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 June 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 August 11, 1998
<PAGE>
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 June 30, 1998 and
December 31, 1997 3
Consolidated Condensed Statements of Operations for the
Three and Six Months Ended June 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 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 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
JUNE 30, DECEMBER 31,
1998 1997
---- ----
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 4,913 $ 3,328
Accounts receivable, net 32,483 30,147
Inventories 13,278 12,633
Prepaid expenses and other 3,582 4,917
----------- -----------
Total current assets 54,256 51,025
----------- -----------
Property and equipment, at cost 409,340 388,035
Less accumulated depreciation and amortization (179,478) (146,542)
----------- -----------
Property and equipment, net 229,862 241,493
----------- -----------
Intangible and other assets, net 687,431 728,202
----------- -----------
$ 971,549 $ 1,020,720
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ -- $ 24,513
Accounts payable 22,951 22,486
Accrued restructuring 15,846 --
Accrued interest 7,453 11,249
Accrued expenses and other liabilities 29,131 26,831
----------- -----------
Total current liabilities 75,381 85,079
----------- -----------
Long-term debt 1,003,357 968,896
----------- -----------
Other long-term liabilities 10,240 --
----------- -----------
Stockholders' equity (deficit):
Preferred stock-- $.01 par value 3 --
Common stock-- $.01 par value 211 209
Additional paid-in capital 376,867 351,210
Accumulated deficit (494,510) (384,674)
----------- -----------
Total stockholders' equity (deficit) (117,429) (33,255)
----------- -----------
$ 971,549 $ 1,020,720
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
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ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except share and per share amounts)
<TABLE>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service, rental, and maintenance
revenues $ 92,883 $ 87,561 $ 184,280 $ 171,978
Product sales 10,663 11,168 21,305 22,290
------------ ------------ ------------ ------------
Total revenues 103,546 98,729 205,585 194,268
Cost of products sold (7,324) (7,165) (14,690) (14,291)
------------ ------------ ------------ ------------
96,222 91,564 190,895 179,977
------------ ------------ ------------ ------------
Operating expenses:
Service, rental, and maintenance 20,220 19,429 40,409 38,111
Selling 12,374 13,431 24,244 26,632
General and administrative 28,198 26,202 56,516 51,345
Depreciation and amortization 54,686 62,148 108,400 120,167
Restructuring charge 16,100 -- 16,100 --
------------ ------------ ------------ ------------
Total operating expenses 131,578 121,210 245,669 236,255
------------ ------------ ------------ ------------
Operating income (loss) (35,356) (29,646) (54,774) (56,278)
Interest expense, net (25,757) (24,120) (51,123) (47,715)
Equity in loss of affiliate (1,164) (924) (2,219) (1,812)
------------ ------------ ------------ ------------
Income (loss) before income tax
benefit and extraordinary item (62,277) (54,690) (108,116) (105,805)
Benefit from income taxes -- 5,300 -- 10,600
------------ ------------ ------------ ------------
Income (loss) before extraordinary item (62,277) (49,390) (108,116) (95,205)
Extraordinary charge from early
extinguishment of debt (1,720) -- (1,720) --
------------ ------------ ------------ ------------
Net income (loss) (63,997) (49,390) (109,836) (95,205)
Accretion of redeemable preferred stock -- -- -- (32)
------------ ------------ ------------ ------------
Net loss to common stockholders $ (63,997) $ (49,390) $ (109,836) $ (95,237)
============ ============ ============ ============
Basic net income (loss) per common
share before extraordinary charge $ (2.97) $ (2.38) $ (5.17) $ (4.60)
Extraordinary charge per basic common
share (0.08) -- (0.08) --
------------ ------------ ------------ ------------
Basic net income (loss) per common
share $ (3.05) $ (2.38) $ (5.25) $ (4.60)
============ ============ ============ ============
Basic weighted average number of
common shares outstanding 20,958,570 20,713,578 20,918,048 20,713,578
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
SIX MONTHS ENDED JUNE 30,
1998 1997
---- ----
Net cash provided by operating activities $ 43,909 $ 35,497
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (38,353) (48,720)
Additions to intangible and other assets (21,584) (7,724)
--------- ---------
Net cash used for investing activities (59,937) (56,444)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 450,964 82,000
Repayment of long-term debt (459,013) (56,024)
Repayment of redeemable preferred stock -- (3,744)
Net proceeds from sale of preferred stock 25,000 --
Net proceeds from sale of common stock 662 418
--------- ---------
