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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ________________________
Commission File Number: 000-33343
AQUIS COMMUNICATIONS GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3281446
- ----------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1719A Route 10, Suite 300, Parsippany, NJ 07054
- ----------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 560-8000
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of July 31, 2002 there were 18,158,767 shares of the Registrant's Common
Stock outstanding.
INDEX TO FINANCIAL STATEMENTS
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
Part I Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets at June 30, 2002 and December 31, 2001 ........................................... 3
Consolidated Statements of Operations for the Three and Six Month Periods ended June 30, 2002 and 2001........ 4
Consolidated Statements of Cash Flows for the Six Month Periods ended June 30, 2002 and 2001.................. 5
Notes to Consolidated Financial Statements.................................................................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risks.................................................... 18
Part II Other Information:
Item 1 - Legal Proceedings.............................................................................................. 19
Item 2 - Changes in Securities and Use of Proceeds...................................................................... 19
Item 3 - Default Upon Senior Securities................................................................................. 19
Item 4 - Submission of Matters to a Vote of Security Holders............................................................ 19
Item 5 - Other Information.............................................................................................. 19
Item 6 - Exhibits and Reports on Form 8-K............................................................................... 19
Signatures.............................................................................................................. 20
2
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AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
June 30, December 31,
2002 2001
-------- --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................................................. $ 1,278 $ 1,084
Accounts receivable (net of allowances of $767 and $1,008, respectively) ............... 1,320 2,058
Inventory, net ......................................................................... 587 442
Assets held for sale, net .............................................................. -- 1,010
Prepaid expenses and other current assets .............................................. 590 328
-------- --------
Total current assets ............................................................... 3,775 4,922
Property and equipment, net .............................................................. 3,594 4,034
Intangible assets, net ................................................................... 1,945 2,216
Deferred charges and other assets ........................................................ 873 267
-------- --------
Total assets ..................................................................... $ 10,187 $ 11,439
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt ................................................... $ 747 $ 28,195
Notes payable .......................................................................... -- 2,000
Accounts payable and accrued expenses .................................................. 2,528 2,938
Accrued interest ....................................................................... 20 3,932
Deferred revenue ....................................................................... 419 476
Customer deposits ...................................................................... 240 272
-------- --------
Total current liabilities .......................................................... 3,954 37,813
Long term debt ........................................................................... 35,552 541
-------- --------
Total liabilities ........................................................................ 39,506 38,354
-------- --------
Commitments and contingencies
7.5% Redeemable Preferred Stock, $0.01 par value, 100,000 shares authorized, 15,000 shares
issued at June 30, 2002 and December 31, 2001 .......................................... 1,772 1,716
-------- --------
Stockholders' equity:
Common stock, $0.01 par value, 75,000,000 shares authorized, 18,158,767 issued and
outstanding at June 30, 2002 and December 31, 2001, respectively ....................... 182 182
Additional paid-in capital ............................................................. 17,809 17,937
Accumulated deficit .................................................................... (49,082) (46,750)
-------- --------
Net stockholders' equity ............................................................... (31,091) (28,631)
-------- --------
Total liabilities and stockholders' equity ....................................... $ 10,187 $ 11,439
======== ========
The accompanying notes are an integral part of these
financial statements.
3
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AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Paging services, rent and maintenance ........ $ 3,393 $ 4,715 $ 7,076 $ 9,804
Equipment sales .............................. 68 205 130 336
------------ ------------ ------------ ------------
Total revenues .......................... 3,461 4,920 7,206 10,140
------------ ------------ ------------ ------------
Operating expenses:
Cost of paging services excluding depreciation 1,596 2,161 3,235 4,416
Cost of equipment sold excluding depreciation 31 170 61 337
Selling and marketing ........................ 369 461 776 1,044
General and administrative ................... 912 1,325 1,867 2,677
Depreciation and amortization ................ 603 1,894 1,323 4,112
Provision for doubtful accounts .............. 221 224 438 447
Provision for asset impairment ............... _ 2,576 _ 2,576
------------ ------------ ------------ ------------
Total operating expenses ................ 3,732 8,811 7,700 15,609
------------ ------------ ------------ ------------
Operating loss ................................. (271) (3,891) (494) (5,469)
Interest expense, net .......................... (908) (983) (1,765) (1,949)
Loss on sale of assets ......................... (25) _ (73) _
------------ ------------ ------------ ------------
Net loss ....................................... (1,204) (4,874) (2,332) (7,418)
Preferred stock dividends ...................... (28) (28) (56) (56)
------------ ------------ ------------ ------------
Loss attributable to common stockholders ....... $ (1,232) $ (4,902) $ (2,388) $ (7,474)
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
Basic and diluted ............................ $ (0.07) $ (0.27) $ (0.13) $ (0.42)
Weighted average common shares outstanding ..... 18,159,000 17,970,000 18,159,000 17,798,000
The accompanying notes are an integral part of these
financial statements.
4
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AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
Six Months Ended June 30,
-------------------------
2002 2001
------- -------
Cash flows from operating activities:
Net loss .................................................................... $(2,332) $(7,418)
Adjustments to reconcile net loss to net cash provided by (used by)
operating activities:
Depreciation and amortization ............................................... 1,323 4,112
Provision for asset impairment .............................................. _ 2,576
Senior loan costs and amortization of deferred financing costs .............. _ 425
Loss on sale of assets ...................................................... 73 _
Stock-based compensation .................................................... _ 6
Provision for doubtful accounts ............................................. 438 447
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable ...................................................... 300 904
Inventory ................................................................ (608) (456)
Prepaid expenses and other current assets ................................ (262) (328)
Accounts payable and accrued expenses .................................... 1,255 402
Deferred revenues and customer deposits .................................. (89) (196)
------- -------
Net cash provided by operating activities ................................... 98 474
------- -------
Cash flows from investing activities:
Acquisition of property, equipment and licenses ............................. (371) (275)
Sale of property and equipment .............................................. 1,176 263
------- -------
Net cash provided (used) by investing activities ............................ 805 (12)
------- -------
Cash flows from financing activities:
Repayment of long term debt ................................................. _ (108)
Repayment of capital lease obligation ....................................... (14) (5)
Deferred financing and stock registration costs ............................. (695) (84)
------- -------
Net cash (used by) financing activities ..................................... (709) (197)
------- -------
Net increase (decrease) in cash and cash equivalents .......................... 194 265
Cash and cash equivalents - beginning of period ............................... 1,084 378
------- -------
Cash and cash equivalents - end of period ..................................... $ 1,278 $ 643
======= =======
The accompanying notes are an integral part of these
financial statements.
