circumstances. Confirmation of a plan of reorganization by a
bankruptcy court makes the plan binding upon the debtor, any issuer of
securities under the plan, any person acquiring property under the plan and any
F-10
creditor or equity security holder of the debtor. Subject to certain limited
exceptions, the confirmation order discharges the debtor from any debt that
arose prior to the effective date of the plan and substitutes the obligations
specified under the confirmed plan.
The Debtors filed a plan of reorganization with the Bankruptcy Court on
January 15, 2002. The plan provides for separate classes of claims and interests
for creditors and equity holders of each of the Debtors. The plan proposes that
the holders of AWCI's 9 1/2% Senior Notes due 2004 and AWCI's 14% Senior Notes
due 2004 and the lenders under AWHI's credit agreement (collectively, the
"Secured Creditors") will receive in the aggregate (1) $200 million of new 10%
Senior Secured Notes due 2007 to be issued by AWHI; (2) $100 million of new 12%
Senior Subordinated Secured Notes due 2009 to be issued by AWHI; (3) 15,133,098
shares of new common stock to be issued by Arch; and (4) 100% of the cash
available for distribution as detailed below. The unsecured creditors of AWHI,
including the deficiency claims of secured creditors, and its subsidiaries will
receive in the aggregate 3,600,000 shares of new common stock to be issued by
Arch. Unsecured creditors of Arch and its subsidiaries other than AWCI and AWHI
and its subsidiaries will receive no distribution. The unsecured creditors of
AWCI, including the deficiency claims of the secured creditors, will receive a
pro rata share of 66,902 shares of new common stock to be issued by Arch.
Holders of common and preferred equity interests will receive no distributions
under the plan and all equity interests in Arch will be cancelled. The new
common stock to be issued to the secured and unsecured creditors will constitute
100% of the outstanding common stock on the effective date of the plan of
reorganization. Additionally, on the effective date of the plan of
reorganization, Arch will adopt a management stock plan that will make six
percent of the new common stock to be issued pursuant to the plan on a fully
diluted basis available for award to certain members of Arch's continuing
management. The cash available for distribution to the Secured Creditors is an
amount of cash equal to the amount by which the Debtors' cash plus the amount of
availability under a revolving line of credit, if any, exceeds $45 million less
administrative expense claims reasonably expected to be payable for services
provided and fees earned through the closing of the transactions contemplated by
the plan of reorganization.
The accompanying Consolidated Financial Statements have been prepared in
accordance with SOP 90-7 and on a going concern basis, which contemplates
continuity of operations, realization of assets and liquidation of liabilities
in the ordinary course of business. Substantially all of the Company's
pre-petition debt is now in default. As described below, the accompanying
Consolidated Financial Statements present the Debtor's pre-petition debt under
the caption "Liabilities Subject to Compromise." This includes debt under the
pre-petition credit facility and senior notes. As required by SOP 90-7, the
Company has recorded the Debtor's pre-petition debt instruments at the allowed
amount, as defined by SOP 90-7. Accordingly, the Company accelerated the
accretion of its debt discounts and recorded an expense of approximately $133.8
million during December 2001, which is included in other operating expenses in
the Consolidated Statement of Operations. Other operating expenses also includes
the write off of $11.8 million of deferred financing costs and $9.3 million of
professional fees and other expenses directly related to the bankruptcy filing.
As reflected in the Consolidated Financial Statements, "Liabilities subject
to compromise" refer to Debtors' liabilities incurred prior to the commencement
of the chapter 11 cases. The amounts of the various liabilities that are subject
to compromise are set forth below following the Debtor-In-Possession financial
statements. These amounts represent Arch's estimate of known or potential
pre-petition claims to be resolved in connection with the chapter 11 cases. Such
claims remain subject to future adjustments. Adjustments may result from (1)
negotiations; (2) actions of the bankruptcy court; (3) rejection of executory
contracts and unexpired leases; (4) proofs of claims; or (5) other events.
Payment terms for these amounts will be established in connection with the
chapter 11 cases. Further, a plan of reorganization could materially change the
amounts and classifications reported in the consolidated historical financial
statements.
The Debtors have received approval from the Bankruptcy Court to pay or
otherwise honor certain of their pre-petition obligations, including employee
wages, salaries, benefits and other employee obligations, pre-petition claims of
critical vendors, and certain other pre-petition claims. These amounts are
included in the liabilities not subject to compromise section of the
Consolidated Balance Sheet at December 31, 2001 to the extent they had not been
paid.
Contractual interest expense not accrued or recorded on pre-petition debt
totaled $13.0 million for 2001.
F-11
At December 31, 2001, The Company had $72 million of cash. In addition, in
connection with the chapter 11 filing, the Debtors obtained a $50 million
debtor-in-possession credit facility from a group of lenders led by Toronto
Dominion (Texas), Inc. (the "DIP financing"). The company believes, based on
information presently available to it, that cash available from operations and
the DIP financing will provide sufficient liquidity to allow it to continue as a
going concern for the foreseeable future. However, the ability of the Company to
continue as a going concern (including its ability to meet post-petition
obligations of the Debtors and to meet obligations of the non-debtor
subsidiaries) and the appropriateness of using the going concern basis for its
financial statements are dependant upon, among other things, (1) the Company's
ability to comply with the terms of the DIP financing and any cash collateral
order entered by the bankruptcy court in connection with the chapter 11 cases,
(2) the ability of the Company to maintain adequate cash on hand, (3) the
ability of the Company to generate cash from operations and (4) confirmation of
a plan of reorganization under the Bankruptcy Code.
The condensed financial statements of the Debtors are presented as follows:
ARCH WIRELESS, INC.
DEBTOR-IN-POSSESSION BALANCE SHEET
December 31, 2001
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 70,131
Accounts receivable, net ................................. 88,557
Inventories .............................................. 820
Restricted cash .......................................... 34,579
Prepaid expenses and other ............................... 47,179
-----------
Total current assets .................................. 241,266
-----------
Property and equipment, at cost ............................. 1,421,318
Less accumulated depreciation and amortization .............. 1,028,653
-----------
Property and equipment, net ................................. 392,665
-----------
Intangible and other assets, net ............................ 7,054
-----------
$ 640,985
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Accounts payable ...................................... $ 8,718
Accrued expenses and other liabilities ................ 118,487
-----------
Total current liabilities ................................ 127,205
-----------
Other long-term liabilities .............................. 15,298
-----------
Liabilities subject to compromise ........................... 2,096,280
-----------
Stockholders' equity (deficit):
Common stock--$.01 par value ............................. 1,824
Additional paid-in capital ............................... 1,107,233
Accumulated deficit ...................................... (2,706,855)
-----------
Total stockholders' equity (deficit) .................. (1,597,798)
-----------
$ 640,985
===========
F-12
ARCH WIRELESS, INC.
