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QUARTERLY REPORT UNDER SECTION 13 0R 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
______________ to _____________
Commission File Numbers 0-23232/1-14248
ARCH COMMUNICATIONS GROUP, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 31-1358569
(State of incorporation) (I.R.S. Employer Identification No.)
1800 WEST PARK DRIVE, SUITE 250
WESTBOROUGH, MASSACHUSETTS 01581
(address of principal executive offices) (Zip Code)
(508) 870-6700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months or for such shorter period that the Registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 20,777,427 shares of the
Company's Common Stock ($.01 par value) were outstanding as of October 30, 1997.
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ARCH COMMUNICATIONS GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of September 30, 1997
and December 31, 1996 3
Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION 13
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, DECEMBER 31,
1997 1996
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,021 $ 3,497
Accounts receivable, net 28,240 25,344
Inventories 13,916 10,239
Prepaid expenses and other 3,852 4,531
----------- -----------
Total current assets 51,029 43,611
----------- -----------
Property and equipment, at cost 387,841 358,092
Less accumulated depreciation and amortization (148,352) (96,448)
----------- -----------
Property and equipment, net 239,489 261,644
----------- -----------
Intangible and other assets, net 755,583 841,501
----------- -----------
$ 1,046,101 $ 1,146,756
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 18,402 $ 46
Accounts payable 18,291 17,395
Accrued interest 11,831 10,264
Accrued expenses and other liabilities 27,542 28,166
----------- -----------
Total current liabilities 76,066 55,871
----------- -----------
Long-term debt, less current maturities 959,370 918,150
----------- -----------
Deferred income taxes 5,272 21,172
----------- -----------
Redeemable preferred stock -- 3,712
----------- -----------
Stockholders' equity:
Common stock-$.01 par 208 207
Additional paid-in capital 350,835 350,444
Accumulated deficit (345,650) (202,800)
----------- -----------
Total stockholders' equity 5,393 147,851
----------- -----------
$ 1,046,101 $ 1,146,756
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
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ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service, rental, and maintenance
revenues $ 89,592 $ 81,628 $ 261,570 $ 209,661
Product sales 11,739 9,258 34,029 27,379
------------ ------------ ------------ ------------
Total revenues 101,331 90,886 295,599 237,040
Cost of products sold (7,753) (6,167) (22,044) (19,733)
------------ ------------ ------------ ------------
93,578 84,719 273,555 217,307
------------ ------------ ------------ ------------
Operating expenses:
Service, rental, and maintenance 21,116 18,137 59,227 45,480
Selling 12,387 13,190 39,019 35,094
General and administrative 27,533 24,231 78,878 61,214
Depreciation and amortization 59,750 52,808 179,917 130,936
------------ ------------ ------------ ------------
Total operating expenses 120,786 108,366 357,041 272,724
------------ ------------ ------------ ------------
Operating income (loss) (27,208) (23,647) (83,486) (55,417)
Interest expense, net (24,721) (21,814) (72,436) (53,355)
Equity in earnings (loss) of affiliate (1,016) (808) (2,828) (1,192)
------------ ------------ ------------ ------------
Income (loss) before income tax benefit
and extraordinary charge (52,945) (46,269) (158,750) (109,964)
Benefit from income taxes 5,300 14,091 15,900 32,731
------------ ------------ ------------ ------------
Income (loss) before extraordinary
charge (47,645) (32,178) (142,850) (77,233)
Extraordinary charge from early
extinguishment of debt -- -- -- (1,904)
------------ ------------ ------------ ------------
Net income (loss) (47,645) (32,178) (142,850) (79,137)
Accretion of redeemable preferred stock -- (84) (32) (252)
------------ ------------ ------------ ------------
Net loss to common stockholders $ (47,645) $ (32,262) $ (142,882) $ (79,389)
============ ============ ============ ============
Net income (loss) per common share
before extraordinary charge $ (2.29) $ (1.56) $ (6.89) $ (3.81)
Extraordinary charge per common share -- -- -- (0.09)
------------ ------------ ------------ ------------
Net income (loss) per common share $ (2.29) $ (1.56) $ (6.89) $ (3.90)
============ ============ ============ ============
Weighted average number of common
shares outstanding 20,777,427 20,643,979 20,735,730 20,373,860
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---- ----
Net cash provided by operating activities $ 44,551 $ 31,212