5
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AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS:
Aquis Communications Group, Inc. (the "Company") is a holding company,
incorporated in the State of Delaware. Through its operating companies, it
operated three regional paging systems providing one-way wireless alpha and
numeric messaging services in portions of sixteen states principally in the
Northeast, the Midwest and the Mid-Atlantic regions of the United States, as
well as the District of Columbia. The Company ceased operations in the Midwest
region concurrent with the sale of all paging assets there, which was fully
consummated in January 2002 with the release from escrow of the proceeds due in
connection with the settlement of all remaining contingencies between the
parties. Aquis also resells nationwide and regional services, offers alpha
dispatch, news and other messaging enhancements and resells cellular and two-way
paging services. Customers include individuals, businesses, government agencies,
hospitals and resellers. Aquis' financial statements are prepared on a going
concern basis, although at June 30, 2002 and for prior periods Aquis was in
default of its loan agreements with its senior and junior lenders. Final and
definitive agreements were executed with key creditors on July 1, 2002 that,
subject to FCC approval for the transfer of control of Aquis' paging licenses
and satisfaction or waiver of other contingencies, effect the restructuring of
Aquis' debt and equity and provide FINOVA, a senior lender, with control of
Aquis though the issuance of stock and warrants. That required approval from the
FCC was granted and this restructuring transaction closed on August 12, 2002.
The accompanying statements reflect all adjustments considered
necessary by management to present fairly the consolidated financial position as
of June 30, 2002 and December 31, 2001, and the consolidated results of
operations and the related consolidated cash flows for the three and six month
periods ended June 30, 2002 and 2001. The balance sheet at December 31, 2001 has
been derived from the Company's audited financial statements at that date that
are contained in the Company's Form 10K and is provided for comparative
purposes. All other financial statements are unaudited. In management's opinion,
all adjustments have been made which include only normal recurring adjustments
necessary to fairly present the financial position, results of operations and
changes in cash flows for all periods presented. All material intercompany
accounts and transactions have been eliminated in consolidation. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full year. Certain prior period amounts have
been reclassified to conform to the current period presentation.
Footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted in
accordance with the published rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Form
10K for the most recent fiscal year.
Aquis' consolidated financial statements as of and for the periods
ended June 30, 2002 and as of and for the year ended December 31, 2001 have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. Aquis
incurred losses attributable to common stockholders of about $2.4 and $7.5
million for the six months ended June 30, 2002 and 2001, respectively, and $12.0
and $23.8 million during each of the years ended December 31, 2001 and 2000,
respectively. These results have caused it to be in default of its agreement
with its senior lender, and in January 2001 and subsequent periods the Company
failed to make required quarterly principal repayments. Further, Aquis has made
none of the monthly interest payments required for any period subsequent to
December 31, 2000, except for a payment of $156 made in March 2002. Aquis has
also not paid a $2,000 convertible debenture payable to AMRO International that
matured in October 2001 and is default of the terms of that agreement. Neither
lender exercised its rights under the loan agreements and AMRO did not exercise
its right to convert its debenture into common stock. The Company also did not
redeem its 7.5% Redeemable Preferred Stock on January 31, 2002 as required,
under which the total obligation was $1,772 at June 30, 2002. The Company's
principal source of liquidity at June 30, 2002 included cash and cash
equivalents of about $1,278, at which date its working capital deficit totaled
$35,204 prior to any effects of the restructuring, primarily the result of the
inclusion of its term debt as a current liability. These factors along with
Aquis' history of net losses and expectation of further losses in future periods
raise substantial doubt about the Company's ability to continue as a going
concern, and the auditors' opinion on Aquis' financial statements as of and for
the years ended December 31, 2001 and 2000 is qualified as the result of these
conditions. In early August 2002, Aquis was notified that FCC approval for the
change in control of its paging licenses had been granted, and on August 12,
2002 the transaction for the restructuring of its debt and equity and for the
change in control of the Company was closed. Aquis' ability to continue as a
going concern continues to be dependent on factors beyond its unilateral
control, including the ability to generate sufficient cash from operations to
meet operating obligations in a declining industry, continuing supplies of goods
and services from its key vendors, an ongoing ability to limit or reduce
operating costs and capital requirements, and sufficient cash flows to allow it
to service its debt as required under its restructured loan agreements. Prior to
FCC approval, Aquis had operated under terms of preliminary restructuring
agreements, forbearance agreements with its lenders and its loan agreements as
amended.
6
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Aquis' ability to continue as a going concern and successfully execute
our one-way paging business plan is dependent on industry and technology factors
that are beyond our control. The recent completion of the realignment of our
debt and equity structure provides Aquis and its primary lender/equity holders
with an attractive opportunity to maximize the return on invested funds, but
does not guarantee future profitability or cash flows sufficient to allow for
the effective or timely execution of Aquis' existing paging-based business plan.
2. TROUBLED DEBT RESTRUCTURING
On July 1, 2002, the Company and its subsidiaries entered into agreements
defining the final terms of its restructuring ("the restructuring") of debt with
its principal lender FINOVA Capital Corporation ("FINOVA"), AMRO International,
S.A. ("AMRO"), an unsecured lender, and the Company's present holders of its
7.5% Redeemed Preferred Stock. This transaction was subject to certain
contingencies, including but not limited to FCC approval for the change in
control of the Company's FCC licenses. See also Subsequent Events footnote.
The restructuring reduced the Company's outstanding debt, allows the payment of
the restructured obligations in the normal course of business, provides Aquis'
institutional lenders with equity in the Company, and resulted in a change of
control of Aquis. The Company received approval by the Federal Communications
Commission for the transfer of indirect control of Aquis' paging licenses and
the transaction for this restructuring closed on August 12, 2002. FINOVA, the
Company's senior secured lender, through an affiliate, Desert Communications I,
LLC, acquired a 79.99% equity interest and voting control of Aquis, along with
two secured notes in the total principal amount of $9,000,000. In exchange, all
outstanding debt due to FINOVA was canceled. Simultaneously, AMRO, the Company's
unsecured lender, acquired a 9.9% equity interest in Aquis and an unsecured
subordinated note in the principal amount of $1,000,000 in exchange for the
forgiveness of all obligations due under the 11% Convertible Debenture
previously outstanding and the cancellation of all outstanding warrants held by
it. The final component of this restructuring provides the current holders of
Aquis' 7.5% Redeemable Preferred Stock with a new issue of non-convertible
redeemable preferred stock in the face amount of $300,000.