DEBTOR-IN-POSSESSION STATEMENT OF OPERATIONS
For the Year Ended December 31, 2001
(in thousands)
Revenues ..................................................... $ 1,143,879
Operating expenses:
Cost of products sold (exclusive of items shown separately
below) .................................................. 40,932
Service, rental and maintenance (exclusive of items shown
separately below) ....................................... 301,306
Selling ................................................... 135,476
General and administrative (exclusive of items shown
separately below) ....................................... 381,212
Depreciation and amortization ............................. 1,537,789
Reorganization expense..................................... 154,927
Other operating expenses .................................. 7.890
-----------
Total operating expenses ............................... 2,559,532
-----------
Operating income (loss) ...................................... (1,415,653)
Interest expense, net ........................................ (215,574)
Other expense ................................................ (29,668)
-----------
Income (loss) before income tax benefit, extraordinary
items and accounting change ............................... (1,660,895)
Benefit from income taxes .................................... 121,994
-----------
Income (loss) before extraordinary items and accounting change (1,538,901)
Extraordinary gain (loss) from early extinguishment of debt .. 34,229
Cumulative effect of accounting change ....................... (6,794)
-----------
Net income (loss) ............................................ $(1,511,466)
===========
ARCH WIRELESS, INC.
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2001
(in thousands)
Net cash provided by operating activities .......... $ 47,418
---------
Cash flows from investing activities:
Additions to property and equipment, net ........ (102,243)
Additions to intangible and other assets ........ (3,101)
Sale of FCC licenses ............................ 177,150
Acquisition of companies, net of cash acquired .. 104
---------
Net cash provided by investing activities .......... 71,910
---------
Cash flows from financing activities:
Repayment of long-term debt ..................... (178,111)
Net proceeds from sale of preferred stock ....... 75,000
---------
Net cash used in financing activities .............. (103,111)
---------
Net (decrease) increase in cash and cash equivalents 16,217
Cash and cash equivalents, beginning of period ..... 53,914
---------
Cash and cash equivalents, end of period ........... $ 70,131
=========
Supplemental disclosure:
Interest paid ...................................... $ 111,238
=========
Reorganization expenses paid ....................... $ 8,336
=========
Issuance of common stock for debt .................. $ 11,643
=========
Issuance of preferred stock for debt ............... $ 6,936
=========
Preferred stock dividend ........................... $ 7,260
=========
F-13
The amounts subject to compromise in the Consolidated and
Debtor-in-Possession Balance Sheets consist of the following items at December
31, 2001(in thousands):
Accounts payable.................................... $ 21,790
Accrued restructuring............................... 17,496
Accrued expenses.................................... 45,664
Accrued interest.................................... 109,523
Debt................................................ 1,735,689
Other long-term liabilities......................... 46,418
Series C and series F redeemable preferred stock.... 119,700
----------
Total liabilities subject to compromise............. $2,096,280
==========
3. Acquisitions
On June 3, 1999 Arch completed its acquisition of MobileMedia Communications,
Inc. for $671.1 million, consisting of cash paid of $516.6 million, including
direct transaction costs, 4,781,656 shares of Arch common stock valued at $20.1
million and the assumption of liabilities of $134.4 million. The cash payments
were financed through the issuance of approximately 36.2 million shares of Arch
common stock (including approximately 5.4 million shares of Arch Class B common
stock) in a rights offering for $6.00 per share, the issuance of $147.0 million
principal amount of 13 3/4% senior notes due 2008 (see Note 5) and additional
borrowings under the Company's credit facility.
The acquisition was accounted for as a purchase and the results of
MobileMedia's operations have been included in the consolidated financial
statements from the date of acquisition.
The liabilities assumed in the MobileMedia transaction, referred to above,
include an unfavorable lease accrual related to MobileMedia's rentals on
communications towers, which were in excess of market rental rates. This accrual
amounted to approximately $52.9 million (see Note 10). Concurrent with the
consummation of the MobileMedia acquisition, Arch developed a plan to integrate
the operations of MobileMedia. The liabilities assumed, referred to above,
includes a $14.5 million restructuring accrual to cover the costs to eliminate
redundant headcount and facilities in connection with the overall integration of
operations (see Note 11).
On November 10, 2000, Arch completed its acquisition of Paging Network, Inc.
("PageNet") for $1.35 billion consisting of 89,896,907 shares of Arch common
stock valued at $263.4 million, the assumption of liabilities of $1.06 billion,
including a deferred tax liability of $168.0 million arising in purchase
accounting, and $27.6 million of transaction costs. In the merger, each
outstanding share of PageNet's common stock was exchanged for 0.04796505 shares
of Arch's common stock.
The acquisition was accounted for as a purchase, and the results of PageNet's
operations have been included in the consolidated financial statements from the
date of acquisition. The purchase price for these acquisitions was allocated
based on the fair values of assets acquired and liabilities assumed.
Concurrent with the consummation of the PageNet acquisition, Arch management
developed a plan to integrate the operations of PageNet. The liabilities assumed
in the PageNet transaction, referred to above, include a $76.0 million
restructuring accrual related to the costs to eliminate redundant headcount and
facilities in connection with the overall integration of operations (see Note
11).
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisitions had occurred at the beginning of the period
presented, after giving effect to certain adjustments, including depreciation
and amortization of acquired assets and interest expense on acquisition debt.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisitions
been completed at the beginning of the period presented, or of results that may
occur in the future.
F-14
Year Ended Year Ended
December 31, December 31,
1999 2000
----------- ------------
(unaudited and in thousands
except for per share amounts)
Revenues......................................... $1,803,519 $1,475,828
Income (loss) before extraordinary item.......... (429,994) (499,006)
Net income (loss)................................ (433,355) (440,403)
Basic/diluted net income (loss) per common share. (2.55) (2.90)
4. Intangible and Other Assets
Intangible and other assets, net of accumulated amortization, are composed of
the following (in thousands):
December 31,
2000 2001
---- ----
Purchased Federal Communications Commission licenses $ 451,431 $ 28
Purchased subscriber lists ......................... 412,015 --
Goodwill ........................................... 163,027 --
Restricted cash .................................... 35,280 --
Deferred financing costs ........................... 24,905 894
Other .............................................. 14,086 236
---------- ----------
$1,100,744 $ 1,158
========== ==========
Amortization expense related to intangible and other assets totaled $164.6
million, $289.1 million and $887.7 million (including $528.7 million of the
impairment charge) for the years ended December 31, 1999, 2000 and 2001,
respectively.
