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, 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: 21,067,110 shares of the
Company's Common Stock ($.01 par value) were outstanding as of November 11, 1998
<PAGE> 2
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, 1998 and
December 31, 1997 3
Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,571 $ 3,328
Accounts receivable, net 34,496 30,147
Inventories 10,578 12,633
Prepaid expenses and other 4,170 4,917
----------- -----------
Total current assets 55,815 51,025
----------- -----------
Property and equipment, at cost 421,305 388,035
Less accumulated depreciation and amortization (197,416) (146,542)
----------- -----------
Property and equipment, net 223,889 241,493
----------- -----------
Intangible and other assets, net 662,662 728,202
----------- -----------
$ 942,366 $ 1,020,720
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ -- $ 24,513
Accounts payable 23,571 22,486
Accrued restructuring 14,810 --
Accrued interest 18,767 11,249
Accrued expenses and other liabilities 29,212 26,831
----------- -----------
Total current liabilities 86,360 85,079
----------- -----------
Long-term debt 992,790 968,896
----------- -----------
Other long-term liabilities 28,639 --
----------- -----------
Stockholders' equity (deficit):
Preferred stock-- $.01 par value 3 --
Common stock-- $.01 par value 211 209
Additional paid-in capital 377,382 351,210
Accumulated deficit (543,019) (384,674)
----------- -----------
Total stockholders' equity (deficit) (165,423) (33,255)
----------- -----------
$ 942,366 $ 1,020,720
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 4
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service, rental, and maintenance
revenues $ 93,546 $ 89,592 $ 277,826 $ 261,570
Product sales 10,506 11,739 31,811 34,029
------------ ------------ ------------ ------------
Total revenues 104,052 101,331 309,637 295,599
Cost of products sold (7,173) (7,753) (21,863) (22,044)
------------ ------------ ------------ ------------
96,879 93,578 287,774 273,555
------------ ------------ ------------ ------------
Operating expenses:
Service, rental, and maintenance 20,403 21,116 60,812 59,227
Selling 12,658 12,387 36,902 39,019
General and administrative 28,011 27,533 84,527 78,878
Depreciation and amortization 56,590 59,750 164,990 179,917
Restructuring charge -- -- 16,100 --
------------ ------------ ------------ ------------
Total operating expenses 117,662 120,786 363,331 357,041
------------ ------------ ------------ ------------
Operating income (loss) (20,783) (27,208) (75,557) (83,486)
Interest expense, net (27,211) (24,721) (78,334) (72,436)
Equity in loss of affiliate -- (1,016) (2,219) (2,828)
------------ ------------ ------------ ------------
Income (loss) before income tax
benefit and extraordinary item (47,994) (52,945) (156,110) (158,750)
Benefit from income taxes -- 5,300 -- 15,900
------------ ------------ ------------ ------------
Income (loss) before extraordinary item (47,994) (47,645) (156,110) (142,850)
Extraordinary charge from early
extinguishment of debt -- -- (1,720) --
------------ ------------ ------------ ------------
Net income (loss) (47,994) (47,645) (157,830) (142,850)
Accretion of redeemable preferred stock -- -- -- (32)
Preferred stock dividend (515) -- (515) --
------------ ------------ ------------ ------------
Net income (loss) to common
stockholders $ (48,509) $ (47,645) $ (158,345) $ (142,882)
============ ============ ============ ============
Basic/diluted net income (loss) per
common share before extraordinary
charge $ (2.30) $ (2.29) $ (7.47) $ (6.89)
Extraordinary charge per basic/diluted
common share -- -- (0.08) --
------------ ------------ ------------ ------------
Basic/diluted net income (loss) per
common share $ (2.30) $ (2.29) $ (7.55) $ (6.89)
============ ============ ============ ============
Basic/diluted weighted average number
of common shares outstanding 21,067,110 20,777,427 20,968,281 20,735,730
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 5
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 91,415 $ 44,551
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (58,029) (63,694)
Additions to intangible and other assets (27,756) (10,978)
--------- ---------
Net cash used for investing activities (85,785) (74,672)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 455,964 91,000
Repayment of long-term debt (484,013) (56,035)
Repayment of redeemable preferred stock -- (3,744)
Net proceeds from sale of preferred stock 25,000 --
Net proceeds from sale of common stock 662 424
--------- ---------
Net cash (used for) provided by financing activities (2,387) 31,645
--------- ---------
Net increase in cash and cash equivalents 3,243 1,524
Cash and cash equivalents, beginning of period 3,328 3,497
--------- ---------
Cash and cash equivalents, end of period $ 6,571 $ 5,021
========= =========
Supplemental disclosure:
Interest paid $ 42,962 $ 45,366
Accretion of discount on senior notes $ 27,430 $ 24,611
Accretion of redeemable preferred stock $ -- $ 32
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 6
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):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Goodwill $281,847 $312,017
Purchased FCC licenses 265,873 293,922
Purchased subscriber lists 64,341 87,281
Deferred financing costs 21,885 8,752
Investment in Benbow PCS Ventures, Inc. ("Benbow") 12,362 6,189
Investment in CONXUS Communications, Inc. 6,500 6,500
Non-competition agreements 2,026 2,783
Other 7,828 10,758
-------- --------
$662,662 $728,202
======== ========
</TABLE>
(c) Tower Site Sale -- In April 1998, Arch announced an agreement to sell
certain of its tower site assets (the "Tower Site Sale") for approximately $38
million in cash (subject to adjustment), of which $1.3 million was paid to
entities affiliated with Benbow, in payment for certain assets owned by such
entities and included in the Tower Site Sale. In the Tower Site Sale, Arch is
selling communications towers, real estate, site management contracts and/or
leasehold interests involving 133 sites in 22 states and will rent 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
(estimated to be $36 million) to repay indebtedness under the Amended Credit
Facility (see Note (e)). Arch held the initial closing of the Tower Site Sale on
June 26, 1998 with gross proceeds to Arch of approximately $12 million
(excluding the $1.3 million which was paid to entities affiliated with Benbow)
and held a second closing on September 29, 1998 with gross proceeds to Arch of
approximately $20.4 million. The final closing for the balance of the
transaction is expected to be completed in the fourth quarter of 1998, although
no assurance can be given that the final closing will be held as expected.
