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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 March 31, 1998
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: 20,958,570 shares of the
Company's Common Stock ($.01 par value) were outstanding as of May 7, 1998.
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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 March 31, 1998
and December 31, 1997 3
Consolidated Condensed Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
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)
March 31, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,540 $ 3,328
Accounts receivable, net 31,424 30,147
Inventories 18,202 12,633
Prepaid expenses and other 3,566 4,917
----------- -----------
Total current assets 57,732 51,025
----------- -----------
Property and equipment, at cost 394,798 388,035
Less accumulated depreciation and amortization (162,179) (146,542)
----------- -----------
Property and equipment, net 232,619 241,493
----------- -----------
Intangible and other assets, net 703,626 728,202
----------- -----------
$ 993,977 $ 1,020,720
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 19,316 $ 24,513
Accounts payable 18,439 22,486
Accrued interest 11,890 11,249
Accrued expenses and other liabilities 27,914 26,831
----------- -----------
Total current liabilities 77,559 85,079
----------- -----------
Long-term debt, less current maturities 995,214 968,896
----------- -----------
Stockholders' equity (deficit):
Common stock-$.01 par 210 209
Additional paid-in capital 351,507 351,210
Accumulated deficit (430,513) (384,674)
----------- -----------
Total stockholders' equity (deficit) (78,796) (33,255)
----------- -----------
$ 993,977 $ 1,020,720
=========== ===========
The accompanying notes are an integral part of these
consolidated condensed financial statements
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ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
(unaudited and in thousands, except share and per share amounts)
1998 1997
---- ----
Service, rental, and maintenance revenues $ 91,397 $ 84,417
Product sales 10,642 11,122
------------ ------------
Total revenues 102,039 95,539
Cost of products sold (7,366) (7,126)
------------ ------------
94,673 88,413
------------ ------------
Operating expenses:
Service, rental, and maintenance 20,189 18,682
Selling 11,870 13,201
General and administrative 28,318 25,143
Depreciation and amortization 53,714 58,019
------------ ------------
Total operating expenses 114,091 115,045
------------ ------------
Operating income (loss) (19,418) (26,632)
Interest expense, net (25,366) (23,595)
Equity in loss of affiliate (1,055) (888)
------------ ------------
Income (loss) before income tax benefit (45,839) (51,115)
Benefit from income taxes -- 5,300
------------ ------------
Net income (loss) (45,839) (45,815)
Accretion of redeemable preferred stock -- (32)
------------ ------------
Net income (loss) to common stockholders $ (45,839) $ (45,847)
============ ============
Basic net income (loss) per common share $ (2.20) $ (2.21)
============ ============
Basic weighted average number of
common shares outstanding 20,877,076 20,713,088
============ ============
The accompanying notes are an integral part of these
consolidated condensed financial statements
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ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1997
(unaudited and in thousands)
1998 1997
---- ----
Net cash provided by operating activities $ 9,992 $ 20,254
-------- --------
Cash flows used for investing activities:
Additions to property and equipment, net (15,915) (25,510)
Additions to intangible and other assets (5,404) (4,811)
-------- --------
Net cash used for investing activities (21,319) (30,321)
-------- --------
Cash flows from financing activities:
Issuance of long-term debt 24,500 70,000
Repayment of long-term debt (12,259) (56,012)
Repayment of redeemable preferred stock -- (3,744)
Net proceeds from sale of common stock 298 5
-------- --------
Net cash provided by financing activities 12,539 10,249
-------- --------
Net increase in cash and cash equivalents 1,212 182
Cash and cash equivalents, beginning of period 3,328 3,497
-------- --------
Cash and cash equivalents, end of period $ 4,540 $ 3,679
======== ========
Supplemental disclosure:
Interest paid $ 15,289 $ 14,009
Accretion of redeemable preferred stock $ -- $ 32
The accompanying notes are an integral part of these
consolidated condensed 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,
1997, 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, 1997 has been derived from, but does not include all the
disclosures contained in, the audited consolidated financial statements for the
year ended December 31, 1997. 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, 1997. 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):
March 31, December 31,
1998 1997
---- ----
(unaudited)
Goodwill $301,957 $312,017
Purchased FCC licenses 284,573 293,922