In 2000, other assets consist of a note receivable from Vast Solutions, Inc.,
contract rights, organizational and Federal Communications Commission
application and development costs which were amortized using the straight-line
method over their estimated useful lives, not exceeding ten years.
N-PCS Investments--In connection with Arch's May 1996 acquisition of Westlink
Holdings, Inc., Arch acquired Westlink's 49.9% share of the capital stock of
Benbow PCS Ventures, Inc. Benbow held exclusive rights to a 50kHz
outbound/12.5kHz inbound narrowband PCS license in each of the five regions of
the United States. Arch's investment in Benbow was accounted for under the
equity method whereby Arch's share of Benbow's losses, since the acquisition
date of Westlink, were recognized in Arch's accompanying consolidated statements
of operations under the caption equity in loss of affiliate.
Benbow does not have any meaningful business operations and is unlikely to
retain its narrowband PCS licenses. Therefore, Arch wrote off substantially all
of its investment in Benbow in the amount of $8.2 million in June 1999. Arch
accrued the payment to the controlling stockholder of $3.8 million and legal and
other expenses of approximately $1.0 million, which are included in accrued
expenses. In addition, Arch guaranteed Benbow's obligations in conjunction with
Benbow's June 1998 purchase of the stock of PageCall. Since Benbow was unable to
meet these obligations and Arch was required to settle the obligation in its
stock, Arch recorded the issuance of $22.8 million of its common stock in
additional paid-in capital and as a charge to operations in June 1999, to
satisfy the obligation. In April 2000, Arch issued the stock to the shareholders
of PageCall, Inc.
On November 8, 1994, CONXUS Communications, Inc. was successful in acquiring
the rights to an interactive messaging license in five designated regions in the
United States from the Federal Communications Commission narrowband wireless
spectrum auction. On May 18, 1999, CONXUS filed for Chapter 11 protection in the
U.S. Bankruptcy Court in Delaware, which case was converted to a case under
Chapter 7 on August 17, 1999. In June 1999, Arch wrote-off its $6.5 million
investment in CONXUS. On November 3, 1999, in order to document its disposition
of any interest it has, if any, in CONXUS, Arch offered to transfer to CONXUS
its shares in CONXUS for no consideration. The Chapter 7 trustee accepted this
offer on December 9, 1999.
F-15
All of the above charges, totaling $42.3 million, are included in other
expense in 1999 in the accompanying statement of operations.
Included in purchased Federal Communications Commissions licenses at December
31, 2000 was $175.0 million of 900 MHz SMR (Specialized Mobile Radio) licenses.
In January 2001, Arch agreed to sell its SMR licenses to Nextel Communications,
Inc. Nextel acquired the SMR licenses for an aggregate purchase price of $175
million and invested approximately $75 million in a new equity issue, Arch
series F 12% redeemable cumulative junior preferred stock. The transaction was
completed in two stages. In February 2001, Nextel advanced $250 million in the
form of a secured loan in the principal amount of $175 million and an unsecured
loan in the principal amount of $75 million to a newly created, stand-alone Arch
subsidiary that held the SMR licenses pending FCC regulatory approval of their
transfer. The new Arch subsidiary was not permitted to engage in any business
other than ownership and maintenance of the SMR licenses and did not have any
liability or obligation with respect to any of the debt obligations of Arch or
its subsidiaries. In May 2001, upon transfer of the SMR licenses to Nextel, the
principal amount of the secured loan was offset against the $175.0 million
aggregate purchase price for the SMR licenses, and the principal amount of the
unsecured loan was exchanged for shares of series F preferred stock. Accrued
interest on the secured and unsecured loans was also paid in series F preferred
stock.
During the fourth quarter of 2000, the Company reviewed the remaining lives
of its intangible assets. Due to the nature of change in the traditional
messaging industry and the new technologies for two-way messaging, effective
October 1, 2000 the Company changed the remaining lives on purchased subscriber
lists, purchased Federal Communications Commission licenses and goodwill which
resulted from acquisitions prior to 2000 as follows:
Book Value at
December 31, Estimated
Intangible Asset Classification 2000 Useful Life
------------------------------- ---- -----------
Purchased Federal Communications Commission licenses...... $ 276,420 24 Months
Purchased subscriber lists................................ 137,426 12 Months
Goodwill.................................................. 163,027 12 Months
These changes resulted in additional amortization expense in 2000 of $103.5
million.
Impairment of Property and Equipment and Intangible Assets--In July 2001,
Arch developed preliminary projections in order to assess the carrying value of
its long-lived assets. These projections were management's best estimate, at the
time, of future results based on lower than expected operating results for the
quarter ended June 30, 2001 and potential yearend liquidity constraints that
could arise. The aggregate undiscounted cash flows from these projections was
compared to the carrying value of the long-lived assets. Since the carrying
value exceeded the aggregate undiscounted cash flows, fair value of the assets
was determined based on a discounted cash flow analysis. As a result, Arch
recorded an impairment charge of $976.2 million in the second quarter of 2001,
which is included in depreciation and amortization expense in the statement of
operations, and reduced the carrying value of certain one-way messaging
equipment, computer equipment and intangible assets.
5. Debt
Debt consisted of the following (in thousands):
December 31,
---------------------------------------------------------
2000 2001
---- ----
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
Canadian Bank Debt...................... $ 63,355 $ 63,355 $ 67,271 $ 67,271
Less--Current maturities................ -- 67,271
------------ ------------
Long-term debt.......................... $ 63,355 $ --
============ ============
F-16
Debt subject to compromise consisted of the following (in thousands):
December 31,
---------------------------------------------------------
2000 2001
---- ----
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
Senior Bank Debt........................ $ 1,135,113 $1,070,757 $ 1,119,609 $ 167,941
10 7/8% Senior Discount Notes due 2008.. 160,272 40,068 113,141 --
9 1/2% Senior Notes due 2004............ 125,000 85,000 125,000 625
14% Senior Notes due 2004............... 100,000 75,000 100,000 500
12 3/4% Senior Notes due 2007........... 128,168 46,140 130,000 650
13 3/4% Senior Notes due 2008........... 141,167 50,820 147,000 735
Other................................... 3,485 2,539 939 --
------------ ------------
Long-term debt subject to compromise.... $ 1,793,205 $ 1,735,689
============ ============
Due to the bankruptcy filing (see Note 2), pre-petition long-term debt of the
Debtors has been reclassified to the caption Liabilities subject to compromise
in the above table and on the Consolidated Balance Sheet. Amounts listed in 2000
"Debt subject to compromise" were reclassified for comparison purposes in the
above table. These instruments did not become subject to compromise until
December 6, 2001.