Arch entered into options to repurchase each site and until this continuing
involvement ends the gain is deferred and included in other long-term
liabilities. At September 30, 1998, Arch had sold 117 of the 133 sites which
resulted in a total gain of approximately $23.5 million and through September
30, 1998 approximately $1.5 million of this gain had been recognized in the
statement of operations and is included operating income.
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(d) Senior Notes -- On June 29, 1998, Arch Communications, Inc. ("ACI"), a
wholly-owned subsidiary of Arch, issued and sold $130.0 million principal amount
of 12 3/4% Senior Notes due 2007 (the "Notes") for net proceeds of $122.6
million (after deducting the discount to the Initial Purchasers and offering
expenses paid by ACI) in a private placement (the "Note Offering") under Rule
144A promulgated under the Securities Act of 1933, as amended. The Notes were
sold at an initial price to investors of 98.049%. The Notes mature on July 1,
2007 and bear interest at a rate of 12 3/4% per annum, payable semi-annually in
arrears on January 1 and July 1 of each year, commencing January 1, 1999.
The indenture governing the Notes (the "Indenture") contains certain
covenants that, among other things, limit the ability of ACI to incur additional
indebtedness, issue preferred stock, pay dividends or make other distributions,
repurchase Capital Stock (as defined in the Indenture), repay subordinated
indebtedness or make other Restricted Payments (as defined in the Indenture),
create certain liens, enter into certain transactions with affiliates, sell
assets, issue or sell Capital Stock of ACI's Restricted Subsidiaries (as defined
in the Indenture) or enter into certain mergers and consolidations.
(e) Amended Credit Facility -- On June 29, 1998, Arch Communications
Enterprises, Inc. ("ACE"), a wholly-owned subsidiary of Arch, was merged (the
"Merger") into a subsidiary of USA Mobile Communications, Inc. II ("USAM"), a
wholly-owned subsidiary of Arch, named Arch Paging, Inc. ("API"). In connection
with the Merger, USAM changed its name to Arch Communications, Inc.
Contemporaneously with the Merger, ACE's existing credit facility was amended
and restated to establish senior secured revolving credit and term loan
facilities with API, as borrower, in the aggregate amount of $400.0 million
(collectively, the "Amended Credit Facility") consisting of (i) a $175.0 million
reducing revolving credit facility (the "Tranche A Facility"), (ii) a $100.0
million 364-day revolving credit facility under which the principal amount
outstanding on the 364th day following the closing will convert to a term loan
(the "Tranche B Facility") and (iii) a $125.0 million term loan which was
available in a single drawing on the closing date (the "Tranche C Facility").
The Tranche A Facility is subject to scheduled quarterly reductions
commencing on September 30, 2000 and will mature on June 30, 2005. The term loan
portion of the Tranche B Facility will be amortized in quarterly installments
commencing September 30, 2000, with an ultimate maturity date of June 30, 2005.
The Tranche C Facility will be amortized in annual installments commencing
December 31, 1999, with an ultimate maturity date of June 30, 2006.
API's obligations under the Amended Credit Facility are secured by its
pledge of the capital stock of the former ACE operating subsidiaries. The
Amended Credit Facility is guaranteed by Arch, ACI and the former ACE operating
subsidiaries. Arch's guarantee is secured by a pledge of Arch's stock and notes
in ACI, and the guarantees of the former ACE operating subsidiaries are secured
by a security interest in those assets of such subsidiaries which were pledged
under ACE's previous credit facility.
Borrowings under the Amended Credit Facility bear interest based on a
reference rate equal to either the Agent Bank's Alternate Base Rate or LIBOR, in
each case plus a margin based on ACI's or API's ratio of total debt to
annualized earnings before interest, taxes, depreciation and amortization
("EBITDA").
The Amended Credit Facility requires payment of fees on the daily average
amount available to be borrowed under the Tranche A Facility and the Tranche B
Facility, which fees vary depending on ACI's or API's ratio of total debt to
annualized EBITDA.
The Amended Credit Facility contains restrictions that limit, among other
things: additional indebtedness and encumbrances on assets; cash dividends and
other distributions; mergers and sales of assets; the repurchase or redemption
of capital stock; investments; acquisitions that exceed certain dollar
limitations without the lenders' prior approval; and prepayment of indebtedness
other than indebtedness under the Amended Credit Facility. In addition, the
Amended Credit Facility requires API and its subsidiaries to meet certain
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<PAGE> 8
financial covenants, including covenants with respect to ratios of EBITDA to
fixed charges, EBITDA to debt service, EBITDA to interest service and total
indebtedness to EBITDA.