-------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (63,694) (109,518)
Additions to intangible and other assets (10,978) (21,239)
Acquisitions of paging companies, net of cash acquired -- (326,453)
-------- ---------
Net cash used for investing activities (74,672) (457,210)
-------- ---------
Cash flows from financing activities:
Issuance of long-term debt 91,000 650,500
Repayment of long-term debt (56,035) (225,152)
Repayment of redeemable preferred stock (3,744) --
Net proceeds from sale of common stock 424 1,391
-------- ---------
Net cash provided by financing activities 31,645 426,739
-------- ---------
Net increase in cash and cash equivalents 1,524 741
Cash and cash equivalents, beginning of period 3,497 3,643
-------- ---------
Cash and cash equivalents, end of period $ 5,021 $ 4,384
======== =========
Supplemental disclosure:
Interest paid $ 45,366 $ 36,120
Accretion of discount on senior notes $ 24,611 $ 16,493
Accretion of redeemable preferred stock $ 32 $ 252
Issuance of common stock for convertible $ -- $ 14,121
debentures
The accompanying notes are an integral part of these consolidated
financial statements.
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ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(a) Preparation of Interim Financial Statements - The consolidated
condensed financial statements of Arch Communications Group, Inc. ("Arch" or the
"Company") have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission. The financial information included
herein, other than the consolidated condensed balance sheet as of December 31,
1996, has been prepared by management without audit by independent accountants
who do not express an opinion thereon. The consolidated condensed balance sheet
at December 31, 1996 has been derived from, but does not include all the
disclosures contained in, the audited consolidated financial statements for the
year ended December 31, 1996. In the opinion of management, all of these
unaudited statements include all adjustments and accruals consisting only of
normal recurring accrual adjustments which are necessary for a fair presentation
of the results of all interim periods reported herein. These consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying notes included in Arch's
Annual Report on Form 10-K for the year ended December 31, 1996. The results of
operations for the periods presented are not necessarily indicative of the
results that may be expected for a full year.
(b) Intangible and Other Assets - Intangible and other assets, net of
accumulated amortization, are composed of the following (in thousands):
September 30, December 31,
1997 1996
(unaudited)
------------- ------------
Goodwill $322,057 $351,969
Purchased FCC licenses 303,271 330,483
Purchased subscriber lists 94,913 120,981
Deferred financing costs 9,963 12,449
Investment in CONXUS Communications, Inc. 6,500 6,500
Investment in Benbow PCS Ventures, Inc. 5,286 3,642
Non-competition agreements 3,047 3,594
Other 10,546 11,883
-------- --------
$755,583 $841,501
======== ========
(c) Acquisitions - On May 21, 1996, Arch completed its acquisition of all
the outstanding capital stock of Westlink Holdings, Inc. ("Westlink") for $325.4
million in cash, including direct transaction costs. The purchase price was
allocated based on the fair values of assets acquired and liabilities assumed
(including deferred income taxes arising in purchase accounting), which amounted
to $383.6 million and $58.2 million, respectively. Goodwill resulting from the
acquisition is being amortized over a ten-year period using the straight-line
method. This acquisition has been accounted for as a purchase, and the results
of its operations have been included in the consolidated financial statements
from the date of the acquisition.
The following unaudited pro forma summary presents the consolidated
results of operations as if the Westlink acquisition had occurred on January 1,
1996, after giving effect to certain adjustments, including primarily
depreciation and amortization of acquired assets and interest expense on
acquisition debt. These pro forma results for the nine months ended September
30, 1996 do not purport to be indicative of what would have occurred had the
acquisitions been made on January 1, 1996, or of results that may occur in the
future.
Nine Months Ended
September 30, 1996
(in thousands, except per share amount)
Revenues $ 264,570
Net income (loss) (94,823)
Net income (loss) per common share (4.67)
(d) Reclassifications - Certain amounts of prior periods were reclassified
to conform with the 1997 presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated or suggested by such forward-looking statements. These factors
include, without limitation, those set forth below under the caption "Factors
Affecting Future Operating Results".