Purchased subscriber lists 79,599 87,281
Deferred financing costs 10,175 8,752
Investment in Benbow PCS Ventures, Inc. 8,171 6,189
Investment in CONXUS Communications, Inc. 6,500 6,500
Non-competition agreements 2,520 2,783
Other 10,131 10,758
-------- --------
$703,626 $728,202
======== ========
(c) Tower Site Sale - On April 13, 1998, Arch announced an agreement to
sell the tower site assets (the "Tower Site Sale") owned by Arch for
approximately $38.0 million in cash (subject to adjustment), of which $1.3
million will be paid to Benbow PCS Ventures, Inc. ("Benbow"), in which Arch
holds a 49.9% equity interest, in payment of certain assets owned by Benbow and
included in the Tower Site Sale. Arch will sell communications towers, real
estate, site management contracts and/or leasehold interests involving 134 sites
in 22 states, and will lease back space on the towers on which it currently
operates communications equipment to service its own paging network. Arch will
use its net proceeds from the Tower Site Sale to repay indebtedness under its
bank credit facilities. The closing of the Tower Site Sale is subject to receipt
of customary regulatory approvals and other conditions. Arch currently expects
to complete the Tower Site Sale in the second quarter of 1998.
(d) Pending Accounting Pronouncements - In April 1998, the Accounting
Standards Executive Committee of the Financial Accounting Standards Board issued
Statement of Position 98-5 ("SOP 98-5" ) "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. Initial application of SOP 98-5 will be
reported as the cumulative effect of a change in accounting principle. The
Company intends to adopt SOP 98-5 effective January 1, 1999. The adoption of SOP
98-5 is not expected to have a material effect on the Company's financial
position or results of operations.
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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
In April 1997, Arch reordered its operating priorities to improve capital
efficiency and strengthen its balance sheet by placing a higher priority on
leverage reduction than subscriber unit growth. As part of its reordered
operating priorities, Arch has implemented and is continuing to implement
various initiatives to reduce capital costs while sustaining acceptable levels
of unit and revenue growth. As a result, the Company's rate of internal growth
in pagers in service has slowed and is expected to remain below the rates of
internal growth previously achieved by Arch. Additionally, Arch has considered
the possible sale of non-strategic assets. In April 1998, Arch announced the
Tower Site Sale, in which Arch will sell communications towers, real estate,
site management contracts and/or leasehold interests involving 134 sites in 22
states, and will lease back space on the towers on which it currently operates
communications equipment to service its own paging network. Arch will use its
proceeds from the Tower Site Sale to repay indebtedness under its bank credit
facilities. The pending Tower Site Sale, if completed, will result in a
reduction in Arch's rental income, an increase in its operating expenses and the
elimination of future interest expense on the repaid debt.
RESULTS OF OPERATIONS
Total revenues increased $6.5 million, or 6.8%, to $102.0 million in the
three months ended March 31, 1998 from $95.5 million in the three months ended
March 31, 1997, and net revenues (total revenues less cost of products sold)
increased $6.3 million, or 7.1%, from $88.4 million to $94.7 million over the
same period. Service, rental and maintenance revenues, which consist primarily
of recurring revenues associated with the sale or lease of pagers, increased
$7.0 million, or 8.3%, to $91.4 million in the three months ended March 31, 1998
from $84.4 million in the three months ended March 31, 1997. These increases in
revenues were due primarily to an increase in the number of pagers in service
from 3,515,000 at March 31, 1997 to 4,016,000 at March 31, 1998. All of the
501,000 pagers were added through internal growth. Maintenance revenues
represented less than 10% of total service, rental and maintenance revenues in
the three months ended March 31, 1998 and 1997. Arch does not differentiate
between service and rental revenues. Product sales, less cost of products sold,
decreased 18.0% to $3.3 million in the three months ended March 31, 1998 from
$4.0 million in the three months ended March 31, 1997 as a result of a decline
in the average revenue per pager sold.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $20.2 million (21.3% of
net revenues) in the three months ended March 31, 1998 from $18.7 million (21.1%
of net revenues) in the three months ended March 31, 1997. The increase was 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
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subscriber base. Annualized service, rental and maintenance expenses per
subscriber decreased to $20 in the three months ended March 31, 1998 from $22 in
the three months ended March 31, 1997.