(f) Series C Convertible Preferred Stock -- On June 29, 1998, two
partnerships managed by Sandler Capital Management Company, Inc., an investment
management firm ("Sandler"), together with certain other private investors, made
an equity investment in Arch of $25.0 million in the form of 250,000 shares of
Series C Convertible Preferred Stock of Arch ("Series C Preferred Stock"). Arch
used $24.0 million of the net proceeds to repay indebtedness under ACE's
existing credit facility as part of the establishment of the Amended Credit
Facility. The Series C Preferred Stock: (i) is convertible into Common Stock of
Arch at an initial conversion price of $5.50 per share, subject to certain
adjustments; (ii) bears dividends at an annual rate of 8.0%, (A) payable
quarterly in cash or, at Arch's option, through the issuance of shares of Arch's
Common Stock valued at 95% of the then prevailing market price or (B) if not
paid quarterly, accumulating and payable upon redemption or conversion of the
Series C Preferred Stock or the liquidation of Arch; (iii) permits the holders
after seven years to require Arch, at Arch's option, to redeem the Series C
Preferred Stock for cash or convert such shares into Arch's Common Stock valued
at 95% of the then prevailing market price of Arch's Common Stock; (iv) is
subject to redemption for cash or conversion into Arch's Common Stock at Arch's
option in certain circumstances; (v) in the event of a "Change of Control" as
defined in the Indenture governing Arch's 107/8% Senior Discount Notes due 2008
(the "Arch Discount Notes Indenture"), requires Arch, at its option, to redeem
the Series C Preferred Stock for cash or convert such shares into Arch's Common
Stock valued at 95% of the then prevailing market price of Arch's Common Stock,
with such cash redemption or conversion being at a price equal to 105% of the
sum of the original purchase price plus accumulated dividends; (vi) limits
certain mergers or asset sales by Arch; (vii) so long as at least 50% of the
Series C Preferred Stock remains outstanding, limits the incurrence of
indebtedness and "restricted payments" in the same manner as contained in the
Arch Discount Notes Indenture; and (viii) has certain voting and preemptive
rights. Upon an event of redemption or conversion, Arch, at this time, intends
to convert such Series C Preferred Stock into Arch Common Stock.
(g) Divisional Reorganization - In June 1998, Arch's Board of Directors
approved a reorganization of its operations (the "Divisional Reorganization").
As part of the Divisional Reorganization, which is being implemented over a
period of 18 to 24 months, Arch has consolidated its former Midwest, Western and
Northern divisions into four existing operating divisions and is in the process
of consolidating certain regional administrative support functions, such as
customer service, collections, inventory and billing, to reduce redundancy and
to take advantage of various operating efficiencies. In connection with the
Divisional Reorganization, Arch (i) anticipates a net reduction of approximately
10% of its workforce, (ii) plans to close certain office locations and redeploy
other assets and (iii) has recorded a restructuring charge of $16.1 million, or
$0.77 per share (basic and diluted) in the second quarter of 1998. The
restructuring charge consisted of approximately (i) $9.7 million for employee
severance, (ii) $3.5 million for lease obligations and terminations (iii) $1.4
million for the writedown of fixed assets and (iv) $1.5 million of other costs.
The write-down of fixed assets primarily relates to a non-cash charge which
will reduce the carrying amount of certain leasehold improvements that the
Company will not continue to utilize following the Divisional Reorganization, to
their estimated net realizable value as of the date such assets are projected to
be disposed of or abandoned by the Company. The net realizable value of these
assets was determined based on management's estimates and due to the nature of
the assets should be minimal. Such estimates are subject to change.
The provision for lease obligations and terminations relates primarily to
future lease commitments on local, regional and divisional office facilities
that will be closed as part of the Divisional Reorganization. The charge
represents future lease obligations on such leases past the dates the offices
will be closed by the Company, or for certain leases, the cost of terminating
the leases prior to their scheduled expiration. Cash payments on the leases and
lease terminations will occur over the remaining lease terms, the majority of
which expire prior to 2001.
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Through the elimination of certain local and regional administrative
operations and the consolidation of certain support functions, the Company will
eliminate approximately 280 net positions. As a result of eliminating these
positions, the Company will involuntarily terminate an estimated 900 personnel.
The majority of the positions to be eliminated will be related to the customer
service, collections, inventory and billing functions in local and regional
offices which will be closed as a result of the Divisional Reorganization. As of
September 30, 1998, 114 employees had been terminated due to the Divisional
Reorganization. The majority of the severance and benefits costs to be paid by
the Company will be paid during the remainder of 1998 and in 1999.
The Company's restructuring activity as of September 30, 1998 is as follows
(in thousands):
<TABLE>
<CAPTION>
Reserve
Initially Utilization of Reserve Remaining
Established Cash Non-cash Reserve
----------- ---- -------- -------
<S> <C> <C> <C> <C>
Severance costs............. $ 9,700 $ 1,105 $ -- $ 8,595
Lease obligation costs...... 3,500 34 -- 3,466
Write-down of fixed assets.. 1,400 -- -- 1,400
Other costs................. 1,500 151 -- 1,349
------- ------- ------- --------
Total................... $16,100 $ 1,290 $ -- $ 14,810
======= ======= ======= ========
</TABLE>
(h) Recent and Pending Accounting Pronouncements - In June 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 130 "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company adopted SFAS No. 130 in 1998.
The adoption of this standard did not have an effect on its reporting of income.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Arch intends to adopt SFAS No. 131 for its year ending December 31,
1998. Arch has not completed its review of SFAS No. 131 but adoption of this
standard is not expected to have a significant impact on Arch's financial
reporting.