Arch's debt financing primarily consists of senior bank debt and fixed rate
senior notes. Arch's senior bank debt trades and is quoted regularly, therefore
the fair value at December 31, 2000 and 2001 was determined with reference to
market quotes. Arch considers the fair value of the Canadian bank debt to be
equal to the carrying value since the related facilities bear a current market
rate of interest and are not known to be quoted and /or traded. Arch's fixed
rate senior notes are traded publicly. The fair values of the fixed rate senior
notes were based on current market quotes as of December 31, 2000 and 2001.
DIP Credit Agreement--In connection with the bankruptcy filing, Arch obtained
a $50 million debtor-in-possession credit facility from a group of lenders led
by Toronto Dominion (Texas), Inc. which expires the earlier of December 5, 2002
or the effective date of a confirmed plan of reorganization. Arch's availability
under this facility is the lesser of $50 million or a calculated borrowing base,
which is derived based on eligible accounts receivable, as defined in the
agreement. Availability at December 31, 2001 was approximately $30 million. The
interest rate is LIBOR plus 3.25% or the bank's base rate plus 2.25%, if
outstanding borrowings are less than $25 million. If outstanding borrowings are
greater than $25 million, the interest rate is LIBOR plus 4% or the bank's base
rate plus 3%. The applicable interest rate at December 31, 2001 was 5.13%. The
facility has a commitment fee of 0.5% per annum on unused portions, payable
monthly and a quarterly collateral agent fee of $25,000. There were no
borrowings outstanding under the facility at December 31, 2001. This facility is
secured by a first priority security interest in all of the pre-petition and
post-petition assets of the Debtors and is entitled to super priority expense of
administration in the bankruptcy proceeding.
The DIP credit facility contains restrictions that limit, among other things,
Arch's operating subsidiaries' ability to:
o declare dividends or redeem or repurchase capital stock;
o prepay, redeem or purchase debt;
o incur liens and engage in sale/leaseback transactions;
o make loans and investments;
o incur indebtedness and contingent obligations;
o amend or otherwise alter debt instruments and other material agreements;
o engage in mergers, consolidations, acquisitions and asset sales;
o alter its lines of business or accounting methods.
In addition, the DIP credit facility requires Arch and its subsidiaries to
meet certain financial covenants, including minimum earnings before interest,
income taxes, depreciation and amortization, minimum direct units in service,
minimum service revenue and maximum capital expenditures. As of December 31,
2001, Arch and its operating subsidiaries were in compliance with the covenants
of the DIP credit facility.
F-17
In connection with the bankruptcy filing, if the aggregate average daily cash
balance for any fiscal month exceeds $45 million, Arch is required to pay the
pre-petition secured lenders such excess less amounts due under the DIP credit
facility, provided, however, that after such payment the aggregate cash balance
shall not be less than $45 million. Such cash payment is to be applied to the
outstanding principal amount of the pre-petition secured debt. In January 2002,
Arch paid $13.5 million pursuant to this provision.
Canadian Bank Debt--The Company's Canadian operations are financed through
two credit agreements, one to each of the two Canadian subsidiaries, which
provide for total borrowings of approximately $72.8 million. As of December 31,
2001, approximately $67.3 million of borrowings were outstanding under these
credit facilities. The Canadian subsidiaries are currently in violation of
certain of its financial covenants and therefore the outstanding balances have
been classified as current liabilities in the consolidated balance sheet. The
Canadian subsidiaries, Arch and the secured lenders are currently evaluating
options to restructure the outstanding debt. Maximum borrowing that may be
outstanding under the credit facilities are permanently reduced beginning on
March 31, 2002, by the following amounts: 2002 - $0.7 million; 2003 - $4.0
million and 2004 - $62.6 million. Both credit agreements expire on December 31,
2004. Borrowings under the agreements bear interest based on the agent bank's
prime rate plus a margin based on specified ratios of debt to annualized
earnings before interest, income taxes, depreciation and amortization.
The two Canadian credit agreements are secured by $34.6 million of cash
collateral, which is classified as restricted cash on the balance sheet at
December 31, 2001, and a general security interest in all the assets of the
Canadian subsidiary. Any liabilities of the Canadian subsidiary, including
borrowings under its two credit agreements, have no recourse to Arch or any of
its other assets.
Debt Exchanged for Equity--In October 1999, Arch completed transactions with
four bondholders in which Arch issued an aggregate of 3,136,665 shares of Arch
common stock and warrants to purchase 540,487 shares of Arch common stock for
$9.03 per share in exchange for $25.2 million accreted value of debt securities.
Under two of the exchange agreements, Arch issued 809,545 shares of Arch common
stock and warrants to purchase 540,487 shares of Arch common stock for $9.03 per
share in exchange for $8.9 million principal amount of Arch convertible
debentures. Arch recorded $2.9 million of non-cash interest expense in
conjunction with these transactions. Under the remaining exchange agreements,
Arch issued 2,327,120 shares of Arch common stock in exchange for $16.3 million
accreted value ($19.0 million maturity value) of its senior discount notes. Arch
recorded an extraordinary gain of $7.0 million on the early extinguishment of
debt as a result of these transactions.
In 2000, Arch issued 285,973 shares of Arch common stock in exchange for $3.5
million principal amount of Arch convertible debentures. Arch also issued
12,182,659 shares of Arch common stock in exchange for $165.3 million accreted
value ($184.2 million maturity value) of its senior discount notes. Arch
recorded an extraordinary gain of $14.2 million on the early extinguishment of
debt as a result of these transactions.
On May 10, 2000, Arch announced it had completed an agreement with Resurgence
Asset Management L.L.C. for the exchange of $91.1 million accreted value ($100.0
million maturity value) of senior discount notes held by various Resurgence
entities for 1,000,000 shares of a new class of Arch's preferred stock called
Series D preferred stock. The Series D preferred stock was converted into an
aggregate of 6,613,180 shares of common stock upon completion of Arch's merger
with PageNet.