The restructuring resulted in an extraordinary gain of approximately
$20,000,000, net of income taxes that were calculated to be zero.
3. MERGERS, ACQUISITIONS AND DISPOSITIONS:
SourceOne Wireless:
As part of the business plan developed in consideration of its lack of
liquidity and the requirements of its lenders, Aquis signed a letter of intent
dated June 7, 2001 for the sale of its Midwest paging operations. On August 31,
2001, a related Asset Purchase Agreement was executed which provided for a
purchase price of $1.1 million in cash to be paid in exchange for the customer
receivables, the customer lists, all equipment and FCC licenses used in that
operation and specified contract rights under leases and other operating
agreements. Also effective on that date the parties executed an Agreement
Pending Purchase Consummation under which the buyer, on the closing date, would
assume operational management of the business while Aquis would continue to
maintain the licensed communications facilities. A related Escrow Agreement was
funded on October 18, 2001, at which time Aquis had no further rights in the
revenues and expenses of that operation and those were no longer recorded by the
Company. Release from escrow of the proceeds to Aquis was held pending the FCC's
approval of the transfer of the related communications licenses. Such release
was authorized in January 2002 and proceeds of $1,010 were delivered to Aquis.
FINOVA has agreed to release the liens it holds on these assets and allow Aquis
to retain the proceeds for use in accordance with its business plan.
4. INTANGIBLE ASSETS
Aquis reviews its assets for impairment when events or changes in
circumstances indicate that such costs may not be recoverable in the normal
course of business. Accordingly, as a result of the Company's ongoing losses,
its forecast for continuing losses, its defaults under its loan agreements, the
declining paging market, the sale of its Midwest paging assets, and the decision
to further consolidate its paging operations over time into its 900mHz network,
Aquis recognized charges for impairment of the carrying value of its FCC
licenses and State certificates, and its Midwest paging assets in amounts
totaling $14,069 during 2000 and 2001. The amount of the losses was based on the
amount of the estimated annual cash flows through December 31, 2008 discounted
to net present value using a discount rate of 20% and the net realizable value
of the Midwest assets sold. The resulting adjusted carrying value is believed by
management to approximate the realizable value of these assets. Amortization
expenses for the periods ended June 30, 2002 and 2001, as a result of these
write downs, have declined from earlier comparative periods accordingly.
7
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5. DEFERRED CHARGES:
The Company deferred into the third quarter of 2002 approximately $623
of costs incurred during the six months ended June 30, 2002 that were associated
with the restructuring of its debt and equity. These were fees paid for
investment banking, consultation and legal costs directly related to this
effort. Such capitalized costs will be charged against earnings when the gain
related to this restructuring is recognized during the quarter ended September
30, 2002.
6. LONG-TERM DEBT:
For periods prior to June 30, 2002, debt due to Aquis' institutional
lenders was classified primarily as currently payable due to defaults under loan
agreements with FINOVA and AMRO. However, in early August 2002, the required FCC
approval for the change in control of Aquis' FCC licenses was granted, the
restructuring transaction closed on August 12, 2002, the restructuring of Aquis'
debt and equity became effective, and control of Aquis was transferred to
FINOVA. See the proforma information presented in footnote 9 that depicts Aquis'
financial position as if the restructuring was effected on June 30, 2002. In
connection with Aquis' restructuring and in accordance with SFAS 6,
"Classification of Short-Term Obligations Expected to be Refinanced", and SFAS
15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings", the
Company has presented as a current liability only those amounts due its
institutional lenders that are expected to be repaid within 12 months of the
balance sheet date. The remaining amount of debt, including accrued unpaid
interest, due to FINOVA and AMRO has been reclassified to long term debt.
Because the restructuring transaction closed after the balance sheet date, on
August 12, 2002, recognition of the related gain will occur during the quarter
ended September 30, 2002.
Under the terms of the restructuring agreements and effective upon
receipt of the FCC approval in early August 2002, Aquis' Senior and Subordinated
Lenders exchanged their debt and accrued unpaid interest due to them for
warrants and preferred stock that would convert into a combined equity position
of 89.89%. FINOVA also received an interest-bearing note of about $9,000,
payable over four years, with an additional $2,000 discount and a 5% equity
position reduction available if the initial $7,000 of debt principal is paid in
full by March 31, 2006. AMRO became holder of a 9.9% equity interest and its new
note in the principal amount of $1,000 will accrue interest at 10% until the
FINOVA debt is paid in full, at which time quarterly cash payments of current
interest will be made. The principal balance of $1,000 and interest accrued
through the date of full payment of FINOVA will become due and payable two years
after maturity of the FINOVA note. Finally, the holders of the preferred stock
outstanding as of June 30, 2002 exchanged those shares for shares of a new issue
preferred stock, redeemable and without conversion rights, valued at $300, and
accruing dividends at 10% through the date that the AMRO note is paid in full.
This issue will become redeemable at its face value plus accrued unpaid
dividends two years following repayment of the AMRO debt, with current cash
dividends payable during that two year period leading to the redemption date.
7. NET LOSS PER COMMON SHARE:
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share", which requires a dual presentation of basic and
diluted earnings per share ("EPS"). Basic EPS is based on the weighted average
number of shares outstanding during the periods presented. Diluted EPS reflects
the potential dilution that could occur if options, warrants, convertible
securities or other contracts requiring the issuance of common stock were
converted into common stock during the periods presented. The Company has not
presented diluted EPS because the effect would be anti-dilutive.
8. SUPPLEMENTAL CASH FLOW DATA:
The tables below provides supplemental information to the consolidated
statements of cash flows:
June 30,
2002 2001
--------------- --------------
Cash paid for interest..................... $ 162 $ 279
Cash paid for taxes........................ $_ $_
9. SUBSEQUENT EVENTS - FINANCIAL RESTRUCTURING:
Final definitive agreements effecting the restructuring of Aquis' debt
and equity were executed on July 1, 2002. In early August 2002, Aquis was
notified that FCC approval for the change in control of the Company's paging
licenses had been granted, and on August 12, 2002 the restructuring transaction
closed, putting into effect the restructuring of Aquis' debt and equity and the
change in control contemplated by the related agreements.
8
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The following Unaudited Pro Forma Consolidated Balance Sheet (the "Pro
Forma Balance Sheet") as of June 30, 2002 gives effect to the restructuring of
the Company's debt and equity as if this transaction took place on that date.