In March 1998, the Accounting Standards Executive Committee of the
Financial Accounting Standards Board issued Statement of Position 98-1 ("SOP
98-1") "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 establishes criteria for capitalizing costs of computer
software developed or obtained for internal use. The Company adopted SOP 98-1 in
1998. The adoption of SOP 98-1 has not had a material effect on Arch's financial
position or results of operations.
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. Arch 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
Arch's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No.133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings. Arch intends to
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adopt SFAS No. 133 effective January 1, 2000. Arch has not yet quantified the
impact of adopting SFAS No. 133 on its financial statements, however, adopting
SFAS No. 133 could increase volatility in earnings and other comprehensive
income.
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".
TOWER SITE SALE
In April 1998, Arch announced an agreement to sell certain of its tower
site assets (the "Tower Site Sale") for approximately $38 million in cash
(subject to adjustment), of which $1.3 million was paid to entities affiliated
with Benbow, in payment for certain assets owned by such entities and included
in the Tower Site Sale. In the Tower Site Sale, Arch is selling communications
towers, real estate, site management contracts and/or leasehold interests
involving 133 sites in 22 states and will rent 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 (estimated to be $36
million) to repay indebtedness under the Amended Credit Facility (see Note (e)).
Arch held the initial closing of the Tower Site Sale on June 26, 1998 with gross
proceeds to Arch of approximately $12 million (excluding the $1.3 million which
was paid to entities affiliated with Benbow) and held a second closing on
September 29, 1998 with gross proceeds to Arch of approximately $20.4 million.
The final closing for the balance of the transaction is expected to be completed
in the fourth quarter of 1998, although no assurance can be given that the final
closing will be held as expected.
DIVISIONAL REORGANIZATION
In June 1998, Arch's Board of Directors approved a reorganization of its
operations (the "Divisional Reorganization"). As part of the Divisional
Reorganization, which is being implemented over a period of 18 to 24 months,
Arch has consolidated its former Midwest, Western and Northern divisions into
four existing operating divisions and is in the process of consolidating certain
regional administrative support functions, such as customer service,
collections, inventory and billing, to reduce redundancy and to take advantage
of various operating efficiencies.
Arch estimates that the Divisional Reorganization, once fully implemented,
will result in annual cost savings of approximately $15 million. These cost
savings will consist primarily of a reduction in compensation expense of
approximately $11.5 million, a reduction in rental expense of facilities and
general and administrative costs of approximately $3.5 million. Arch expects to
reinvest a portion of these cost savings to expand its sales activities, however
to date the extent of this reinvestment and therefore the cost has not been
determined.
In connection with the Divisional Reorganization, Arch (i) anticipates a
net reduction of approximately 10% of its workforce, (ii) plans to close certain
office locations and redeploy other assets and (iii) has recorded a
restructuring charge of $16.1 million during the second quarter of 1998. The
restructuring charge consisted of approximately (i) $9.7 million for employee
severance, (ii) $3.5 million for lease obligations and terminations (iii) $1.4
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million for the writedown of fixed assets and (iv) $1.5 million of other costs.
The severance costs and lease obligations will require cash outlays throughout
the 18 to 24 month restructuring period. Management anticipates the cash
requirements for these items to be relatively consistent from quarter to quarter
throughout the Divisional Reorganization period. These cash outlays will be
funded from operations or the Company's Amended Credit Facility. There can be no
assurance that the desired cost savings will be achieved or that the anticipated
reorganization of Arch's business will be accomplished smoothly, expeditiously
or successfully. See Note (g) to the Consolidated Condensed Financial
Statements.
RESULTS OF OPERATIONS
Total revenues increased to $104.1 million (a 2.7% increase) and $309.6
million (a 4.7% increase) in the three and nine months ended September 30, 1998,
respectively, from $101.3 million and $295.6 million in the three and nine
months ended September 30, 1997, respectively. Net revenues (total revenues less
cost of products sold) increased to $96.9 million (a 3.5% increase) and $287.8
million (a 5.2% increase) in the three and nine months ended September 30, 1998,
respectively, from $93.6 million and $273.6 million in the three and nine months
ended September 30, 1997, respectively. Service, rental and maintenance
revenues, which consist primarily of recurring revenues associated with the sale
or lease of pagers, increased to $93.5 million (a 4.4% increase) and $277.8
million (a 6.2% increase) in the three and nine months ended September 30, 1998,
respectively, from $89.6 million and $261.6 million in the three and nine months
ended September 30, 1997, respectively. These increases in revenues were due
primarily to the increase through internal growth in the number of pagers in
service from 3.8 million at September 30, 1997 to 4.2 million at September 30,
1998. Maintenance revenues represented less than 10% of total service, rental
and maintenance revenues in the three and nine months ended September 30, 1998
and 1997. Arch does not differentiate between service and rental revenues.
Product sales, less cost of products sold, decreased to $3.3 million (a 16.4%
decrease) and $9.9 million (a 17.0% decrease) in the three and nine months ended
September 30, 1998, respectively, from $4.0 million and $12.0 million in the
three and nine months ended September 30, 1997, respectively, 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, were $20.4 million (21.1% of net
revenues) and $60.8 million (21.1% of net revenues) in the three and nine months
ended September 30, 1998, respectively, compared 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. The increase in the nine-month period
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
subscriber base. Annualized service, rental and maintenance expenses per
subscriber were $20 in both the three and nine months ended September 30, 1998,
respectively, compared to $23 and $22, respectively, in the corresponding 1997
periods.