Net cash provided by financing activities 17,613 22,650
--------- ---------
Net increase in cash and cash equivalents 1,585 1,703
Cash and cash equivalents, beginning of period 3,328 3,497
--------- ---------
Cash and cash equivalents, end of period $ 4,913 $ 5,200
========= =========
Supplemental disclosure:
Interest paid $ 36,372 $ 30,119
Accretion of discount on senior notes $ 17,997 $ 16,189
Accretion of redeemable preferred stock $ -- $ 32
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
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):
June 30, December 31,
1998 1997
---- ----
(unaudited)
Goodwill $291,898 $312,017
Purchased FCC licenses 275,224 293,922
Purchased subscriber lists 71,933 87,281
Deferred financing costs 20,813 8,752
Investment in Benbow PCS Ventures, Inc. 9,942 6,189
Investment in CONXUS Communications, Inc. 6,500 6,500
Non-competition agreements 2,268 2,783
Other 8,853 10,758
-------- --------
$687,431 $728,202
======== ========
(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 will be paid to a
subsidiary of Benbow in payment for certain assets owned by such subsidiary 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 134 sites in 22 states and renting 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 a subsidiary of Benbow for the assets it sold). The
final closing for the balance of the transaction is expected to be completed in
the third quarter of 1998, although no assurance can be given that the final
closing will be held as expected.
(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,
6
<PAGE>
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
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.
7
<PAGE>
(f) Series C Cumulative 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 plans to consolidate its seven operating
divisions into four operating divisions and consolidate certain regional
administrative support functions, resulting in 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 real estate 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 and benefits, (ii) $3.5 million for lease obligations and terminations
and (iii) $2.9 million for the writedown of related assets.
The write-down of fixed assets relates to a non-cash charge which will
reduce the carrying amount of certain leasehold improvements and other fixed
assets 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,
which considered such factors as the nature and age of the assets to be disposed
of, the timing of the assets' disposal and the method and potential costs of
disposal. 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.
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 terminate up to 900 personnel. The majority of the
positions to be eliminated are in local and regional offices which will be
closed as a result of 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.
8
<PAGE>
The Company's restructuring activity as of June 30, 1998 is as follows (in
thousands):
Reserve
Initially Utilization of Reserve Remaining
Established Cash Non-Cash Reserve
----------- ---- -------- -------
Severance costs............. $ 9,700 $ 205 $ -- $ 9,495
Lease obligation costs...... 3,500 20 -- 3,480
Write-down of related assets 2,900 29 -- 2,871
---- ----- ------ -- --------- ----------
Total................... $16,100 $ 254 $ -- $15,846
======= ====== ======== =======
(h) 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. The adoption of this standard is not expected to have a significant impact
on Arch's financial reporting.
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
adopt this standard 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.
9
<PAGE>
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 will be paid to a subsidiary of
Benbow in payment for certain assets owned by such subsidiary 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 134 sites in 22 states and renting 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. 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
a subsidiary of Benbow for the assets it sold). The final closing for the
balance of the transaction is expected to be completed in the third 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 plans to consolidate its seven operating divisions into four operating
divisions and consolidate certain regional administrative support functions,
resulting in various operating efficiencies. Arch estimates that the Divisional
Reorganization, once fully implemented, will result in annual cost savings of
approximately $15 million. Arch expects to reinvest a portion of these cost
savings to expand its sales activities.
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 real estate 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 and benefits, (ii) $3.5 million for lease obligations and terminations
and (iii) $2.9 million for the writedown of related assets. See Note (g) to the
Consolidated Condensed Financial Statements.