The Pro Forma Balance Sheet is based on the historical financial position of
Aquis Communications Group, Inc. ("Aquis") as of June 30, 2002 and the terms
specified in the restructuring agreements executed by Aquis and its creditors.
The Pro Forma Financial Information is intended for informational
purposes only and is not necessarily indicative of the future financial position
or future results of operations that would have occurred had the transactions
been consummated on the transaction date implicit in the Pro Forma Financial
Information.
9
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AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 2002
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
Historical Pro Forma Restructured
Aquis Adjustments Pro Forma
------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................................... $1,278 $(834) (E) $444
Accounts receivable, net.................................................... 1,320 1,320
Inventory, net.............................................................. 587 587
Prepaid expenses and other current assets................................... 590 590
----------- ------------
Total current assets.................................................... 3,775 2,941
Property and equipment, net................................................... 3,594 3,594
Intangible assets, net........................................................ 1,945 1,945
Deferred charges and other assets............................................. 873 (750) (A) 123
----------- ------------
Total assets.......................................................... $10,187 $8,603
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt........................................ $747 $747
Accounts payable and accrued expenses....................................... 2,528 (29) (A) 2,499
834 (D)
(834) (E)
Accrued interest............................................................ 20 20
Deferred revenue............................................................ 419 419
Customer deposits........................................................... 240 240
----------- ------------
Total current liabilities............................................... 3,954 3,925
Restructured Senior Secured Promissory Note................................... 8,651 (A) 8,651
Senior Secured Subordinated Note.............................................. 3,216 (A) 3,216
Unsecured Promissory Note..................................................... 1,608 (B) 1,608
Long term debt................................................................ 35,552 (35,025) (A,B) 527
----------- ------------
Total liabilities............................................................. 39,506 17,927
----------- ------------
Commitments and contingencies
7.5% Redeemable Preferred Stock, $0.01 par value, 100,000 shares authorized, 543 (C)
15,000 shares issued at December 31, 2001................................... 1,772 (1,772) (C) 543
----------- ------------
Stockholders' equity:
Common stock, $0.01 par value, 75,000,000 shares authorized, 18,158,767
issued and outstanding at June 30, 2002 and December 31, 2001 182 1,616 (A,B) 1,798
Additional paid-in capital.................................................. 17,809 (1,291) (A,B) 16,518
Accumulated deficit......................................................... (49,082) 20,899 (A-D) (28,183)
----------- ------------
Net stockholders' equity.................................................... (31,091) (9,867)
----------- ------------
Total liabilities and stockholders' equity............................ $10,187 $8,603
=========== ============
Book value per share........................................................ $(1.71) $ (0.05)
=========== ============
Shares outstanding.......................................................... 18,158,767 179,773,589
=========== ============
10
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AQUIS COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Aquis Communications Group, Inc. has executed agreements with its institutional
lenders under which its obligations to those creditors will be restructured.
Federal Communications Commission approval was granted and other specified
conditions were met in early August, and the restructuring transaction closed on
August 12, 2002. This restructuring provides for the issuance of Aquis common
stock in exchange for significant reductions in Aquis' outstanding debt to its
institutional lenders and holders of Aquis 7.5% Redeemable Preferred Stock.
Pro forma adjustments to the consolidated balance sheet as of June 30, 2002
reflecting the effects of this restructuring as if it had been consummated on
that date are presented below. The amount of the restructured debt and the
obligations under the new issue of preferred stock has been determined based on
their face or stated values.
(A) Reflects the issuance of a 79.99% equity interest in Aquis common
stock, warrants and two senior secured notes payable to FINOVA in
exchange for the cancellation of all other outstanding debt due to
Aquis' senior institutional lender. The new notes issued to FINOVA
include a Restructured Senior Secured Promissory Note and a Senior
Secured Subordinated Note in the principal amounts of $7,000,000 and
$2,000,000, respectively. This equity interest is provided primarily
(74.99%) through the issuance of Convertible Preferred Stock. An
additional 5% is represented by Warrants exercisable at $0.01 and
expiring ten years from the date of issue, or, if earlier, on the date
that the Senior Secured Promissory Note is paid in full if prior to its
maturity date. The issue date will coincide with the date of FCC
approval.
The Restructured Senior Secured Promissory Note matures on June 30,
2006, bears interest at the prime rate plus 3.5% but not less than a
minimum of 9%, and requires quarterly payments of interest in arrears.
This note also requires annual principal repayments in an amount that
is the greater of $250,000 or 50% of Aquis' Excess Cash Flow, as
defined.
The Senior Secured Subordinated Note also matures on June 30, 2006.
This note requires the accrual of interest at 15%, and provides that
all accrued interest and the full amount of principal is due and
payable on the maturity date, unless the Restructured Senior Secured
Promissory Note is paid in full on or before March 31, 2006. If that
note is paid in full at that date, then all amounts due under this
Subordinated Note will be forgiven and the Warrants will be cancelled.
(B) Reflects the issuance of a 9.9% equity interest in Aquis common stock
and an unsecured note payable to AMRO in exchange for cancellation of
all payment obligations under the 11% Convertible Debenture held by
AMRO.
The Unsecured Promissory Note is issued in the principal amount of
$1,000,000, bears interest at 10%, matures two years after the payment
in full of the Senior Secured Promissory Note due to FINOVA, and
carries no conversion rights. Payment of all interest accrued during
the periods during which FINOVA's Senior Secured Promissory Note are
outstanding is deferred until the maturity date of this Unsecured
Promissory Note. Upon payment of FINOVA's note in full, quarterly
interest payments are to begin.
(C) Reflects the exchange of all outstanding shares of Aquis' 7.5%
Redeemable Preferred Stock for shares of a new issue of non-convertible
Aquis 10% Redeemable Preferred Stock in the face amount of $300,000.
This issue will be redeemable two years after the repayment of all
amounts due to AMRO under terms of their restructured notes. Cash
dividends accruing during the time that amounts are outstanding and due
to FINOVA and AMRO are deferred to the maturity date of this preferred
stock. Annual dividends are payable in cash during the two years
following the retirement of the amounts due to AMRO.
(D) Reflects the accrual of estimated investment banking, legal, consulting
fees and other costs to complete this restructuring. Total investment
banking fees incurred for this transaction, including those accrued or
previously paid, total approximately $947,000. The investment banking
fees incurred are based on the total amount of debt restructured.
Accordingly, as interest accrues each month subsequent to the date of
the accompanying proforma balance sheet, the amount of this fee will
also increase at the rate of 2% of such increase.
(E) Reflects use of cash required to pay accrued expenses associated with this
restructuring.