Selling expenses were $12.7 million (13.1% of net revenues) and $36.9
million (12.8% of net revenues) in the three and nine months ended September 30,
1998, respectively, compared to $12.4 million (13.2% of net revenues) and $39.0
million (14.3% of net revenues) in the three and nine months ended September 30,
1997, respectively. The increase in the three-month period was primarily due to
the addition of salespeople to support the Company's direct channel of
distribution, as well as increased advertising. The decrease in the nine-month
period was due primarily to a decrease in the number of net new pagers in
service and marketing costs incurred in 1997 to promote the Company's new Arch
Paging brand identity. The number of net new pagers in service resulting from
internal growth decreased by 30% and 34% in the three and nine months ended
September 30, 1998 compared to the three and nine months ended September 30,
1997, respectively, primarily due to Arch's shift in operating focus from unit
growth to capital efficiency and leverage reduction.
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General and administrative expenses increased to $28.0 million (28.9% of
net revenues) and $84.5 million (29.4% of net revenues) in the three and nine
months ended September 30, 1998, respectively, from $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. The increases were due primarily to
administrative and facility costs associated with supporting more pagers in
service.
Depreciation and amortization expenses decreased to $56.6 million and
$165.0 million in the three and nine months ended September 30, 1998,
respectively, from $59.8 million and $179.9 million in the three and nine months
ended September 30, 1997, respectively. These expenses principally reflect
Arch's acquisitions of paging businesses in prior periods, accounted for as
purchases, and investment in pagers and other system expansion equipment to
support growth.
Operating losses decreased to $20.8 million and $75.6 million in the three
and nine months ended September 30, 1998, respectively, from $27.2 million and
$83.5 million in the three and nine months ended September 30, 1997,
respectively, as a result of the factors outlined above.
Net interest expense increased to $27.2 million and $78.3 million in the
three and nine months ended September 30, 1998, respectively, from $24.7 million
and $72.4 million in the three and nine months ended September 30, 1997,
respectively. The increases were principally attributable to an increase in
Arch's outstanding debt. Interest expense for the nine months ended September
30, 1998 and 1997 include approximately $27.4 million and $24.6 million,
respectively, of non-cash interest accretion on the 107/8% 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.
These benefits represent 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, in the
foreseeable future, its deferred tax asset and will continue to increase its
valuation reserve accordingly.
In June 1998, Arch recognized an extraordinary charge of $1.7 million
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under prior credit facilities.
Net loss increased to $48.0 million and $157.8 million in the three and
nine months ended September 30, 1998, respectively, from $47.6 million and
$142.9 million in the three and nine months ended September 30, 1997,
respectively, as a result of the factors outlined above.
Earnings before interest, taxes, depreciation and amortization, excluding
restructuring charge, equity in loss of affiliate, income tax benefit and
extraordinary items ("EBITDA") increased 10.0% to $35.8 million (37.0% of net
revenues) and 9.4% to $105.5 million (36.7% of net revenues) in the three and
nine months ended September 30, 1998, respectively, from $32.5 million (34.8% of
net revenues) and $96.4 million (35.3% of net revenues) in the three and nine
months ended September 30, 1997, respectively, as a result of the factors
outlined above. EBITDA is a commonly used 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 certain 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 restructuring charges, income tax benefit or 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
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system equipment, construction and expansion of paging systems and possible
acquisitions. EBITDA, as determined by Arch, may not necessarily be comparable
to similarly titled data of other paging companies.
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 finance acquisitions and to service debt.
Capital Expenditures And Commitments
Arch's capital expenditures decreased from $74.7 million in the nine months
ended September 30, 1997 to $67.9 million (exclusive of $17.8 million of
deferred financing costs incurred in connection with the 12 3/4% Senior Notes,
the API Credit Facility and its proposed acquisition of MobileMedia
Communications, Inc.) in the nine months ended September 30, 1998. 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 currently anticipates capital expenditures of approximately $85
million to $90 million (exclusive of deferred financing costs) for the year
ending December 31, 1998, primarily for the purchase of pagers, paging system
equipment and transmission equipment, as well as expenditures for information
systems and advances to 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 upgrade hardware and to internally develop software for a
centralized billing and management information system which is expected to offer
the back office capability to support significant future growth. Arch believes
that it will have sufficient cash available from operations and its Amended
Credit Facility to fund these expenditures.
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 its FCC
license-related debt obligations incurred by Benbow in connection with its
acquisition of its N-PCS licenses and to finance construction of an N-PCS
system. Arch estimates that the total cost to Benbow of servicing its debt
obligations and constructing an N-PCS system (including the effect of Benbow's
acquisition of Page Call Inc.) will be approximately $100 million over the next
five years. Arch currently anticipates that approximately $40 million
(approximately $10 million in each of the next four 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 $91.4 million and
$44.6 million in the nine months ended September 30, 1998 and 1997,
respectively.
Arch believes that its capital needs for the foreseeable future will be
funded with borrowings under its Amended Credit Facility , net cash provided by
operations and, depending on the Company's needs and market conditions, possible
sales of equity or debt securities.
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Amended Credit Facility
On June 29, 1998, Arch Communications Enterprises, Inc. ("ACE"), a
wholly-owned subsidiary of Arch, was merged (the "Merger") into a subsidiary of
USAM named Arch Paging, Inc. ("API"). In connection with the Merger, USAM
changed its name to Arch Communications, Inc. ("ACI"). Contemporaneously with
the Merger, ACE's existing credit facility was amended and restated to establish
senior secured revolving credit and term loan facilities with API, as borrower,
in the aggregate amount of $400.0 million consisting of (i) a $175.0 million
reducing revolving credit facility, (ii) a $100.0 million 364-day revolving
credit facility under which the principal amount outstanding on the 364th day
following the closing will convert to a term loan and (iii) a $125.0 million
term loan which was available in a single drawing on the closing date. See Note
(e) to the Consolidated Condensed Financial Statements.