Selling expenses decreased to $11.9 million (12.5% of net revenues) in the
three months ended March 31, 1998 from $13.2 million (14.9% of net revenues) in
the three months ended March 31, 1997. The number of net new pagers in service
resulting from internal growth decreased by 42.7% from the three months ended
March 31, 1997 compared to the three months ended March 31, 1998. Most selling
expenses are directly related to the number of net new subscribers added.
General and administrative expenses increased to $28.3 million (29.9% of
net revenues) in the three months ended March 31, 1998 from $25.1 million (28.4%
of net revenues) in the three months ended March 31, 1997. The increase was due
primarily to administrative and facility costs associated with supporting more
pagers in service.
Depreciation and amortization expenses decreased to $53.7 million (56.7% of
net revenues) in the three months ended March 31, 1998 from $58.0 million (65.6%
of net revenues) in the three months ended March 31, 1997. These expenses
reflect Arch's acquisitions of paging businesses, accounted for as purchases,
and investment in pagers and other system expansion equipment to support growth.
Operating loss decreased to $19.4 million in the three months ended March
31, 1998 from $26.6 million in the three months ended March 31, 1997 as a result
of the factors outlined above.
Net interest expense increased to $25.4 million in the three months ended
March 31, 1998 from $23.6 million in the three months ended March 31, 1997. The
increase was attributable to an increase in Arch's average outstanding debt.
Interest expense in the three months ended March 31, 1998 and 1997 includes
approximately $8.9 million and $8.0 million, respectively, of non-cash interest
accretion on the 107/8% Senior Discount Notes due 2008 ("Senior Discount Notes")
under which semi-annual interest payments commence on September 15, 2001.
The Company recognized an income tax benefit of $5.3 million in the three
months ended March 31, 1997 representing the tax benefit of operating losses
incurred subsequent to the acquisitions of USA Mobile Communications Holdings.
Inc. ("USA Mobile") and Westlink Holdings, Inc. ("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 tax
benefit of these operating losses was fully recognized during 1997. Accordingly,
the Company has established a valuation reserve against its deferred tax asset
which reduced the income tax benefit to zero. The Company does not expect to
recover its deferred tax asset and will continue to increase its valuation
reserve accordingly.
Net losses were $45.8 million for each of the three months ended March 31,
1998 and 1997 as a result of the factors outlined above.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased 9.3% to $34.3 million (36.2% of net revenues) in the three months
ended March 31, 1998 from $31.4 million (35.5% of net revenues) in the three
months ended March 31, 1997 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 equity in loss of
affiliate, income tax benefit, interest expense, net and extraordinary items.
One of Arch's principal financial objectives is to increase EBITDA, as such
earnings are a significant source of funds for servicing indebtedness and for
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investments in continued growth, including the purchase of pagers and paging
system equipment, construction and expansion of paging systems and possible
acquisitions.
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
Arch's capital expenditures decreased from $30.3 million in the three
months ended March 31, 1997 to $21.3 million in the three months ended March 31,
1998. Arch generally has funded its capital expenditures with net cash provided
by operating activities and the incurrence of debt. Arch's free cash flow from
operations (EBITDA less capital expenditures, excluding acquisitions of paging
businesses) increased to $13.0 million in the three months ended March 31, 1998
from $1.1 million in the corresponding 1997 period.