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Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
Future revenues, costs, product mix and new product acceptance are all
influenced by a number of factors that are inherently uncertain and difficult to
predict. Therefore, no assurance can be given that financing for such
investments will be available. In addition, no assurance can be given that the
Company's operations will generate positive cash flows.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contain forward-looking statements made by the Company's management
that are based on current expectations, estimates and projections about the
industries in which the Company operates and management's beliefs and
assumptions. In addition, other written or oral statements that constitute
forward-looking statements may be made by or on behalf of the Company. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," or variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Organization and Basis of Presentation
Aquis Communications Group, Inc. is a holding company, incorporated in
the State of Delaware. Through our operating companies, we operated three
regional paging systems providing one-way wireless alpha and numeric messaging
services in portions of sixteen states principally in the Northeast, the Midwest
and the Mid-Atlantic regions of the United States, as well as the District of
Columbia. We ceased operations in the Midwestern region concurrent with the sale
of our paging assets there, which was fully consummated in January 2002 with the
release from escrow of the proceeds due upon settlement of all remaining
contingencies among the parties. We also resell nationwide and regional
services, offer alpha dispatch, news and other messaging enhancements and resell
cellular service. Customers include individuals, businesses, government
agencies, hospitals and resellers. Our financial statements are prepared on a
going concern basis, although as of June 30, 2002 we were in default of our loan
agreements with our senior and junior lenders. We executed agreements with our
key creditors on July 1, 2002 that, upon FCC approval for the transfer of
control of our paging licenses and satisfaction or waiver of other
contingencies, would result in the restructuring of our debt and equity and
provide FINOVA, our senior lender, with control of Aquis though the issuance of
stock and warrants. That required approval from the FCC was granted in early
August 2002 and the restructuring transaction closed on August 12, 2002.
Aquis' consolidated financial statements are, and historically have
been, prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. We
incurred losses of about $11,950,000, $23,841,000 and $10,879,000 million during
the years ended December 31, 2001, 2000 and 1999 respectively. During the six
months ended June 30, 2002, our net loss was $2,332,000. This history of losses
caused us to be in default of our agreements with our senior lender, and in
January 2001 and later periods we were unable to make required quarterly
principal repayments under that loan nor did we make any significant interest
payments on this debt since January 11, 2001. We were also in default of the
terms of a $2,000,000 convertible debenture due to our unsecured lender, AMRO
International, S.A., that matured in October 2001 but went unpaid and was not
converted into Aquis common stock. We also did not redeem Aquis' 7.5% Redeemable
Preferred Stock as was required in January 2002. We have historically
experienced working capital deficits, and at June 30, 2002 before reflecting the
proforma effects of the recently completed restructuring, we had a working
capital deficit of $35,204,000, primarily resulting from the classification of
our debts due to FINOVA as a current liability due to our default thereunder.
These factors raised substantial doubt about our ability to continue as a going
concern, and our auditors' opinion on Aquis' financial statements as of and for
the years ended December 31, 2001 and 2000 was qualified as a result of these
conditions.
In response to our defaults, Aquis engaged the services of a financial
consultant specializing in the management of distressed businesses, developed
and largely implemented business plans intended to improve our financial
performance and our ability to pay our lenders, and developed and negotiated a
restructuring of our debt and equity. Accordingly, we reduced our operating
structure and expenses through salary reductions, targeted cutbacks and normal
attrition, along with consolidation of our communications networks, sales of
non-core paging properties and equipment and have implemented marketing
strategies intended to exploit the marketing opportunities in one-way paging
resulting from the refocusing of many of our paging industry competitors on
two-way and other advanced services. Pursuant to this plan, we collected in
January 2002 the proceeds from the sale of our paging operations in the Midwest
of $1,010,000 and have reduced our workforce by about 44% since December 31,
2000. We also collected in 2001 the remaining $625,000 balance due for the sale
of our Internet assets in accord with the discounted payment terms provided in
the June 2001 modifications to the related buyer's note, and we settled certain
claims under the Telecommunications Act of 1996 with one of our service
providers in the net amount of $765,000. These initiatives allowed Aquis to pay
down amounts due to its general creditors and to invest in paging equipment to
better supply its core markets. Following extensive negotiations with our
lenders, we signed a term sheet in February 2002, amended that in March 2002,
executed various agreements with some of the affected creditors in May 2002, and
executed the completed restructuring agreement with FINOVA on July 1, 2002.
Having received FCC approval for the change in control of our paging licenses in
early August 2002 and closing that transaction on August 12, 2002, Aquis'
restructuring provides our Senior and Junior Lenders with warrants and preferred
stock that convert into a combined equity position of 89.89% in exchange for all
outstanding debt and accrued unpaid interest due to them. In addition, the
agreements provide FINOVA with two notes totaling $9,000,000, payable over four
years, with a $2,000,000 discount and a 5% equity position reduction available
if, under specified conditions, the initial $7,000,000 of debt principal is paid
in full by March 31, 2006. The agreements also provide AMRO with an equity
position of 9.9% and a note in the amount of $1,000,000 that will accrue
interest at 10% until the FINOVA debt is paid in full, at which time quarterly
cash payments of current interest will be made. The principal balance of
$1,000,000 and interest accrued through the date of full payment of FINOVA are
due and payable two years after maturity of the FINOVA note. Finally, our
agreements provide that the holders of the preferred stock outstanding as of
June 30, 2002 exchange those shares for shares of a new issue preferred stock,
redeemable and without conversion rights, valued at $300,000, and accruing
dividends at 10% through the date that the AMRO note is paid in full. This issue
is redeemable at face value plus accrued unpaid dividends two years following
repayment of the AMRO debt, with current cash dividends payable during that two
year period leading to the redemption date.
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Given the intensely price-competitive nature of the paging industry at
this time and our expectation that such competition will continue for the
foreseeable future, we can offer no assurance that the aforementioned
operational efficiencies or the effects of the restructuring will guarantee
Aquis' return to profitability.
General
Aquis is a leading Northeastern United States provider of paging and
other wireless messaging services and markets one-way paging service and
equipment to customers directly and through resellers. Our subscribers either
lease their pagers from us or purchase their device outright from us, commonly
referred to as "COAM", or customer owned and maintained. We also offer a variety
of messaging enhancements to paging subscribers, and resell two-way paging and
cellular phone service on a small scale.