Issuance And Sale Of Notes
On June 29, 1998, ACI issued and sold $130.0 million principal amount of 12
3/4% Senior Notes due 2007 (the "Notes") for net proceeds of $122.6 million
(after deducting the discount to the Initial Purchasers and offering expenses
paid by ACI) in a private placement (the "Note Offering") under Rule 144A under
the Securities Act of 1933. The Notes were sold at an initial price to investors
of 98.049%. The Notes mature on July 1, 2007 and bear interest at a rate of 12
3/4% per annum, payable semi-annually in arrears on January 1 and July 1 of each
year, commencing January 1, 1999. See Note (d) to the Consolidated Condensed
Financial Statements.
Equity Investment
On June 29, 1998, two partnerships managed by Sandler Capital Management
Company, Inc., an investment management firm ("Sandler"), together with certain
other private investors, made an equity investment in Arch of $25.0 million in
the form of Series C Convertible Preferred Stock of Arch ("Series C Preferred
Stock"). Arch used $24.0 million of the net proceeds to repay indebtedness under
ACE's existing credit facility as part of the establishment of the Amended
Credit Facility. The Series C Preferred Stock: (i) is convertible into Common
Stock of Arch at an initial conversion price of $5.50 per share, subject to
certain adjustments; (ii) bears dividends at an annual rate of 8.0%, (A) payable
quarterly in cash or, at Arch's option, through the issuance of shares of Arch's
Common Stock valued at 95% of the then prevailing market price or (B) if not
paid quarterly, accumulating and payable upon redemption or conversion of the
Series C Preferred Stock or liquidation of Arch; (iii) permits the holders after
seven years to require Arch, at Arch's option, to redeem the Series C Preferred
Stock for cash or convert such shares into Arch's Common Stock valued at 95% of
the then prevailing market price of Arch's Common Stock; (iv) is subject to
redemption for cash or conversion into Arch's Common Stock at Arch's option in
certain circumstances; (v) in the event of a "Change of Control" as defined in
the Indenture governing Arch's 107/8% Senior Discount Notes due 2008 (the "Arch
Discount Notes Indenture"), requires Arch, at its option, to redeem the Series C
Preferred Stock for cash or convert such shares into Arch's Common Stock valued
at 95% of the then prevailing market price of Arch's Common Stock, with such
cash redemption or conversion being at a price equal to 105% of the sum of the
original purchase price plus accumulated dividends; (vi) limits certain mergers
or asset sales by Arch; (vii) so long as at least 50% of the Series C Preferred
Stock remains outstanding, limits the incurrence of indebtedness and "restricted
payments" in the same manner as contained in the Arch Discount Notes Indenture;
and (viii) has certain voting and preemptive rights. Upon an event of redemption
or conversion, Arch, at this time, intends to convert the Series C Preferred
Stock into Arch Common Stock.
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FACTORS AFFECTING FUTURE OPERATING RESULTS
The following important factors, among others, could cause Arch's actual
operating results to differ materially from those indicated or suggested by
forward-looking statements made in this Form 10-Q or presented elsewhere by
Arch's management from time to time.
Indebtedness And High Degree Of Leverage
Arch is highly leveraged. At September 30, 1998, Arch had outstanding
$992.8 million of total debt. The Company's high degree of leverage may have
adverse 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 available on acceptable terms, if at all; (ii) a
substantial portion of the cash flow of the Company and its subsidiaries will be
required to pay interest expense, which will reduce the funds which would
otherwise be available for operations and future business opportunities; (iii)
the Amended Credit Facility, the Indenture and the indentures under which the
ACI Notes are outstanding 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; (v) the Company's high degree of leverage will make
it more vulnerable to a downturn in its business or the economy generally; and
(vi) the Company's high degree of leverage may impair its ability to participate
in future consolidation of the paging industry. Arch has implemented various
initiatives to reduce capital costs while sustaining acceptable levels of unit
and revenue growth, 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. If Arch is not able to achieve continued growth in EBITDA,
it may be precluded from incurring additional indebtedness due to cash flow
coverage requirements under existing debt instruments, including the Senior
Discount Notes.
Future Capital Needs
The Company's business strategy requires the availability of substantial
funds to finance the continued development and further 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, the type of paging devices and services demanded by customers, service
revenues, technological developments, marketing and sales expenses, competitive
conditions, the nature and timing of the Company's N-PCS strategy and
acquisition strategies and opportunities. No assurance can be given that
additional equity or debt financing will be available to the Company when needed
on acceptable terms, if at all. The unavailability of sufficient financing when
needed would have a material adverse effect on the business, financial
condition, results of operations or prospects of 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 substantial
depreciation and amortization expense, primarily related to intangible assets
and pager depreciation, interest expense 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 business, financial condition, results of
operations or prospects of the Company. The Company expects to continue to
report net losses for the foreseeable future.
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Possible Acquisition Transactions
Arch believes that the paging industry will undergo further consolidation
and Arch expects to participate in such continued industry consolidation. The
Company has evaluated and expects to continue to evaluate possible acquisition
transactions on an ongoing basis and at any given time may be engaged in
discussions with respect to possible acquisitions or other business
combinations. 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 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.