SHIFT IN OPERATING FOCUS
On April 30, 1997, the Company announced it was shifting its operating
focus to put a higher priority on leverage reduction rather than subscriber unit
growth. Arch's deleveraging efforts are focused on but not limited to slowing
capital expenditures, across-the-board operating efficiencies and the possible
sale of non-strategic assets.
RESULTS OF OPERATIONS
Total revenues increased to $101.3 million (a 11.5% increase) and $295.6
million (a 24.7% increase) in the three and nine months ended September 30,
1997, respectively, from $90.9 million and $237.0 million in the three and nine
months ended September 30, 1996, respectively. Net revenues (total revenues less
cost of products sold) increased to $93.6 million (a 10.5% increase) and $273.6
million (a 25.9% increase) in the three and nine months ended September 30,
1997, respectively, from $84.7 million and $217.3 million in the three and nine
months ended September 30, 1996, respectively. Service, rental and maintenance
revenues, which consist primarily of recurring revenues associated with the sale
or lease of pagers, increased to $89.6 million (a 9.8% increase) and $261.6
million (a 24.8% increase) in the three and nine months ended September 30,
1997, respectively, from $81.6 million and $209.7 million in the three and nine
months ended September 30, 1996, respectively. These increases in revenues were
due primarily to the increase in the number of pagers in service from 3,077,000
at September 30, 1996 to 3,781,000 at September 30, 1997. All of the 704,000
pagers were added through internal growth. Maintenance revenues represented less
than 10% of total service, rental and maintenance revenues in the three and nine
months ended September 30, 1997 and 1996. Arch does not differentiate between
service and rental revenues. Product sales, less cost of products sold,
increased to $4.0 million (a 29.0% increase) and $12.0 million (a 56.7%
increase) in the three and nine months ended September 30, 1997, respectively,
from $3.1 million and $7.6 million in the three and nine months ended September
30, 1996, respectively, as a result of a greater number of pager unit sales.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $21.1 million (22.6% of
net revenues) and $59.2 million (21.7% of net revenues) in the three and nine
months ended September 30, 1997, respectively, from $18.1 million (21.4% of net
revenues) and $45.5 million (20.9% of net revenues) in the three and nine months
ended September 30, 1996, respectively. The increases were due primarily to
increased expenses associated with system expansions and the provision of paging
services to a greater number of subscribers. As existing paging systems become
more populated through the addition of new subscribers, the fixed costs of
operating these paging systems are spread over a greater subscriber base.
Annualized service, rental and maintenance expenses per subscriber were $23 and
$22 in the three and nine months ended September 30, 1997, respectively, as
compared to $24 in the corresponding 1996 periods.
Selling expenses decreased to $12.4 million (13.2% of net revenues) in the
three months ended September 30, 1997 from $13.2 million (15.6% of net revenues)
in the corresponding 1996 period. Selling expenses increased to $39.0 million
(14.3% of net revenues) in the nine months ended September 30, 1997 from $35.1
million (16.1% of net revenues) in the nine months ended September 30, 1996.
Although selling costs as a percentage of net revenues have decreased in the
1997 periods as compared to the 1996 periods, Arch's selling cost per net new
pager in service increased to $108 and $80 in the three and nine months ended
September 30, 1997, respectively, from $61 and $59 in the three and nine months
ended September 30, 1996, respectively. The increase in selling costs per net
new subscriber in service for both the three and nine month periods
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ended September 30, 1997 is directly related to fixed selling costs being spread
over fewer net new pagers put into service and marketing costs incurred in 1997
to promote the Company's new Arch Paging brand identity.
General and administrative expenses increased to $27.5 million (29.4% of
net revenues) and $78.9 million (28.8% of net revenues) in the three and nine
months ended September 30, 1997, respectively, from $24.2 million (28.6% of net
revenues) and $61.2 million (28.2% of net revenues) in the three and nine months
ended September 30, 1996, respectively. The increases in absolute dollars were
due primarily to increased expenses associated with supporting more pagers in
service.