RESULTS OF OPERATIONS
Total revenues increased to $103.5 million (a 4.9% increase) and $205.6
million (a 5.8% increase) in the three and six months ended June 30, 1998,
respectively, from $98.7 million and $194.3 million in the three and six months
ended June 30, 1997, respectively. Net revenues (total revenues less cost of
products sold) increased to $96.2 million (a 5.1% increase) and $190.9 million
(a 6.1% increase) in the three and six months ended June 30, 1998, respectively,
from $91.6 million and $180.0 million in the three and six months ended June 30,
1997, respectively. Service, rental and maintenance revenues, which consist
primarily of recurring revenues associated with the sale or lease of pagers,
increased to $92.9 million (a 6.1% increase) and $184.3 million (a 7.2%
increase) in the three and six months ended June 30, 1998, respectively, from
$87.6 million and $172.0 million in the three and six months ended June 30,
10
<PAGE>
1997, respectively. These increases in revenues were due primarily to the
increase through internal growth in the number of pagers in service from 3.7
million at June 30, 1997 to 4.1 at June 30, 1998. Maintenance revenues
represented less than 10% of total service, rental and maintenance revenues in
the three and six months ended June 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 16.6% decrease) and $6.6 million (a
17.3% decrease) in the three and six months ended June 30, 1998, respectively,
from $4.0 million and $8.0 million in the three and six months ended June 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, increased to $20.2 million (21.0% of
net revenues) and $40.4 million (21.2% of net revenues) in the three and six
months ended June 30, 1998, respectively, from $19.4 million (21.2% of net
revenues) and $38.1 million (21.2% of net revenues) in the three and six months
ended June 30, 1997, respectively. The increases were due primarily to increased
expenses associated with system expansions and the provision of paging services
to a greater number of subscribers. As existing paging systems become more
populated through the addition of new subscribers, the fixed costs of operating
these paging systems are spread over a greater subscriber base. Annualized
service, rental and maintenance expenses per subscriber were $20 in both the
three and six months ended June 30, 1998, respectively, as compared to $22 in
the corresponding 1997 periods.
Selling expenses decreased to $12.4 million (12.9% of net revenues) and
$24.2 million (12.7% of net revenues) in the three and six months ended June 30,
1998, respectively, from $13.4 million (14.7% of net revenues) and $26.6 million
(14.8% of net revenues) in the three and six months ended June 30, 1997,
respectively. The decreases were 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 23.8% and 35.0% in the three
and six months ended June 30, 1998 compared to the three and six months ended
June 30, 1997, respectively, primarily due to Arch's shift in operating focus
from unit growth to capital efficiency and leverage reduction. Most selling
expenses are directly related to the number of net new subscribers added.
General and administrative expenses increased to $28.2 million (29.3% of
net revenues) and $56.5 million (29.6% of net revenues) in the three and six
months ended June 30, 1998, respectively, from $26.2 million (28.6% of net
revenues) and $51.3 million (28.5% of net revenues) in the three and six months
ended June 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 $54.7 million and
$108.4 million in the three and six months ended June 30, 1998, respectively,
from $62.1 million and $120.2 million in the three and six months ended June 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 were $35.4 million and $54.8 million in the three and six
months ended June 30, 1998, respectively, as compared to $29.6 million and $56.3
million in the three and six months ended June 30, 1997, respectively, as a
result of the factors outlined above including the $16.1 million restructuring
charge recorded in the second quarter of 1998.