Arch has agreed to acquire MobileMedia Communications, Inc. (together with
its subsidiaries "MobileMedia"), one of the largest paging companies in the
United States ( the "MobileMedia Transaction"). As part of the MobileMedia
Transaction, MobileMedia would become a wholly owned subsidiary of API and Arch
would issue certain stock, warrants and stock purchase rights, pay $479.0
million in cash to certain creditors of MobileMedia, pay approximately $60.0
million of administrative, transactional and related costs, raise $217.0 million
in cash through a rights offering of its stock, and cause ACI and API to borrow
an estimated total of $322.0 million. Following consummation of the MobileMedia
Transaction, Arch would be the second largest paging operator in the United
States as measured by pagers in service, net revenues and EBITDA. Arch believes
that the MobileMedia Transaction, if effected, would result in a reduction in
the overall financial leverage of Arch, as well as certain anticipated operating
synergies and cost savings.
MobileMedia, together with its parent company MobileMedia Corporation, are
operating as debtors-in-possession in connection with their pending insolvency
proceedings under Chapter 11 of the U.S. Bankruptcy Code. Consummation of the
MobileMedia Transaction is subject to Bankruptcy Court approval, approval by
Arch's stockholders and MobileMedia's creditors, approval by the Federal
Communications Commission ("FCC"), the availability of sufficient financing and
other conditions. THERE CAN BE NO ASSURANCE THAT ARCH WILL ACQUIRE MOBILEMEDIA
OR THAT, IF ARCH ACQUIRES MOBILEMEDIA, ARCH WOULD REALIZE ITS ANTICIPATED
IMPROVEMENTS IN FINANCIAL LEVERAGE, OPERATING SYNERGIES OR COST SAVINGS. The
acquisition of MobileMedia by Arch will increase ACI's and API's indebtedness
and will involve significant operational and financial risks, including but not
limited to the risks associated with integrating MobileMedia's operations with
the current operations of Arch and its subsidiaries, and these risks may be
exacerbated by the fact that MobileMedia is currently operating under the
jurisdiction of the Bankruptcy court.
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, or maintain life insurance on,
any of its current executive officers, although certain executive officers have
entered into non-competition agreements and all executive officers have entered
into executive 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 a material adverse effect on the
business, financial condition, results of operations or prospects of the
Company.
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. Monthly fees for basic paging services have, in general,
declined in recent years, due in part to competitive conditions, and the Company
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may face significant price-based competition in the future which could have a
material adverse effect on the Company. Certain 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, there could be a material
adverse effect on the business, financial condition, results of operations or
prospects of the Company.
Competitors are currently using and developing a variety of two-way paging
technologies. The Company does not presently provide such two-way services,
other than as a reseller. Although such services generally are higher priced
than traditional one-way paging services, technological improvements could
result in increased capacity and efficiency for such two-way paging technologies
and, accordingly, could result in increased competition for the Company. 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. Other forms of wireless two-way
communications technology, including cellular and broadband personal
communications services ("PCS"), and specialized mobile radio services, also
compete with the paging services that the Company provides. While such services
are primarily focused on two-way voice communications, service providers are, in
many cases, electing to provide paging services as an adjunct to their primary
services. Technological change also may affect the value of the pagers owned by
Arch and leased to its subscribers. If Arch's subscribers requested more
technologically advanced pagers, including but not limited to two-way 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. Such additional investment or capital expenditures could have a
material adverse effect on the business, financial condition, results of
operations or prospects of the Company. 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 EBITDA. An increase in the Company's subscriber
cancellation rate could have a material adverse effect on the business,
financial condition, results of operations or prospects of the Company.
Dependence On Third Parties
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's purchase agreement with Motorola expires on June 19, 1999, with a
provision for automatic renewal for successive one year terms unless either
party gives notice of cancellation by May 20 of any year. There can be no
assurance that the Company's agreement with Motorola will be automatically
renewed or, if renewed, that such agreement will be on terms and conditions as
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favorable to the Company as those under the current agreement. 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
materially adversely affected if it were unable to obtain these items from
current supply sources or on terms comparable to existing terms. The Company
also relies on third parties to provide satellite transmission for some aspects
of its paging services. To the extent there are satellite outages or if
satellite coverage is otherwise impaired, the Company may experience a loss of
service until such time as satellite coverage is restored, which could have an
adverse material effect on the Company.
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 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 Arch and its subsidiaries hold
FCC licenses, in general, no more than 25% of Arch's stock can be owned or voted
by non-resident aliens or their representatives, a foreign government or its
representative or a foreign corporation. A 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. Arch's Restated Certificate of Incorporation permits the redemption
of shares of Arch's capital stock from foreign stockholders where necessary to
protect FCC licenses held by Arch or its subsidiaries, but such redemption would
be subject to the availability of capital to Arch and any restrictions contained
in applicable debt instruments and under Delaware law (which currently would not
permit any such redemptions). The failure to redeem such shares promptly could
jeopardize the FCC licenses held by Arch or its subsidiaries. From time to time,
legislation and regulations which could potentially adversely affect the Company
are proposed or enacted by federal or state legislators and regulators. For
example, the FCC and certain states require paging companies to contribute a
portion of specified revenues to support broad telecommunications policies, such
as the universal availability of telephone service. Additional states and
localities may in the future seek to impose similar requirements and the FCC
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 continue 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 business, financial condition, results of operations or prospects of the
Company.
Impact Of The Year 2000 Issue
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. As a result, in less than two
years, the computerized systems (including both information and non-information
technology systems) and applications used by Arch will need to be reviewed,
evaluated and, if and where necessary, modified or replaced to ensure that all
financial, information and operating systems are Year 2000 compliant.