Depreciation and amortization expenses increased to $59.8 million and
$179.9 million in the three and nine months ended September 30, 1997,
respectively, from $52.8 million and $130.9 million in the three and nine months
ended September 30, 1996, respectively. These expenses principally reflect
Arch's acquisitions of paging businesses, accounted for as purchases, as well as
continued investment in pagers and other system expansion equipment to support
continued growth.
Operating loss increased to $27.2 million and $83.5 million in the three
and nine months ended September 30, 1997, respectively, from $23.6 million and
$55.4 million in the three and nine months ended September 30, 1996,
respectively, as a result of the factors outlined above.
Net interest expense increased to $24.7 million and $72.4 million in the
three and nine months ended September 30, 1997, respectively, from $21.8 million
and $53.4 million in the three and nine months ended September 30, 1996,
respectively. The increases were principally attributable to an increase in
Arch's outstanding debt. Interest expense in the nine months ended September 30,
1997 and 1996 includes approximately $24.6 million and $16.5 million,
respectively, of non-cash interest accretion on the 10 7/8% Senior Discount
Notes due 2008 (the "Senior Discount Notes") under which semi-annual interest
payments commence on September 15, 2001.
The Company recognized income tax benefits of $5.3 million and $15.9
million in the three and nine months ended September 30, 1997, respectively, as
compared to $14.1 million and $32.7 million recognized in the three and nine
months ended September 30, 1996, respectively. These benefits represent the tax
benefit of operating losses subsequent to the acquisitions of USA Mobile
Communications Holdings. Inc. ("USA Mobile") and Westlink which were available
to offset deferred tax liabilities arising from the Company's acquisition of USA
Mobile in September 1995 and Westlink in May 1996. The Company expects to
recognize the remaining $5.3 million balance by December 31, 1997.
In May 1996, Arch recognized an extraordinary charge of $1.9 million
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under prior credit facilities.
Net loss increased to $47.6 million and $142.9 million in the three and
nine months ended September 30, 1997, respectively, from $32.2 million and $79.1
million in the three and nine months ended September 30, 1996, respectively, as
a result of the factors outlined above.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased 11.6% to $32.5 million (34.8% of net revenues) and 27.7% to $96.4
million (35.3% of net revenues) in the three and nine months ended September 30,
1997, respectively, from $29.1 million (34.4% of net revenues) and $75.5 million
(34.8% of net revenues) in the three and nine months ended September 30, 1996,
respectively, as a result of the factors outlined above. EBITDA is a standard
measure of financial performance in the paging industry and is also one of the
financial measures used to calculate whether Arch and its subsidiaries are in
compliance with the covenants under their respective debt agreements, but 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. EBITDA does not reflect income tax benefit and interest
expense. One of Arch's principal financial objectives is to increase its EBITDA,
as such earnings are a significant source of funds for servicing indebtedness
and for investments in continued growth, including the purchase of pagers and
paging system equipment, construction and expansion of paging systems and
possible acquisitions.
8
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LIQUIDITY AND CAPITAL RESOURCES
Arch's business strategy requires the availability of substantial funds to
finance the expansion of existing operations, to fund capital expenditures for
pagers and paging system equipment, to service debt and to finance acquisitions.
CAPITAL EXPENDITURES AND COMMITMENTS
Excluding acquisitions of paging businesses, Arch's capital expenditures
decreased from $130.7 million (inclusive of $15.3 million of deferred financing
costs incurred in connection with the Senior Discount Notes and the Arch
Enterprises Credit Facility) in the nine months ended September 30, 1996 to
$74.7 million in the nine months ended September 30, 1997. To date, Arch has
funded its capital expenditures with net cash provided by operating activities,
the issuance of equity securities and the incurrence of debt. Arch's free cash
flow from operations (EBITDA less capital expenditures, excluding acquisitions
of paging businesses) increased to $21.8 in the nine months ended September 30,
1997 from negative $55.2 million in the corresponding 1996 period. Arch believes
that it will have sufficient cash available from operations and credit
facilities to fund its capital expenditures for the remainder of the year.