Arch recorded an extraordinary gain of $44.4 million on the early
extinguishment of debt as a result of this transaction based on the difference
between the carrying value of the exchanged debt, including deferred financing
fees, and the fair value of the preferred stock issued. Arch recorded $4.2
million of accretion on this preferred stock prior to its conversion to common
stock on November 10, 2000.
In 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.
F-18
6. Redeemable Preferred Stock and Stockholders' Equity
Redeemable Series C Cumulative Convertible Preferred Stock--The Series C
Preferred Stock: (1) is convertible into Arch common stock at a conversion price
of $16.38 per share, subject to certain adjustments; (2) bears dividends at an
annual rate of 8.0%, (A) payable quarterly in cash or, at Arch's option, through
the issuance of shares of Arch common stock valued at 95% of the then prevailing
market price or (B) if not paid quarterly, accumulating and payable upon
redemption or conversion of the Series C Preferred Stock or liquidation of Arch;
(3) permits the holders after seven years to require Arch, at Arch's option, to
redeem the Series C Preferred Stock for cash or convert such shares into Arch
common stock valued at 95% of the then prevailing market price of Arch common
stock, so long as the common stock remains listed on a national securities
exchange; (4) is subject to redemption for cash or conversion into Arch common
stock at Arch's option in certain circumstances; (5) in the event of a "Change
of Control" as defined in the indenture governing the senior discount notes,
requires Arch, at its option, to redeem the Series C Preferred Stock for cash or
convert such shares into Arch common stock valued at 95% of the then prevailing
market price of Arch common stock, with such cash redemption or conversion being
at a price equal to 105% of the sum of the original purchase price plus
accumulated dividends; (6) limits certain mergers or asset sales by Arch; (7) so
long as at least 50% of the Series C Preferred Stock remains outstanding, limits
the incurrence of indebtedness and "restricted payments" in the same manner as
contained in the senior discount notes indenture; and (8) has certain voting and
preemptive rights. The balance of $32.8 million, which includes accrued
dividends through December 5, 2001, is included in liabilities subject to
compromise at December 31, 2001.
Series F Redeemable Cumulative Junior Preferred Stock - In May 2001, in
connection with the Nextel transactions discussed in Note (4) above, Arch issued
793,219 shares of series F preferred stock. The series F preferred stock: (1) 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; (2) 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; (3) must be redeemed on the tenth
anniversary of the date of issuance, at Arch's option, for cash or converted
into Arch common stock valued at the then prevailing market price of Arch common
stock, so long as the common stock remains listed on a national securities
exchange; (4) is subject to redemption for cash or conversion into Arch common
stock at Arch's option in certain circumstances; (5) 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; (6) limits certain mergers or asset sales by
Arch; and (7) has certain voting and preemptive rights. The balance of $86.9
million, which includes accrued dividends through December 5, 2001, is included
in liabilities subject to compromise at December 31, 2001.
Stock Options--Arch has stock option plans, which provide for the grant of
incentive and nonqualified stock options to key employees, directors and
consultants to purchase Arch common stock. Incentive stock options are granted
at exercise prices not less than the fair market value on the date of grant.
Options generally vest over a five-year period from the date of grant. However,
in certain circumstances, options may be immediately exercisable in full.
Options generally have a duration of 10 years. The plans provide for the grant
of options to purchase a total of 9,131,865 shares of common stock.
As a result of the PageNet merger, each outstanding option to purchase
PageNet common stock became fully exercisable and vested and was converted into
an option to purchase the same number of shares of Arch common stock that the
holder of the option would have received in the merger if the holder had
exercised the option immediately prior to the merger.
F-19
The following table summarizes the activity under Arch's stock option plans
for the periods presented:
Weighted
Number Average
of Exercise
Options Price
------- -----
Options outstanding at December 31, 1998........ 648,768 $ 15.51
Granted...................................... 1,295,666 7.80
Exercised.................................... -- --
Terminated................................... (109,672) 13.89
---------- ---------
Options outstanding at December 31, 1999........ 1,834,762 10.16
Granted...................................... 6,147,950 4.07
Assumed in merger............................ 410,183 161.63
Exercised.................................... -- --
Terminated................................... (445,903) 17.46
---------- ---------
Options outstanding at December 31, 2000........ 7,946,992 12.86
Granted...................................... 185,000 0.90
Exercised.................................... -- --
Terminated................................... (1,965,931) 30.73
---------- ---------
Options outstanding at December 31, 2001........ 6,166,061 $ 6.80
========== =========
Options exercisable at December 31, 2001........ 2,014,131 $ 11.31
========== =========
The following table summarizes the options outstanding and options
exercisable by price range at December 31, 2001:
Weighted
Average Weighted Weighted
Remaining Average Average
Options Contractual Exercise Options Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- ---- ----- ----------- -----
$ 0.37 -- $ 0.37....... 21,000 9.37 $ 0.37 21,000 $ 0.37
0.40 -- 0.97....... 1,797,000 8.96 0.95 433,250 0.97
1.31 -- 6.06....... 2,997,513 8.39 5.89 775,113 6.03
6.09 -- 15.19....... 1,266,783 6.99 9.96 701,406 11.06
17.12 -- 319.04....... 83,765 6.21 118.51 83,362 118.99
------- ------ --------- ---- ------- --------- -------
$ 0.37 -- $319.04....... 6,166,061 8.24 $ 6.80 2,014,131 $ 11.31
======= ======= ========= ==== ======= ========= =======
Employee Stock Purchase Plans--The Company's employee stock purchase plans
allow eligible employees the right to purchase common stock, through payroll
deductions not exceeding 10% of their compensation, at the lower of 85% of the
market price at the beginning or the end of each six-month offering period.
During 1999 and 2000, 34,217 and 459,133 shares were issued at an average price
per share of $5.60 and $1.25, respectively. No shares were issued in 2001 as the
plan was suspended.