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Arch has created a cross-functional project group (the "Y2K Project Group")
to work on the Year 2000 problem. The Y2K Project Group is finishing its
analysis of external and internal areas likely to be affected by the Year 2000
problem. It has classified the identified areas of concern into either a mission
critical or non-mission critical status. For the external areas, Arch has
distributed vendor surveys to its primary and secondary vendors. The surveys
requested information about hardware and/or software supplied by information
technology vendors as well as non-information technology system vendors that
might use embedded technologies in their systems or products. Information was
requested regarding the vendor's Year 2000 compliance planning, timing, status,
testing and contingency planning. As part of its evaluation of Year 2000
vulnerability related to its pager and paging equipment vendors, Arch has
discussed with them their efforts to identify potential issues associated with
their equipment and/or software and has concluded that, to the extent any
vulnerability exists, it has been addressed. Internally, Arch has initiated an
inventory audit of hardware and software testing for both its corporate and
divisional operations. These areas of operation include: information systems,
finance, operations, inventory, billing, pager activation and purchasing.
Additional testing is scheduled to conclude in the first quarter of 1999.
The Company expects that it will incur costs to replace existing hardware
software and paging equipment, which will be capitalized and amortized in
accordance with the Company's existing accounting policies, while maintenance or
modification costs will be expensed as incurred. Arch has upgraded hardware to
enable compliance testing to be performed on dedicated test equipment in an
isolated production-like environment. Based on the Company's costs incurred to
date, as well as estimated costs to be incurred over the next fourteen months,
the Company does not expect that resolution of the Year 2000 problem will have a
material adverse effect on its results of operations and financial condition.
Costs of the Year 2000 project are based on current estimates and actual results
may vary significantly from such estimates once detailed plans are developed and
implemented.
While it is Arch's stated goal to be compliant, on an internal basis, by
September 30, 1999, Arch may face the possibility that one or more of its
mission critical vendors, such as its utilities, telephone carriers or satellite
carriers, may not be Year 2000 compliant. Because of the unique nature of such
vendors, alternative providers of these services may not be available.
Additionally, although Arch has initiated its test plan for its business-related
hardware and software applications, there can be no assurance that such testing
will detect all applications that may be affected by the Year 2000 problem.
Lastly, Arch does not manufacture any of the pagers or paging-related equipment
used by its customers or for its own paging operations. Although Arch has
initiated testing of such equipment it has relied on to a large extent the
representations of its vendors with respect to their readiness. Arch can offer
no assurances as to the accuracy of such vendor's representations.
Arch has initiated the process of designing and implementing contingency
plans relating to the Year 2000 problem. To this end, each department will
identify the likely risks and determine commercially reasonable solutions. The
Y2K Project Group will collect and review the determinations on both a
department-by-department and company-wide basis. Arch intends to complete its
Year 2000 contingency planning during calendar year 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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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
Stockholder Proposals for 1999 Annual Meeting
As set forth in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders, stockholder proposals submitted pursuant to
Rule 14a-8 under the Exchange Act for inclusion in the Company's proxy
materials for its 1999 Annual Meeting of Stockholders must be received
by the Secretary of the Company at the principal offices of the
Company no later than December 19, 1998.
In addition, the Company's By-laws require that the Company be given
advance notice of stockholder nominations for election to the
Company's Board of Directors and of other matters which stockholders
wish to present for action at an annual meeting of stockholders (other
than matters included in the Company's proxy statement in accordance
with Rule 14a-8). The required notice must be made in writing and
delivered or mailed to the Secretary of the Company at the principal
offices of the Company, and received not less than 80 days prior to
the 1999 Annual Meeting; provided, however, that if less than 90 days'
notice or prior public disclosure of the date of the meeting is given
or made to stockholders, such nomination shall have been mailed or
delivered to the Secretary not later than the close of business on the
10th day following the date on which the notice of the meeting was
mailed or such public disclosure was made, whichever occurs first. The
1999 Annual Meeting is currently expected to be held on May 18, 1999.
Assuming that this date does not change, in order to comply with the
time periods set forth in the Company's By-Laws, appropriate notice
would need to be provided no later than February 27, 1999.
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) No reports on Form 8-K were filed for the quarter for which this
report is filed.
20
<PAGE> 21
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, 1998, to be signed on its behalf by the undersigned thereunto duly
authorized.
ARCH COMMUNICATIONS GROUP, INC.
Dated: November 12, 1998 By: /S/ J. ROY POTTLE
-----------------
J. Roy Pottle
Executive Vice President and
Chief Financial Officer
21
<PAGE> 22
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> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 6,571
<SECURITIES> 0
<RECEIVABLES> 34,496
<ALLOWANCES> 0
<INVENTORY> 10,578
<CURRENT-ASSETS> 55,815
<PP&E> 421,305
<DEPRECIATION> 197,416
<TOTAL-ASSETS> 942,366
<CURRENT-LIABILITIES> 86,360
<BONDS> 992,790
0
3
<COMMON> 211
<OTHER-SE> (165,637)
<TOTAL-LIABILITY-AND-EQUITY> 942,366
<SALES> 31,811
<TOTAL-REVENUES> 309,637
<CGS> 21,863
<TOTAL-COSTS> 21,863
<OTHER-EXPENSES> 60,812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,334
<INCOME-PRETAX> (156,110)
<INCOME-TAX> 0
<INCOME-CONTINUING> (156,110)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,720)
<CHANGES> 0
<NET-INCOME> (157,830)
<EPS-PRIMARY> (7.55)
<EPS-DILUTED> (7.55)
</TABLE>