On April 30, 1997 Benbow PCS Ventures, Inc. (Benbow), 49.9% owned by Arch,
signed a definitive agreement to purchase 100% of the stock of Page Call Inc.,
which owns three regional narrowband-PCS licenses, for a total of $17.15
million. The purchase price includes $3.4 million in cash, and the balance in
Series A convertible preferred stock of Arch. Terms of the agreement also call
for Benbow to assume $25.4 million in debt payments of Page Call owed to the
Federal Communications Commission (FCC). The transaction, subject to usual
regulatory approvals, is expected to be completed during the fourth quarter of
1997.
SOURCES OF FUNDS
Arch's net cash provided by operating activities was $44.6 million and
$31.2 million in the nine months ended September 30, 1997 and 1996 respectively.
Arch believes that its capital needs for the foreseeable future will be
funded with borrowings under current and future credit facilities, net cash
provided by operations and, depending on the Company's needs and market
conditions, possible sales of equity or debt securities.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The following important factors, among others, could cause the Company's
actual operating results to differ materially from those indicated or suggested
by forward-looking statements made in this Form 10-Q or presented elsewhere by
the Company's management from time to time.
INDEBTEDNESS AND HIGH DEGREE OF LEVERAGE
The Company is highly leveraged. At September 30, 1997, the Company had
outstanding $977.8 million of total debt. The ability of the Company to make
payments of principal and interest on its indebtedness will be dependent upon
the Company's subsidiaries achieving and sustaining levels of performance in the
future that will permit such subsidiaries to pay sufficient dividends,
distributions or fees to the Company. Many factors, some of which will be beyond
the Company's control, such as prevailing economic conditions, will affect the
performance of the Company and its subsidiaries. In addition, covenants imposed
by the current and future credit facilities and other indebtedness of the
Company and its subsidiaries will restrict the ability of the Company and its
subsidiaries to incur additional indebtedness and prohibit certain activities
and may limit other aspects of the Company's operations. There can be no
assurance that the Company or its subsidiaries will be able to generate
sufficient cash flow to cover required interest and principal payments on their
current and future indebtedness. If the Company is unable to meet interest and
principal payments in the future, it may, depending upon the circumstances which
then exist, seek additional equity or debt financing, attempt to refinance its
existing indebtedness or sell all or part of its business or assets to raise
funds to repay its
9
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indebtedness. There can be no assurance that sufficient equity or debt financing
will be available or, if available, that it will be on terms acceptable to the
Company, that the Company will be able to refinance its existing indebtedness or
that sufficient funds could be raised through asset sales. The Company's high
degree of leverage may have important consequences for the Company, including:
(i) the ability of the Company and its subsidiaries to obtain additional
financing for acquisitions, working capital, capital expenditures or other
purposes, if necessary, may be impaired or such financing may not be on
favorable terms; (ii) a substantial portion of the cash flow of the Company's
subsidiaries will be used to pay interest expense, which will reduce the funds
which would otherwise be available for operations and future business
opportunities; (iii) the Company may be more highly leveraged than its
competitors which may place it at a competitive disadvantage; and (iv) the
Company's high degree of leverage will make it more vulnerable to a downturn in
its business or the economy generally.
FUTURE CAPITAL NEEDS
The Company's business strategy requires the availability of substantial
funds to service debt and finance the continued development and future growth
and expansion of its operations, including possible acquisitions. The amount of
capital required by the Company will depend upon a number of factors, including
subscriber growth, technological developments, marketing and sales expenses,
competitive conditions, acquisition strategy and acquisition opportunities. No
assurance can be given that additional equity or debt financing will be
available to the Company on acceptable terms, if at all. The unavailability of
sufficient financing when needed would have a material adverse effect on the
Company.
HISTORY OF LOSSES
The Company has not reported any net income since its inception. The
Company reported net losses of $142.9 million and $79.1 million in the nine
months ended September 30, 1997 and 1996, respectively. These net losses have
resulted principally from (i) substantial depreciation and amortization
expenses, primarily related to intangible assets and pager depreciation, and
(ii) interest expense on debt incurred primarily to finance acquisitions of
paging operations and other costs of growth. Substantial and increased amounts
of debt are expected to be outstanding for the foreseeable future, which will
result in significant additional interest expense which could have a substantial
negative impact on the Company. The Company expects to continue to report net
losses for the foreseeable future.