We generate a substantial majority of our revenue from fixed periodic
fees for paging services that are not generally dependent on usage. Usage
sensitive charges consist primarily of charges for messages exceeding the number
included in a customer's fixed monthly rate plan, and fees charged to resellers
for messages sent to the resellers' subscribers over Aquis' communication
network on a per-character basis under a Telocator Networking Paging Protocol
("TNPP"). During periods prior to October 2001, usage sensitive charges were
also made to subscribers using the "Calling-Party-Pays" service that we operated
in connection with our Midwest paging operations, which we sold at that time.
Our ability to recover initial operating, selling and marketing costs
and to achieve profitability is dependent on the average duration of each
customer's subscription period. For as long as a subscriber continues to utilize
the service, operating results benefit from the recurring fixed fee payments
without the requirement of any incremental selling expenses. Conversely,
customer disconnections adversely affect operating results. Each month a
percentage of existing customers have their service terminated for reasons
including failure to pay, dissatisfaction with service or coverage limitations,
or switching to competing service providers.
This discussion should be read in conjunction with Aquis' consolidated
financial statements and the notes thereto. Some of the following financial data
is presented on a per subscriber or unit basis. Management believes that such a
presentation is useful in understanding year-to-year comparative results by
providing a meaningful basis for comparison, given the differences in business
management and in the number of subscribers of other paging companies.
RESULTS OF OPERATIONS FOR THE PERIODS ENDED JUNE 30, 2002 AND 2001
Units in Service
Units in service totaled 189,000 and 312,000 at June 30, 2002 and 2001,
respectively. Approximately 36% of the decline during this period was the result
of the October 2001 sale of our Midwest paging assets and the 44,000 units
serviced through that network. Also during that period, Verizon Wireless, one of
our resellers, reduced its units in service with us from about 47,000 units to
21,000 units as the industry grew smaller and this segment of their paging
business was de-emphasized. Our average monthly churn rates during the six
months ended June 30, 2002 and 2001 steadied at 5.2% during each period. These
rates were influenced by industry trends in a nationwide contracting paging
market and our own limited ability to procure paging units, negatively affecting
our ability to secure new subscribers or to replace those for our customers who
have lost or damaged their paging units.
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Revenues
Service revenues for the six months ended June 30, 2002 and 2001,
respectively, were $7,076,000 and 9,804,000. Service revenues for the respective
three-month periods, were $3,393,000 and $4,715,000, a decrease of approximately
$1,322,000 or about 28%. Continuing churn, described above, and ongoing
industry-wide pricing pressures were factors contributing to this result. The
units disconnected by Verizon and those sold as part of the Midwest paging
operations disposition were primarily reseller units producing low average
monthly revenue per unit, or ARPU, and were the largest individual factors
leading to the 105,000 unit decline in our reseller business during the periods
reported. This decline in our reseller business brought our reseller base at
June 30, 2002 to approximately 51% of our total subscriber base, compared to
approximately 64% at June 30, 2001. Resellers purchase Aquis' services in bulk
and maintain their own billing, collections and customer service organizations
and are therefore provided rates lower than those made available to Aquis'
direct subscribers.
Revenues from sales of paging equipment declined from $205,000 during
the second quarter of 2001 to $68,000 during the corresponding quarter in 2002.
Aquis continued its strategy of marketing lower-cost units at reduced sales
prices in 2002, but due to continued industry-wide weak demand and continuing
competition from alternative technologies, fewer units were sold during 2002.
Cost of Equipment Sales
The cost of equipment sold during the six and three-month periods ended
June 30, 2002 totaled $61,000 and $31,000, respectively. Costs during the
respective six and three-month periods in 2001 totaled $337,000 and $170,000.
The previously described low-cost pager strategy and weaker demand combined to
produce this result, resulting in sales of about 9,500 fewer units during the
comparative six month periods.
Cost of Paging Services
Costs of paging services consists principally of technical operating
expenses incurred to operate Aquis' paging network and, to a lesser extent, fees
paid to third party carriers and message dispatch companies. Third party
carriers are utilized when a customer requires service outside of Aquis' service
area, and are most commonly used to provide nationwide coverage. Technical
operating expenses include transmission site rentals, telephone interconnect
services and the costs of network maintenance and engineering.
Total six-month services costs decreased to $3,235,000 in 2002 from
$4,416,000 in 2001. During the three-month periods, costs totaled $1,596,000 in
2002 compared to $2,161,000 in 2001. Costs of third party paging carriers and
dispatch service providers declined approximately 39%, or $547,000, to $849,000
from levels incurred during the six-month period ended June 30, 2002 as compared
to the year-earlier period. This cost reduction was achieved in part as the
result of the continued focusing of our sales efforts more strictly on units
serviced by our own networks, in part as the result of the sale of our Midwest
operations, and in part as a normal result of the churn discussed above. We also
reduced technical operating expenses by about $634,000 through elimination of
Midwest tower rents and employment costs of technical staff formerly employed
there and, to a lesser extent, through our continuing efforts to consolidate our
paging networks.
Sales and Marketing
Selling and marketing expenses include the cost to acquire and retain
subscribers, operating costs associated with the sales and marketing
organization, and other advertising and marketing expenses. These costs
decreased for the six-month periods from $776,000 in 2002 to $1,044,000 in 2001,
or approximately 26%. The decline for the three-month periods was approximately
20%. This was primarily the result of the reduction of the sales organization,
implemented during the three months ended March 31, 2001, and from lower total
commissions resulting from lower sales volume, selling prices and related weaker
demand for paging services in recent periods. Also contributing to a lesser
extent were cost savings associated with the closure of targeted satellite sales
offices.
General and Administrative
General and administrative expenses include costs associated with
customer service, field administration and corporate headquarters. These costs
measured for six months decreased slightly as a percentage of service revenues
to approximately 25.9% in 2002 from about 26.4% in 2001. Total costs declined
during these periods by approximately $810,000. Cost reductions were primarily
the result of staff reductions effected during the first quarter of 2001. Other
reductions were derived from lower billing, data processing and postage costs as
the result of the sale of our Midwest customer base and other subscriber
reductions. Finally, lower professional fees were incurred during the current
year to date as year-earlier business planning efforts were completed and the
costs of certain public relations were curtailed and other matters requiring
legal assistance were resolved.
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Depreciation and Amortization
Depreciation and amortization decreased to $936,000 in 2002 from
$2,775,000 in the prior year six-month period. Amortization of intangible assets
also decreased significantly as a result of the asset impairment write downs
recorded at December 31, 2000 and 2001. These write downs were made as the
result of our ongoing losses, our forecast for continuing losses, our defaults
under our loan agreements, our decision to continue paging operations through
use of our 900mHz system and gradual phase-out of other frequencies, and the
continuing shrinkage of the paging industry. Accordingly, through December 31,
2001, we recognized total cumulative provisions for impairment of the carrying
value of our FCC licenses and State certificates in the amount of about
$11,700,000. Also contributing to cost reductions of this type was the October
2001 sale of the Midwest paging operating assets, and certain other excess
communications infrastructure equipment throughout 2001.