Accounting for Stock-Based Compensation--Arch accounts for its stock option
and stock purchase plans under APB Opinion No. 25 "Accounting for Stock Issued
to Employees". Since all options have been issued at a grant price equal to fair
market value, no compensation cost has been recognized in the statements of
operations. Had compensation cost for these plans been determined consistent
with SFAS No. 123, "Accounting for Stock-Based Compensation", Arch's net income
(loss) and income (loss) per share would have been increased to the following
pro forma amounts:
Years Ended December 31,
1999 2000 2001
---- ---- ----
(in thousands, except per share amounts)
Net income (loss): As reported..... $(285,586) $(309,780) $(1,569,103)
Pro forma....... (288,070) (315,234) (1,575,091)
Basic net income (loss) per common share: As reported..... (9.10) (4.10) (8.83)
Pro forma....... (9.18) (4.17) (8.87)
F-20
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model. In computing these pro forma amounts,
Arch has assumed risk-free interest rates of 4.5% - 6%, an expected life of 5
years, an expected dividend yield of zero and an expected volatility of 0% -
93%.
The weighted average fair values (computed consistent with SFAS No. 123) of
options granted under all plans in 1999, 2000 and 2001 were $5.56, $3.01 and
$0.19, respectively. The weighted average fair value of shares sold under the
employee stock purchase plans in 1999 and 2000 was $3.13 and $2.72,
respectively.
Deferred Compensation Plan for Nonemployee Directors--Under the deferred
compensation plan for nonemployee directors, outside directors may elect to
defer, for a specified period of time, receipt of some or all of the annual and
meeting fees which would otherwise be payable for service as a director. A
portion of the deferred compensation may be converted into phantom stock units,
at the election of the director. The number of phantom stock units granted
equals the amount of compensation to be deferred as phantom stock divided by the
fair value of Arch common stock on the date the compensation would have
otherwise been paid. At the end of the deferral period, the phantom stock units
will be converted to cash based on the fair market value of Arch common stock on
the date of distribution. Deferred compensation is expensed when earned. Changes
in the value of the phantom stock units are recorded as income/expense based on
the fair market value of Arch common stock.
Stockholders Rights Plan--In October 1995, Arch's board of directors adopted
a stockholders rights plan and declared a dividend of one preferred stock
purchase right for each outstanding share of common stock to stockholders of
record at the close of business on October 25, 1995. Each Right entitles the
registered holder to purchase from Arch one one-thousandth of a share of Series
B Junior Participating Preferred Stock, at a cash purchase price of $150,
subject to adjustment. Pursuant to the Plan, the Rights automatically attach to
and trade together with each share of common stock. The Rights will not be
exercisable or transferable separately from the shares of common stock to which
they are attached until the occurrence of certain events. The Rights will expire
on October 25, 2005, unless earlier redeemed or exchanged by Arch in accordance
with the Plan.
7. Income Taxes
Arch accounts for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes". Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities, given the provisions of enacted laws.
The components of the net deferred tax asset (liability) recognized in the
accompanying consolidated balance sheets at December 31, 2000 and 2001 are as
follows (in thousands):
2000 2001
---- ----
Deferred tax assets................................ $ 275,211 $ 897,566
Deferred tax liabilities........................... (132,884) (11,538)
---------- ----------
142,327 886,028
Valuation allowance................................ (264,321) (886,028)
---------- ----------
$ (121,994) $ --
========== ==========
The approximate effect of each type of temporary difference and carryforward
at December 31, 2000 and 2001 is summarized as follows (in thousands):
2000 2001
---- ----
Net operating losses............................... $ 231,795 $ 397,581
Intangibles and other assets....................... (45,902) 366,259
Depreciation of property and equipment............. (53,405) 85,370
Accruals and reserves.............................. 9,839 36,818
---------- ----------
142,327 886,028
Valuation allowance................................ (264,321) (886,028)
---------- ----------
$ (121,994) $ --
========== ==========
F-21
The effective income tax rate differs from the statutory federal tax rate
primarily due to the nondeductibility of goodwill amortization and the inability
to recognize the benefit of current net operating loss ("NOL") carryforwards.
The NOL carryforwards expire at various dates through 2016. The Internal Revenue
Code contains provisions that may limit the NOL carryforwards available to be
used in any given year if certain events occur, including significant changes in
ownership, as defined. The Company has experienced such changes in ownership and
as a result the utilization of net operating losses in any one year are
significantly limited for income tax purposes. In accordance with provisions of
the Internal Revenue Code, upon emergence from chapter 11, Arch will apply its
cancellation of debt income against its various tax attributes.
The Company has established a valuation reserve against its net deferred tax
asset until it becomes more likely than not that this asset will be realized in
the foreseeable future.
8. Commitments and Contingencies
Arch, from time to time is involved in lawsuits arising in the normal course
of business. Arch believes that its pending lawsuits will not have a material
adverse effect on its financial position or results of operations.
Arch has operating leases for office and transmitting sites with lease terms
ranging from one month to approximately fifty years. In most cases, Arch expects
that, in the normal course of business, leases will be renewed or replaced by
other leases.
Future minimum lease payments under noncancellable operating leases at
December 31, 2001 are as follows (in thousands):
Year Ending December 31,
2002................................................... $ 104,758
2003................................................... 55,779
2004................................................... 43,570
2005................................................... 32,740
2006................................................... 22,952
Thereafter............................................. 92,700
-----------
Total................................................ $ 352,499
===========
Total rent expense under operating leases for the years ended December 31,
1999, 2000 and 2001 approximated $48.3 million, $81.2 million and $150.7
million, respectively.
9. Employee Benefit Plans
Retirement Savings Plans--Arch has retirement savings plans, qualifying under
Section 401(k) of the Internal Revenue Code covering eligible employees, as
defined. Under the plans, a participant may elect to defer receipt of a stated
percentage of the compensation which would otherwise be payable to the
participant for any plan year (the deferred amount) provided, however, that the
deferred amount shall not exceed the maximum amount permitted under Section
401(k) of the Internal Revenue Code. The plans provide for employer matching
contributions. Matching contributions for the years ended December 31, 1999,
2000 and 2001 approximated $960,000, $1.2 million and $1.6 million,
respectively.
10. Other Long-Term Liabilities
During 1998 and 1999, Arch sold communications towers, real estate, site
management contracts and/or leasehold interests involving 133 sites in 22 states
and leased space on the towers on which it currently operates communications
equipment to service its own messaging network. Net proceeds from the sales were
approximately $33.4 million, Arch used the net proceeds to repay indebtedness
under its credit facility.
F-22
Arch entered into options to repurchase each site and until this continuing
involvement ends the gain on the sale of the tower sites is deferred and
included in other long-term liabilities. At December 31, 2000 and 2001,
approximately $20.2 million and $15.3 million of the gain is deferred and
approximately $1.9 million, $2.0 million and $3.1 of this gain has been
recognized in the statement of operations and is included in operating income
for each of the years ended December 31, 1999, 2000 and 2001, respectively.