Arch currently anticipates capital expenditures of approximately $90
million to $100 million for the year ended December 31, 1998, primarily for the
purchase of pagers, paging system equipment and transmission equipment, as well
as expenditures for information systems and Benbow (as described below). Such
amounts are subject to change based on the Company's internal growth rate and
acquisition activity, if any, during 1998. Included in the Company's anticipated
capital expenditures for 1998 is funding to begin converting Arch's customer
base to a centralized billing and management information system which is
expected to offer the back office capability to support significant future
growth and to address year 2000 issues. 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.
Arch is obligated, to the extent such funds are not available to Benbow
from other sources and subject to the approval of Arch's designee on Benbow's
Board of Directors, to advance to Benbow sufficient funds to service debt
obligations incurred by Benbow in connection with its acquisition of its
narrowband PCS licenses and to finance the build out of a regional narrowband
PCS system. Arch estimates that the total cost to Benbow of servicing its debt
obligations and constructing a regional narrowband PCS system will be
approximately $100 million over the next five years. Arch currently anticipates
that approximately $40 million (approximately $20 million over the next two
years) of such amount will be funded by Arch and the balance will be funded
through vendor financing and other sources.
SOURCES OF FUNDS
Arch's net cash provided by operating activities was $10.0 million and
$20.3 million in the three months ended March 31, 1998 and 1997 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.
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INDEBTEDNESS AND HIGH DEGREE OF LEVERAGE
The Company is highly leveraged. At March 31, 1998, the Company had
outstanding $1.0 billion of total debt. 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 Senior
Discount Notes, USA Mobile II Notes, the Company's credit facilities and its
other indebtedness contain financial and restrictive covenants, the failure to
comply with which may result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company; (iv) the Company
may be more highly leveraged than its competitors which may place it at a
competitive disadvantage; and (v) the Company's high degree of leverage will
make it more vulnerable to a downturn in its business or the economy generally.
In April 1997, Arch reordered its operating priorities to improve capital
efficiency and strengthen its balance sheet by placing a higher priority on
leverage reduction than subscriber unit growth. As part of its reordered
operating priorities, Arch has implemented and is continuing to implement
various initiatives to reduce capital costs while sustaining acceptable levels
of unit and revenue growth and reviewing the possible sale of non-strategic
assets. As a result, the Company's rate of internal growth in pagers in service
has slowed and is expected to remain below the rates of internal growth
previously achieved by Arch, but Arch has not yet reduced its financial leverage
significantly. There can be no assurance that Arch will be able to reduce its
financial leverage significantly or that Arch will achieve an appropriate
balance between growth which it considers acceptable and future reductions in
financial leverage.
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's historical 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 material adverse effect on the Company. The Company expects to continue
to report net losses for the foreseeable future.
POSSIBLE ACQUISITION TRANSACTIONS
Arch believes that the paging industry will undergo further consolidation,
and Arch expects to participate in such consolidation, either as an acquirer or
an acquiree. The Company evaluates possible acquisition transactions on an
ongoing basis and, from time to time, is engaged in discussions with respect to
possible acquisitions or other business combinations. The process of integrating
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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 acquisition transactions can be identified, financed and completed
on acceptable terms, that the Company's future acquisitions will be successful,
or that the Company will participate in any future consolidation of the paging
industry.
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 or key man insurance with any of its
current executive officers, although all current executive officers have entered
into non-competition and retention 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.
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 primarily focused on voice services currently are in
use or under development. Although such technologies generally are higher priced
than paging services, 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. Entities offering
service on wireless two-way communications technology, including cellular and
broadband PCS, and specialized mobile radio services, also compete with the
paging services that the Company provides. Technological change also may affect
the value of the pagers owned by the Company and leased to its subscribers. If
the Company's subscribers requested more technologically advanced pagers, the
Company could incur additional inventory costs and capital expenditures if it
were required to replace pagers leased to its subscribers within a short period
of time. 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.
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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 1998, with a
provision for automatic renewal for one-year terms. 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.