Interest Expense
Net interest expense was $1,765,000 for the six months ended June 30,
2002, compared to $1,949,000 for the corresponding period in 2001. For the
respective three-month periods, such costs totaled $908,000 and $983,000. Gross
interest expenses decreased, primarily the result of the accrual of $500,000
during the six months ended June 30, 2001, incurred in connection with our
inability to meet specified debt leverage and coverage ratios required in our
agreements with FINOVA at that time. Also effecting this comparison was an
increase in the interest rate applicable to our debt to FINOVA, which increased
to the prime rate plus 6% as the result of our defaults and the forbearance
agreements between the parties. Finally, interest income recognized in
connection with the outstanding note due from SunStar for the sale of our
Internet assets totaled approximately $144,000 for the six months ended June 30,
2001. No such interest income was recognized subsequent to the collection of
amounts due under that note in September 2001.
Income Taxes
No provision for income taxes is reflected in either period as a result
of the Company's net losses in both periods.
Liquidity and Capital Resources
Effective with the closing of the restructuring transaction on August
12, 2002 following notification in early August 2002 that the FCC had approved
the change in control of our FCC licenses, our debt and equity structure was
modified and FINOVA, our senior lender, gained control of Aquis through the
resulting issuance of equity. These restructuring agreements provide our Senior
and Junior Lenders with warrants and preferred stock that convert into a
combined equity position of 89.89% in exchange for all outstanding debt and
accrued unpaid interest due to them. In addition, the agreements provide FINOVA
with two notes totaling $9,000,000, payable over four years, with a $2,000,000
discount and a 5% equity position reduction available if, under specified
conditions, the initial $7,000,000 of debt principal is paid in full by March
31, 2006. The agreements also provide AMRO with an equity position of 9.9% and a
note in the amount of $1,000,000 that will accrue interest at 10% until the
FINOVA debt is paid in full, at which time quarterly cash payments of current
interest will be made. The principal balance of $1,000,000 and interest accrued
through the date of full payment of FINOVA are due and payable two years after
maturity of the FINOVA note. Finally, our agreements provide that the holders of
the preferred stock outstanding as of June 30, 2002 exchange those shares for
shares of a new issue preferred stock, redeemable and without conversion rights,
valued at $300,000, and accruing dividends at 10% through the date that the AMRO
note is paid in full. This issue is redeemable at face value plus accrued unpaid
dividends two years following repayment of the AMRO debt, with current cash
dividends payable during that two year period leading to the redemption date.
Before FCC approval was granted we operated under the terms of a restructuring
agreement executed on May 20, 2002 with FINOVA and AMRO, and under forbearance
agreements with those lenders.
The restructuring and forbearance agreements that have been executed
with our creditors were based in part on business plans and related projections,
and included many facets:
o Staff and salary reductions through targeted cutbacks, normal
attrition, compensation adjustments and the sale of non-core business
operations. During 2001, we had reduced employment costs by about
$1,425,000 from prior year levels, and the benefits of these cost
reductions continue to effect 2002 results.
o Technical operations improvement plans included financial savings
available through strategically targeted network consolidations
involving co-locating some of our low- and high-band communications
equipment, elimination of Midwest operating costs, and finalization of
reciprocal compensation agreements currently being negotiated with some
of our communications facilities providers. Sales of network equipment
that may become non-essential as a result of these, or any other
initiatives, are also planned. In this regard, compared to 2000 cost
levels, during 2001, we reduced site leasing costs by nearly $650,000,
and have cut interconnect and infrastructure communications expenses by
a similar amount. In 2001, we also settled our claims with an
interconnect services provider for $765,000. And, we sold some excess
transmitting equipment at or around book value during 2001 and 2002.
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o The closure of targeted non-core remote sales offices was included in
our plans. To date, we closed or sublet all except 2 of our remote
locations, which will be retained. Reductions of the costs to lease,
maintain and supply these sales locations compared to prior year levels
reached $145,000 in 2001.
o The sale of our Midwest operations for cash. We sold those assets in
October 2001 and received from escrow the proceeds of $1,010,000 in
January 2002 following FCC approval to transfer the underlying FCC
licenses and settlement of remaining disputes. FINOVA has approved our
request to retain the proceeds for use in our operations and has
released its existing liens on the underlying assets and the proceeds
resulting from their sale.
o Collection of the proceeds of the note due to Aquis for the sale of our
Internet assets was also a key element of our plan for 2001. Discounted
proceeds of $625,000 were collected in September 2001 in accordance
with the revised terms of the note tendered in that August 2000 sale.
o We earmarked a significant portion of the proceeds from the sales,
collections and cost savings noted above for payments to our creditors.
The funds raised from these initiatives, along with the conversion of
$500,000 of invoices currently payable to one of our vendors to a
long-term note has enabled us to reduce our total accounts payable and
accrued expenses excluding interest from $6,537,000 at December 31,
2000 to $2,528,000 at June 30, 2002.
Even with the successful completion of the initial phases of our plan,
including execution of agreements effecting the restructuring of our debt and
equity and notification of the necessary FCC approval for the transfer of
control of our paging licenses, management can offer no assurance that our
completed efforts to date will prove to be timely or sufficient to ensure our
ability to continue as a going concern. We believe that our business plan as a
niche one-way paging carrier in a declining industry that is moving toward other
communications services is viable, yet our ability to execute this plan is
heavily dependent on industry conditions and technological developments which
are largely beyond our unilateral control. We have been unable to take full
advantage of the financial and other difficulties experience by many of our
competitors, including among others Arch Wireless and Metrocall, due to our own
performance and the length of time it has taken to finalize the terms of our
financial restructuring. We expect that our operating strategies and business
plans will undergo further substantial changes, including further staff
reductions perhaps in additional to the 10% employee reduction implemented on
August 2, 2002, in an attempt to effect further improvements in Aquis' operating
performance and financial results.