Also included in other long-term liabilities at December 31, 2000 is a $49.1
million unfavorable lease accrual related to MobileMedia's rentals on
communications towers which were in excess of market rental rates. At December
31, 2001, the remaining balance of this accrual was approximately $46.4 million
and is included in liabilities subject to compromise. This accrual is being
amortized over the term of the leases with approximately 11 3/4 years remaining
at December 31, 2001.
11. Restructuring Reserves
Divisional reorganization--In June 1998, Arch's board of directors approved a
reorganization of Arch's operations. This reorganization consisted of the
consolidation of certain regional administrative support functions, such as
customer service, collections, inventory and billing, to reduce redundancy and
take advantage of various operating efficiencies.
In conjunction with the completion of the MobileMedia merger in June 1999,
the timing and implementation of the divisional reorganization was reviewed by
Arch management in the context of the combined company integration plan.
Pursuant to this review, the Company identified certain of its facilities and
network leases that would not be utilized following the MobileMedia integration,
resulting in an additional charge of $2.6 million. This charge was offset by
$4.8 million of reductions to previously provided severance and other costs in
conjunction with the divisional reorganization.
During the third quarter of 1999, Arch's board of directors approved an
integration plan to eliminate redundant headcount, facilities and tower sites of
MobileMedia in connection with the completion of the MobileMedia acquisition.
The plan anticipated a net reduction of approximately 10% of MobileMedia's
workforce and the closing of certain facilities and tower sites, which resulted
in the establishment a $14.5 million acquisition reserve which was included in
the MobileMedia purchase price allocation. The initial acquisition reserve
consisted of approximately (1) $6.1 million for employee severance, (2) $7.9
million for lease obligations and terminations and (3) $0.5 million of other
costs.
During 2000, Arch completed the actions under the divisional reorganization
and the MobileMedia integration plans. Arch reevaluated the reserves and
determined that each of the reserve balances were adequate to cover the
remaining cash payments which consisted primarily of lease costs.
On November 10, 2000, Arch completed its acquisition of PageNet and
management commenced the development of plans to integrate its operations. In
conjunction with the integration plans, the Company has identified redundant
headcount and certain of its facilities that would not be utilized following the
PageNet integration resulting in an additional charge of $5.4 million.
The provision for lease obligations and terminations related primarily to
future lease commitments on local, regional and divisional office facilities to
be closed as part of this reorganization. The charge represented future lease
obligations on such leases past the dates the offices were to be closed, or for
certain leases, the cost of terminating the leases prior to their scheduled
expiration.
Through the elimination of certain local and regional administrative
operations, the consolidation of certain support functions and the integration
of MobileMedia and PageNet operations, the Company eliminated approximately
1,100 net positions formerly held by Arch and MobileMedia personnel. The
majority of the positions which have been eliminated are related to management,
administrative, customer service, collections, inventory and billing functions.
As of December 31, 1999, 2000 and 2001, 588, 951 and 1,368 employees,
respectively, had been terminated due to the divisional reorganization and the
MobileMedia and PageNet integrations.
F-23
The Company's restructuring activity as of December 31, 2001 is as follows
(in thousands):
Balance at Reserve
December 31, Adjustment Amounts Remaining
2000 in 2001 Paid Reserve
---- ------- ---- -------
Severance costs......... $ 2,957 $ 1,960 $ 4,917 $ --
Lease obligation costs.. 10,776 -- 5,071 5,705
Other costs............. 162 -- 135 27
-------- -------- -------- --------
Total................... $ 13,895 $ 1,960 $ 10,123 $ 5,732
======== ======== ======== ========
The remaining reserve balance at December 31, 2001 has been included in
Liabilities subject to compromise on the Consolidated Balance Sheet and in
accordance with SOP 90-7 has not been adjusted to reflect the potential
reductions due to rejecting the underlying leases pursuant to the Company's
chapter 11 bankruptcy proceedings.
PageNet Acquisition Reserve--On November 10, 2000, Arch completed its
acquisition of PageNet and commenced the development of plans to integrate its
operations. During the fourth quarter of 2000, Arch identified redundant PageNet
headcount and facilities in connection with the overall integration of
operations. The integration activity relating to the PageNet merger, was
substantially completed at December 31, 2001.
In connection with the PageNet acquisition, Arch anticipated a net reduction
of approximately 50% of PageNet's workforce and the closing of certain
facilities and tower sites. This resulted in the establishment a $76 million
acquisition reserve which was included as part of the PageNet purchase price
allocation. The initial acquisition reserve consisted of approximately (1) $66.1
million for employee severance, (2) $9.4 million for lease obligations and
terminations and (3) $0.5 million of other costs.
The provision for lease obligations and terminations related primarily to
future lease commitments on local, regional and divisional office facilities to
be closed as part of this integration. The charge represented future lease
obligations on such leases past the dates the offices were to be closed, or for
certain leases, the cost of terminating the leases prior to their scheduled
expiration.
Through the elimination of redundant management, administrative, customer
service, collections, finance and inventory functions, the Company will
eliminate approximately 2,000 positions. As of December 31, 2001, 1,803 former
PageNet employees had been terminated.
The PageNet acquisition reserve activity as of December 31, 2001 was as
follows (in thousands):
Balance at Reserve
December 31, Adjustment Amounts Remaining
2000 in 2001 Paid Reserve
---- ------- ---- -------
Severance costs......... $ 36,765 $ 10,900 $ 46,071 $ 1,594
Lease obligation costs.. 9,264 11,062 10,306 10,020
Other costs............. 500 -- 350 150
-------- -------- -------- --------
Total................... $ 46,529 $ 21,962 $ 56,727 $ 11,764
======== ======== ======== ========
The remaining reserve balance at December 31, 2001 has been included in
Liabilities subject to compromise on the Consolidated Balance Sheet and in
accordance with SOP 90-7 has not been adjusted to reflect the potential
reductions due to rejecting the underlying leases pursuant to the Company's
chapter 11 bankruptcy proceedings.
F-24
12. Segment Reporting
Arch has determined that it has three reportable segments; traditional paging
operations, two-way messaging operations and international operations.
Management makes operating decisions and assesses individual performances based
on these segments. The traditional paging operations consist of the provision of
paging and other one-way wireless messaging services to Arch's U.S. customers.