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. 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. An FCC licensee may, however, make prior application to the FCC for
a determination that it is not in the public interest to deny an individual
licensee's foreign ownership in excess of the 25% foreign ownership benchmark.
Most recently, the FCC substantially liberalized its authorization process for
foreign entities investing in paging companies that are domiciled in countries
which are signatories to the World Trade Organization agreement. 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 (which currently would
not permit any such redemptions). The failure to redeem such shares promptly
could jeopardize the Company's FCC licenses. From time to time, legislation and
regulations which could potentially adversely affect the Company are proposed or
enacted by federal and state legislators and regulators. For example, the FCC
and certain states require paging companies to contribute a portion of specified
revenues to support telecommunications public purposes. Additional states and
localities may in the future seek to impose similar requirements and the FCC
12
<PAGE>13
recently adopted an order requiring paging companies to compensate pay telephone
providers for 800 and similar telephone calls. Arch has generally passed these
costs on to its subscribers, which makes the Company's services more expensive
and which could affect the attraction or retention of subscribers. There can be
no assurance that Arch will be able to pass on these costs. Although these
requirements have not to date had a material impact on the Company, these or
similar requirements could in the future have a material adverse effect on the
Company.
IMPACT OF THE YEAR 2000 ISSUE
The Company is currently upgrading its information systems in a manner
which will also resolve the potential impact of the year 2000 problem on the
processing of date-sensitive information by the Company's computerized systems
and transmission equipment. The year 2000 problem is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Based on preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. The ability of
third parties with whom the Company transacts business to adequately address
their year 2000 issues is outside the Company's control. If the Company, its
customers or vendors are unable to resolve such processing issues in a timely
manner, there could be a material adverse effect on the Company.
13
<PAGE>14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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 AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying index to exhibits are
filed as part of this Quarterly Report on Form 10-Q.
(b) None
14
<PAGE>15
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 March
31, 1998, to be signed on its behalf by the undersigned thereunto duly
authorized.
ARCH COMMUNICATIONS GROUP, INC.
Dated: May 14, 1998 By: /S/ J. ROY POTTLE
-------------------
J. Roy Pottle
Executive Vice President and
Chief Financial Officer
15
<PAGE>16
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
10.16*! - Amendment 2 dated April 2, 1998 to Letter Agreement dated January 7,
1997 between the Company and Motorola, Inc.
27.1* - Financial Data Schedule.
* Filed herewith
! Confidential treatment requested with respect to portions of this exhibit
+ Identifies exhibits constituting a management contract or compensatory plan
EXHIBIT 10.16
*CONFIDENTIAL TREATMENT REQUESTED
Confidential portions have been omitted and filed separately
ARCH COMMUNICATIONS GROUP, INC.
AMENDMENT "2"
April 2, 1998
This amendment is made and offered at your request and in light of the
additional competitive offers you have received. This amendment shall be
incorporated into the pager purchase proposal offered by Motorola, Inc. and
accepted by ARCH COMMUNICATIONS GROUP, INC. ("hereinafter" call ARCH) on January
21, 1997 through letter of execution.
This Amendment shall become effective April 1, 1998 upon written acceptance by
ARCH and shall continue in effect for a term of one year, and will automatically
renew for successive one year terms subject to 30 days written notice by either
party.
PRICE
The applicable prices are set forth on Attachment "A" hereto.
THESE PRICES ARE APPLICABLE TO PAGERS ORDERED ON COMMON CARRIER FREQUENCIES
FOR WHICH ARCH OR ITS SUBSIDIARY COMPANIES ARE THE LICENSEE OR BONA FIDE
SALES AGENT OF THE LICENSEE. All prices include a primary cell battery
unless otherwise noted.
Other pagers may be ordered at standard common carrier prices in effect at
the time of the order and will be counted toward the fulfillment of the
quantity commitment. All products are quoted for sale subject to
availability.
These pagers carry Motorola's standard warranty for one year on parts and
labor effective the date of shipment.