Aquis believes that the restructuring agreement and underlying business
plans provide our institutional lenders and existing preferred shareholders
their best opportunity for maximum recovery of amounts due to them in the most
rapid timeframe. Recovery available through restructuring in this manner is
believed to exceed amounts that could become available pursuant to a liquidation
under Chapter 7 of the Bankruptcy Code under current market conditions. This
belief is based on the business plan, underlying assumptions and resulting
financial projections prepared in connection with this restructuring and used in
associated negotiations. A key assumption included in these projections is that
the paging industry will decline at a rate comparable to that of the past year.
Readers are cautioned that these, and other, assumptions used in our projections
are subject to uncertainty. These assumptions may or may not materialize, or
unanticipated events or circumstances could occur that could adversely effect
our projections and actual financial results. Accordingly, no assurances can be
offered that our actual performance will correspond to our projections. However,
based on the assumptions, which are believed to be reasonable, and resulting
projected performance, management believes that projected operating results are
attainable and that resulting cash flows will be sufficient to meet ongoing
short-term requirements.
Aquis' operations provided about $98,000 of net cash during the six
months ended June 30, 2002, compared to production of about $474,000 of cash
during the same period of 2001. However, excluding the effects of changes in our
working capital accounts, operations used $498,000 of cash during 2002 and
provided cash of $148,000 during the six-month period ended June 30, 2001.
During the current reporting period, we used cash operationally and primarily to
fund pager purchases totaling $608,000, and to acquire one-year maintenance
contracts for the servicing of our paging infrastructure. Vendor payables and
accruals were paid down by about $410,000 during the current six month period,
while accrued but unpaid interest on our institutional debt increased by
$1,665,000. The need to reduce outstanding accounts payables to vendors
continued to be influenced by the declining telecommunications markets, and the
financial failures of PageNet, and then TSR Wireless late in the year ended
December 31, 2000, last year's bankruptcy filings by Arch Wireless, Inc. and
Weblink Wireless, more recently Metrocall Inc.'s financial difficulties. The
uncertainty caused by these events resulted in increased pressure from our
vendors to keep our accounts with them current.
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During the six months ended June 30, 2002 we realized proceeds from
sales of assets totaling $1,176,000, primarily provided by the release from
escrow of the $1,010,000 proceeds from our sale of the Midwest paging assets.
During the six months ended in 2002, proceeds of $100,000 were also derived the
sales of excess paging infrastructure equipment that became available as the
result of our ongoing network conversion and consolidations. During both
six-month periods, we invested cash in paging infrastructure, data processing
equipment and software.
Financing activities consumed $709,000 of cash during the six months
ended June 30, 2002, primarily to pay fees incurred with our investment banker
and other consultants in connection with our recently completed debt/equity
restructuring. During the same period in 2001, we paid down certain installment
debt as well as fees incurred in connection with our registration of common
stock in 2001.
Our ability to continue as a going concern and successfully execute our
one-way paging business plan is dependent on industry and technology factors
that are beyond our control. The recent completion of the realignment of our
debt and equity structure provides Aquis and its primary lender/equity holders
with an attractive opportunity to maximize the return on invested funds, but
does not guarantee future profitability or cash flows sufficient to allow for
the effective or timely execution of Aquis' existing paging-based business plan.
Seasonality
Retail sales were subject to seasonal fluctuations that affect retail
sales generally. Otherwise, the results were generally not significantly
affected by seasonal factors.
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Item 3 - Quantitative and Qualitative Disclosures about Market Risk
As of June 30, 2002, substantially all of our debt carried floating
interest rates. That debt totaled approximately $33,124,000 at that date,
including capitalized interest. An interest rate increase or decrease of 2% on
this floating rate debt would result in a change in annual interest expenses of
about $662,000. Aquis has not, and does not plan to, enter into any derivative
financial instruments for trading or speculative purposes. As of June 30, 2002,
Aquis had no other significant material exposure to market risk.
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Part II Other Information
Item 1 Legal Proceedings.
The Company was a party to a legal proceeding involving a former reseller that
was reported in its Annual Report on Form 10-K for the year ended December 31,
2001. As reported in May, Aquis settled that matter with a payment of $31,500 to
the interests of Fone Zone in April 2002. There were no other significant
developments related to legal proceedings involving the Company at August 12,
2002.
Item 2 Changes in Securities and Use of Proceeds.
On July 2, 2002, Aquis and its senior secured lender, its junior unsecured
lender and its preferred stockholders executed final agreements, subject to FCC
approval, resulting in the restructuring of Aquis' debt and equity positions and
the change in control of Aquis. The final contingency, approval for the transfer
of control of Aquis' FCC licenses to FINOVA, was satisfied when the FCC gave
approval for this change in control in early August 2002. The restructuring
transaction closed on August 12, 2002 pursuant to which FINOVA has acquired a
controlling interest of 79.99% in the Company in exchange for the cancellation
of a significant portion of outstanding loans due from Aquis to FINOVA.
Item 3 Defaults Upon Senior Securities.
Aquis was in default of its loan agreements with FINOVA and AMRO as of June 30,
2002. Before the restructuring was consummated, Aquis operated subject to the
terms of a restructuring agreement executed with these lenders on May 20, 2002,
and for some time before that operations were subject to terms of forbearance
agreements and related amendments. Relief from Aquis' defaults under these
agreements with both lenders and with the holders of our 7.5% Redeemable
Preferred Stock was obtained when the restructuring of Aquis' debt and equity
was consummated on August 12, 2002 through the closing of the restructuring
transactions with these creditors.
Item 4 Submission of Matters to a Vote of Security Holders. None
Item 5 Other Information. None
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number:
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 dated August 12, 2002
(b) Reports on Form 8-K:
In a report on Form 8-K dated February 28, 2002, Aquis reported
entering into a term sheet with its senior lender that set forth the terms of
the restructuring of its debt and equity, subject to final negotiations, third
party approvals, and other conditions.
In a report on Form 8-K dated July 1, 2002, Aquis reported that
definitive restructuring agreements had been executed with certain creditors
that would result in exchange of a substantial majority of its outstanding debt
for equity and notes and would result in a change in control of the Company,
subject to FCC approval.
No other reports on Form 8K were filed during the current year.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:
Name Title Date
---- ----- ----
/s/ Eugene I. Davis
- ------------------------------------------------
Eugene I. Davis Chief Executive Officer, President and Director August 12, 2002
/s/ D. Brian Plunkett
- ------------------------------------------------
D. Brian Plunkett Chief Financial Officer August 12, 2002
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Exhibit Index
Exhibit Number Description
- -------------- -----------
(Referenced to Page Number in Rule
Item 601 of 0-3(b) Sequential
Regulation S-K) Numbering System
Where Exhibit can be
Found
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 dated August 12, 2002
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