GROWTH AND ACQUISITION STRATEGY
The Company has pursued and intends to continue to pursue acquisitions of
paging businesses as well as the continued internal growth of the Company's
paging business. The process of integrating acquired paging businesses may
involve unforeseen difficulties and may require a disproportionate amount of the
time and attention of the Company's management and the financial and other
resources of the Company. No assurance can be given that suitable additional
acquisitions can be identified, financed and completed on acceptable terms, or
that the Company's future acquisitions will be successful. Implementation of the
Company's growth strategies will be subject to numerous other contingencies
beyond the control of the Company, including general and regional economic
conditions, interest rates, competition, changes in regulation or technology and
the ability to attract and retain skilled employees. Accordingly, no assurance
can be given that the Company's growth strategies will prove effective or that
the goals of the Company will be achieved.
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be dependent, to a significant extent,
upon the continued services of a relatively small group of executive personnel.
The Company does not have employment agreements with any of its current
executive officers, although all current executive officers have entered into
non-competition agreements with the Company. The loss or unavailability of one
or more of its executive officers or the inability to attract or retain key
employees in the future could have an adverse effect upon the Company's
operations.
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COMPETITION AND TECHNOLOGICAL CHANGE
The Company faces competition from other paging service providers in all
markets in which it operates as well as from certain competitors who hold
nationwide licenses. The Company believes that competition for paging
subscribers is based on quality of service, geographic coverage and price and
that the Company generally competes effectively based on these factors. Monthly
fees for basic paging services have, in general, declined since the Company
commenced operations in September 1986, due in part to competitive conditions,
and the Company may face significant price-based competition in the future which
could adversely affect the Company. Some of the Company's competitors possess
greater financial, technical and other resources than the Company. A trend
towards increasing consolidation in the paging industry in particular and the
wireless communications industry in general in recent years has led to
competition from increasingly larger and better capitalized competitors. If any
of such competitors were to devote additional resources to the paging business
or focus its strategy on the Company's markets, the Company's results of
operations could be adversely affected. A variety of wireless two-way
communication technologies currently are in use or under development. Although
such technologies generally are higher priced than paging services or not widely
available, technological improvements could result in increased capacity and
efficiency for wireless two-way communication and, accordingly, could result in
increased competition for the Company. Two-way service providers also could
elect to provide paging service as an adjunct to their primary services. Future
technological advances in the telecommunications industry could increase new
services or products competitive with the paging services provided by the
Company or could require the Company to reduce the price of its paging services
or incur additional capital expenditures to meet competitive requirements.
Recent and proposed regulatory changes by the FCC are aimed at encouraging such
technological advances and new services. For example, the FCC has created
potential sources of competition by opening up new spectrum for such services as
the General Wireless Communications Service ("GWCS") and the Wireless
Communications Service ("WCS") as well as speeding up licensing of other
services through auctions, including the Local Multipoint Distribution Service
("LMDS"), 220-222 MHz and broadband PCS services. Entities offering service on
wireless two-way communications technology, including cellular telephones and
specialized mobile radio services, also compete with the paging services that
the Company provides. There can be no assurance that the Company will be able to
compete successfully with its current and future competitors in the paging
business or with competitors offering alternative communication technologies.
SUBSCRIBER TURNOVER
The results of operations of wireless messaging service providers, such as
the Company, can be significantly affected by subscriber cancellations. The
sales and marketing costs associated with attracting new subscribers are
substantial relative to the costs of providing service to existing customers.
Because the paging business is characterized by high fixed costs, disconnections
directly and adversely affect operating cash flow. An increase in its subscriber
cancellation rate may adversely affect the Company's results of operations.
DEPENDENCE ON SUPPLIERS
The Company does not manufacture any of the pagers used in its paging
operations. The Company buys pagers primarily from Motorola, Inc. ("Motorola")
and NEC America, Inc. ("NEC") and therefore is dependent on such manufacturers
to obtain sufficient pager inventory for new subscriber and replacement needs.