NON-DISCLOSURE
Both ARCH and Motorola recognize the confidentiality of the pricing
information and agree to not disclose same to third parties during the term
of this agreement, unless required by judicial or administrative order.
In the event of any potential merger or stock sale transactions, ARCH will
protect this confidentiality by obtaining written Non-Disclosure Agreements
from the parties.
SALES TO THE U.S. GOVERNMENT
In the event ARCH elects to sell Motorola products or services to the
Federal, State or Local Government, or to a prime contractor selling to a
Government customer, ARCH shall do so at their own option and risk and
agrees not to obligate Motorola as a subcontractor or otherwise to such
customers except as indicated in the paragraph below. ARCH remains solely
and exclusively responsible for compliance with all statutes and
regulations governing sales to the Federal, State or local Government, or
to a prime contractor selling to a Government customer, except as indicated
in the paragraph below. Motorola makes no representations, certifications,
or warranties whatsoever with respect to the ability of its goods, services
or prices to satisfy any such statutes or regulations.
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
April 2, 1998
Page 2
Motorola represents that it generally complies with the following FAR
clauses:
FAR CLAUSE TITLE
52.221-2 Certification of Nonsegregated Facilities
52.221-2 Previous Contracts and Compliance Reports
52.222-2 Affirmative Action Compliance
52.222-2 Equal Opportunity
52.222-3 Affirmative Action for Special Disabled and Vietnam Era
Veterans
52.222-3 Affirmative Action for Handicapped Workers
52.222-3 Employment Reports on Special Disable Veterans And
Veterans of the Vietnam Era
52.223-2 Clean Air and Water
STANDARD TERMS AND CONDITIONS
As stated in original agreement executed on January 21, 1997.
Except as noted above, all other provisions of the agreement as originally
executed remain in force and effect.
Please indicate your acceptance of this proposed amendment by signing below.
MOTOROLA, INC.
/s/ James Grossi
James Grossi
Major Account Manager
North American Paging Subscriber Division
AGREED AND ACCEPTED: ARCH COMMUNICATIONS GROUP, INC.
By: /s/ Paul Kuzia
Title: Executive Vice President
Date: 4-9-98
<PAGE>
*CONFIDENTIAL TREATMENT REQUESTED
Confidential portions have been omitted and filed separately
ARCH COMMUNICATIONS GROUP, INC.
April 2, 1998
Page 3
ATTACHMENT "A" PRICING
The revised pager pricing on the following models will be as follows:
Low/High UHF 900
BAND BAND MHZ
PRONTO Numeric Display w/vib. * * *
PRONTO FLX Numeric Display w/vib. * * *
DIGITZ Numeric Flex Display * * *
BRAVO LX Numeric Display w/vib. * * *
BRAVO FLX FLEX Numeric Display * * *
ULTRA EXPRESS Numeric Display w/vib.* * * *
EXPRESS XTRA Numeric Display w/vib.** * * *
EXPRESS XTRA FLX Numeric Display w/ vib.** * * *
EXPRESS LUNA Numeric Display * * *
JAZZ FLEX Alphanumeric Display * * *
WORDLINE POCSAG Word Message Pager * * *
WORDLINE FLX Word Message Pager * * *
ADVISOR PRO Alpha Display w/vib. * * *
ADVISOR PRO FLEX Alpha Display w/vib. * * *
ADVISOR GOLD Alpha Display w/vib. * * *
ADVISOR ELITE Alpha Display w/vib. * * *
PAGEFINDER * * *
PAGEWRITER w/Standard Kit * * *
PAGEWRITER w/Deluxe Kit * * *
QUICKWORD Message Entry Device * * *
WORDTREK Message Entry Device * * *
WORDTREK PLUS Message Entry Device * * *
ALPHAMATE 250 NDN3000 Entry Device * * *
* Cybersplash colors are available at a $* premium and include Vanilla Swirl
and Snakeskin.
** Cybersplash pattern, Monet Mystique is available at a $* premium.
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