Two-way messaging operations consist of the provision of two-way wireless
messaging services to Arch's U.S. customers. International operations consist of
the operations of the Company'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. The Company's Canadian subsidiary was
acquired in November 2000 in the PageNet acquisition. Prior to 2000,
substantially all of the Company's operations were traditional paging
operations. The following table presents segment financial information related
to Arch's segments as of and for the years ended December 31, 2000 and 2001 (in
thousands):
Year Ended December 31, 2000: Traditional Two-way Messaging International
Paging Operations Operations Operations Consolidated
----------------- ---------- ---------- ------------
Revenues............................... $ 838,425 $ 9,383 $ 3,274 $ 851,082
Depreciation and amortization expense.. 488,048 9,459 3,324 500,831
Operating income (loss)................ (216,591) (25,709) (2,837) (245,137)
Adjusted EBITDA(1)..................... 276,882 (16,250) 487 261,119
Total assets........................... 1,981,156 265,137 63,316 2,309,609
Capital expenditures................... 111,047 28,115 1,123 140,285
Year Ended December 31, 2001: Traditional Two-way Messaging International
Paging Operations Operations Operations Consolidated
----------------- ---------- ---------- ------------
Revenues............................... $ 1,042,767 $ 101,446 $ 19,301 $ 1,163,514
Depreciation and amortization expense.. 1,467,864 69,925 46,693 1,584,482
Operating income (loss)................ (1,338,525) (76,864) (44,273) (1,459,662)
Adjusted EBITDA(1)..................... 292,156 (6,939) 2,420 287,637
Total assets........................... 375,558 221,741 54,334 651,633
Capital expenditures................... 50,823 54,806 3,856 109,485
(1) Adjusted earnings before interest, income taxes, depreciation and
amortization, as determined by Arch, does not reflect interest, income
taxes, depreciation and amortization, restructuring charges, equity in loss
of affiliate and extraordinary items; consequently adjusted earnings before
interest, income taxes, depreciation and amortization may not necessarily
be comparable to similarly titled data of other wireless messaging
companies. Earnings before interest, income taxes, depreciation and
amortization should not be construed as an alternative to operating income
or cash flows from operating activities as determined in accordance with
generally accepted accounting principles or as a measure of liquidity.
Amounts reflected as earnings before interest, income taxes, depreciation
and amortization or adjusted earnings before interest, income taxes,
depreciation and amortization are not necessarily available for
discretionary use as a result of restrictions imposed by the terms of
existing indebtedness or limitations imposed by applicable law upon the
payment of dividends or distributions among other things.
F-25
13. Quarterly Financial Results (Unaudited)
Quarterly financial information for the years ended December 31, 2000 and
2001 is summarized below (in thousands, except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter(2)
------- ------- ------- ----------
Year Ended December 31, 2000:
Revenues........................................... $ 189,995 $ 187,852 $ 184,192 $ 289,043
Operating income (loss)............................ (27,686) (27,945) (26,998) (162,508)
Income (loss) before extraordinary item............ (70,192) (64,148) (63,902) (170,141)
Extraordinary gain (1)............................. 7,615 44,436 -- 6,552
Net income (loss).................................. (62,577) (19,712) (63,902) (163,589)
Basic/diluted net income (loss) per common share:
Income (loss) before extraordinary item......... (1.28) (1.01) (1.00) (1.42)
Extraordinary gain.............................. 0.14 0.68 -- 0.05
Net income (loss)............................... (1.14) (0.33) (1.00) (1.37)
First Second Third Fourth
Quarter Quarter(3) Quarter Quarter(4)
------- ---------- ------- ----------
Year Ended December 31, 2001:
Revenues........................................... $ 327,429 $ 303,399 $ 281,298 $ 251,388
Operating income (loss)............................ (157,546) (1,142,604) (13,027) (146,485)
Income (loss) before extraordinary item............ (194,183) (1,121,081) (92,732) (188,542)
Extraordinary gain (1)............................. 14,956 19,273 -- --
Net income (loss).................................. (186,021) (1,101,808) (92,732) (188,542)
Basic/diluted net income (loss) per common share:
Income (loss) before extraordinary item......... (1.17) (6.19) (0.52) (1.05)
Extraordinary gain.............................. 0.09 0.11 -- --
Net income (loss)............................... (1.12) (6.08) (0.52) (1.05)
(1) Extraordinary gains in all periods are the result of early extinguishment
of debt (see Note 5).
(2) On November 10, 2000 Arch completed its acquisition of PageNet (see Note
3). Arch changed the remaining lives certain intangible assets which
resulted in $103.5 million of additional amortization expense in the
fourth quarter of 2000 (see Note 4). On October 1, 2000 Arch revised the
estimated depreciable life of its subscriber equipment which resulted in
approximately $19.3 million of additional depreciation expense (see Note
1).
(3) Arch recorded an impairment charge of $976.2 million in the second
quarter of 2001, which is included in depreciation and amortization
expense in the statement of operations, and reduced the carrying value of
certain one-way paging equipment, computer equipment and intangible
assets (see Note 4).
(4) Arch recorded an reorganization costs of $153.7 million in the fourth
quarter of 2001, associated with its chapter 11 bankruptcy filing (see
Note 2).
14. Restatement of Financial Statements
As more fully discussed in Note 6, the redeemable preferred series C
convertible preferred stock is convertible, at Arch's option, into common stock.
In order to retain this feature, Arch common stock must be listed on the Nasdaq
National Market. On April 30, 2001, Arch was informed that its common stock was
delisted from the Nasdaq National Market. As a result, Arch determined that the
series C convertible preferred stock was more properly classified as temporary
equity rather than permanent equity.
F-26
The restatement of the financial statements with regard to the
reclassification of the series C convertible preferred stock from permanent to
temporary equity is reflected on the accompanying balance sheet as of December
31, 2000, as restated.
15. Subsequent Event
As more fully discussed in Note 2, Arch and substantially all of its domestic
subsidiaries filed for relief under chapter 11 of the Bankruptcy Code on
December 6, 2001. On May 29, 2002, Arch's plan of reorganization, which was
confirmed by the Bankruptcy Court on May 15, 2002, became effective and Arch and
its domestic subsidiaries are now operating their businesses and properties as
reorganized entities pursuant to the plan.
F-27
EXHIBIT INDEX
99.1* Letter to Commission pursuant to Temporary Note 3T
------------------
* Filed herewith.