Net interest expense increased to $25.8 million and $51.1 million in the
three and six months ended June 30, 1998, respectively, from $24.1 million and
$47.7 million in the three and six months ended June 30, 1997, respectively. The
increases were principally attributable to an increase in Arch's outstanding
debt. Interest expense for the six months ended June 30, 1998 and 1997 include
approximately $18.0 million and $16.2 million, respectively, of non-cash
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<PAGE>
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 $10.6
million in the three and six months ended June 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 $64.0 million and $109.8 million in the three and six
months ended June 30, 1998, respectively, from $49.4 million and $95.2 million
in the three and six months ended June 30, 1997, respectively, as a result of
the factors outlined above.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased 9.0% to $35.4 million (36.8% of net revenues) and 9.1% to $69.7
million (36.5% of net revenues) in the three and six months ended June 30, 1998,
respectively, from $32.5 million (35.5% of net revenues) and $63.9 million
(35.5% of net revenues) in the three and six months ended June 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 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 restructuring charges, income tax
benefit and interest expense. One of Arch's principal financial objectives is to
increase its EBITDA, as such earnings are a significant source of funds for
servicing indebtedness and for investments in continued growth, including the
purchase of pagers and paging system equipment, construction and expansion of
paging systems and possible acquisitions. 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 increased from $56.4 million in the six months
ended June 30, 1997 to $59.9 million (inclusive of $15.1 million of deferred
financing costs incurred in connection with the 12 3/4% Senior Notes and the API
Credit Facility) in the six months ended June 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
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<PAGE>
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 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 and to address
year 2000 issues. Arch believes that it will have sufficient cash available from
operations and credit facilities 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 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 pending
acquisition of Page Call) 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 $43.9 million and
$35.5 million in the six months ended June 30, 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.
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
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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 intends to convert the Series C Preferred Stock into Arch
Common Stock.
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 June 30, 1998, Arch 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 available on favorable terms; (ii) a substantial portion of
the cash flow of the Company and its 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 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.
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<PAGE>
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, 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 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 (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 business, financial condition, results of
operations or prospects of 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 acquiror or
an acquiree. The Company has evaluated and expects to continue to evaluate
possible acquisition transactions on an ongoing basis and, at the present time
is, 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.
On June 22, 1998, Arch filed a Form 8-K with the Securities and Exchange
Commission reporting that Arch is engaged in discussions concerning the possible
acquisition of MobileMedia Communications, Inc. ("MobileMedia"). There are a
number of significant issues which must be resolved prior to execution of an
acquisition agreement, and Arch is aware that other parties are in discussions
with respect to a possible business combination with MobileMedia. Arch has not
entered into a letter of intent or definitive agreement for the acquisition of
MobileMedia and discussions could be terminated at any time. If Arch does enter
into an agreement for the acquisition of MobileMedia, the closing would be
subject to approval by Arch's stockholders, Bankruptcy Court approval, FCC
approval, antitrust regulatory approval, the availability of sufficient
financing and other customary 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. An acquisition of MobileMedia by Arch may 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 as a debtor-in-possession under Chapter
11 of the United States Bankruptcy Code.
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<PAGE>
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 insurance on the
lives of, 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. The Company believes that competition for paging
subscribers is based on quality of service, geographic coverage and price and
that the Company has generally competed effectively based on these factors.
Monthly fees for basic paging services have, in general, declined since the
Company commenced operations, 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, there could be a material adverse effect
on the business, financial condition, results of operations or prospects of the
Company. A variety of wireless two-way communication technologies primarily
focused on voice services currently are in use or under development by
competitors. The Company does not presently provide such two-way services, other
than as a reseller. Although such technologies generally are higher priced than
paging services, technological improvements could result in increased capacity
and efficiency for such wireless two-way communication and, accordingly, could
result in increased competition for the Company. Two-way paging 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 Federal
Communications Commission (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 personal
communications services ("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 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. If the Company is required to
incur such additional investment or capital prospects of the Company. There can
be not assurance that the Company will be able to compete successfully with its
current and future competitors in the paging business or with competitors
offering alternative communication technologies.
SUBSCRIBER TURNOVER
The results of operations of wireless messaging service providers, such as
the Company, can be significantly affected by subscriber cancellations. The
sales and marketing costs associated with attracting new subscribers are
substantial relative to the costs of providing service to existing customers.
Because the paging business is characterized by high fixed costs, disconnections
directly and adversely affect operating cash flow. An increase in its subscriber
cancellation rate have a material adverse effect on the business, financial
condition, results of operations or prospects of the Company.
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<PAGE>
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's purchase agreement with Motorola expires on June 19, 1999, 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 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
Arch 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
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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.