In addition, the Company purchases terminals and transmitters primarily from
Glenayre Technologies, Inc. ("Glenayre") and Motorola and thus is dependent on
such manufacturers for sufficient terminals and transmitters to meet its
expansion and replacement requirements. To date, the Company has not experienced
significant delays in obtaining pagers, terminals or transmitters, but there can
be no assurance that the Company will not experience such delays in the future.
The Company has never had a purchase agreement with Glenayre or NEC. The
Company's purchase agreement with Motorola expires in December 1997, with a
provision for automatic renewal for a one-year term. Although the Company
believes that sufficient alternative sources of pagers, terminals and
transmitters exist, there can be no assurance that the Company would not be
adversely affected if it were unable to obtain these items from current supply
sources or on terms comparable to existing terms.
11
<PAGE> 12
GOVERNMENT REGULATION, FOREIGN OWNERSHIP AND POSSIBLE REDEMPTION
The paging operations of the Company are subject to regulation by the FCC and
various state regulatory agencies. There can be no assurance that those agencies
will not propose or adopt regulations or take actions that would have a material
adverse effect on the Company's business. Changes in regulation of the Company's
paging business or the allocation of radio spectrum for services that compete
with the Company's business could adversely affect the Company's results of
operations. Indeed, the FCC has created potential sources of competition by
opening up new spectrum for such services as the GWCS and the WCS as well as,
speeding up licensing of other services through auctions, including the LMDS,
220-222 MHz and broadband PCS services. Further, the FCC has recently adopted
rules implementing a market area licensing scheme. In addition, some aspects of
the recently enacted Telecommunications Act of 1996 could have a beneficial
effect on Arch's business, but other provisions may place additional burdens
upon Arch or subject Arch to increased competition. The Communications Act of
1934, as amended, limits foreign ownership of entities that hold certain
licenses from the FCC. Because the Company, through its subsidiaries, holds FCC
licenses, in general, no more than 25% of the Company's stock can be owned or
voted by aliens or their representatives, a foreign government or its
representative or a foreign corporation, the Company's Restated Certificate of
Incorporation permits the redemption of shares of the Company's capital stock
from foreign stockholders where necessary to protect the Company's regulatory
licenses, but such redemption would be subject to the availability of capital to
the Company and any restrictions contained in the debt instruments of the
Company and under Delaware law. The failure to redeem such shares promptly could
jeopardize the Company's FCC licenses.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the
normal course of business. The Company believes that none of such
matters will have a material adverse effect on the Company's business
or financial condition.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying index to exhibits are
filed as part of this Quarterly Report on Form 10-Q.
(b) None.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q for the quarter ended
September 30, 1997, to be signed on its behalf by the undersigned thereunto duly
authorized.
ARCH COMMUNICATIONS GROUP, INC.
Dated: October 31, 1997 By: /S/ BRIAN D. BOYCE
---------------------
Brian D. Boyce
Vice President, Finance and Controller
14
<PAGE> 15
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
27.1* - Financial Data Schedule.
* Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000915390
<NAME> Arch Communications Group, Inc.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<CASH> 5,021
<SECURITIES> 0
<RECEIVABLES> 33,714
<ALLOWANCES> 5,474
<INVENTORY> 13,916
<CURRENT-ASSETS> 51,029
<PP&E> 387,841
<DEPRECIATION> 148,352
<TOTAL-ASSETS> 1,046,101
<CURRENT-LIABILITIES> 76,066
<BONDS> 959,370
0
0
<COMMON> 351,043
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,046,101
<SALES> 11,739
<TOTAL-REVENUES> 101,331
<CGS> 7,753
<TOTAL-COSTS> 33,503
<OTHER-EXPENSES> 87,283
<LOSS-PROVISION> 1,802
<INTEREST-EXPENSE> 24,721
<INCOME-PRETAX> (52,945)
<INCOME-TAX> (5,300)
<INCOME-CONTINUING> (47,645)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (47,645)
<EPS-PRIMARY> (2.29)
<EPS-DILUTED> (2.29)
</TABLE>