In 1997 the Company designated members of its Information Services and
Engineering Departments to assess the impact of the so-called Year 2000 problem
on its information systems and information systems of its customers, vendors and
other parties that service or otherwise interact with the Company. Data
processing for the Company's major operating systems is conducted in-house using
programs developed primarily by third-party vendors. Assessment of inventory and
year 2000 readiness for all systems and applications has been substantially
completed and most third-party vendors who provide applications to the Company
have been contacted. Arch intends to bring its major operating systems and
outsourced applications into compliance with year 2000 requirements through the
installation of updated or replacement programs developed by third parties or by
new and enhanced software programs developed internally. The Company currently
believes that it will be able to modify or replace any affected systems by
September 30, 1999 in order to minimize any detrimental effects on the Company's
operations. In a number of cases, Year 2000 compliant systems are currently
installed or are already in the process of implementation in the normal course
of upgrade and functionality improvement.
The Company expects that it will incur costs to replace existing hardware
and software 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. Based on the Company's preliminary estimate of the
costs to be incurred, 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.
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 Year 2000 issues in
a timely manner, there could be a material adverse effect on the business,
financial condition, results of operations or prospects of the Company.
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
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
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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.
The Company issued the Series C Preferred Stock pursuant to the
exemption from registration under Section 4(2) of the Securities Act,
as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 19, 1998
the following proposals were adopted by the vote specified below:
<TABLE>
BROKER
PROPOSAL FOR AGAINST ABSTAIN NONVOTES
-------- --- ------- ------- --------
<S> <C> <C> <C> <C>
To elect two directors of the Company
1. C. Edward Baker, Jr. 19,134,828 588,377 - -
2. R. Schorr Berman 19,134,848 588,357 - -
3. To approve an amendment to the
Company's 1996 Employee Stock
Purchase Plan increasing the number of
shares of Common Stock issuable under
such plan from 250,000 to 500,000 17,304,224 2,360,130 21,892 36,959
4. To ratify the selection by the Board of
Directors of Arthur Andersen LLP as
independent public accountants for the
Company for the fiscal year ending
December 31, 1998 19,683,632 24,002 14,501 1,070
</TABLE>
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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) The following reports on Form 8-K were filed for the quarter for
which this report is filed:
Current Report on Form 8-K dated June 22, 1998 (reporting that
Arch is engaged in discussions concerning the possible
acquisition of MobileMedia Corporation) filed June 22, 1998.
Current Report on Form 8-K dated June 26, 1998 (reporting the
Merger, the Amended Credit Facility, the issuance and sale of the
Notes, the Equity Investment, the Tower Site Sale, the Divisional
Reorganization and the acquisition by Benbow PCS Ventures, Inc.
of Page Call, Inc.) filed July 23, 1998.
20
<PAGE>
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 June
30, 1998, to be signed on its behalf by the undersigned thereunto duly
authorized.
ARCH COMMUNICATIONS GROUP, INC.
Dated: August 12, 1998 By: /S/ J. ROY POTTLE
-----------------
J. Roy Pottle
Executive Vice President and
Chief Financial Officer
21
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
27.1* - Financial Data Schedule.
* Filed herewith
22
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000915390
<NAME> ARCH COMMUNICATIONS GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 4,913
<SECURITIES> 0
<RECEIVABLES> 32,483
<ALLOWANCES> 0
<INVENTORY> 13,278
<CURRENT-ASSETS> 54,256
<PP&E> 409,340
<DEPRECIATION> 179,478
<TOTAL-ASSETS> 971,549
<CURRENT-LIABILITIES> 75,381
<BONDS> 1,003,357
0
3
<COMMON> 211
<OTHER-SE> (117,643)
<TOTAL-LIABILITY-AND-EQUITY> 971,549
<SALES> 21,305
<TOTAL-REVENUES> 205,585
<CGS> 14,690
<TOTAL-COSTS> 14,690
<OTHER-EXPENSES> 40,409
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,123
<INCOME-PRETAX> (108,116)
<INCOME-TAX> 0
<INCOME-CONTINUING> (108,116)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,720)
<CHANGES> 0
<NET-INCOME> (109,836)
<EPS-PRIMARY> 5.25
<EPS-DILUTED> 5.25
</TABLE>
