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, 1999
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: 51,197,447 shares of the
Company's Common Stock ($.01 par value) were outstanding as of November 05,
1999.
<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 September 30, 1999
and December 31, 1998 3
Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,488 $ 1,633
Accounts receivable, net 57,570 30,753
Inventories 10,163 10,319
Prepaid expenses and other 9,959 8,007
----------- -----------
Total current assets 99,180 50,712
----------- -----------
Property and equipment, at cost 697,337 428,173
Less accumulated depreciation and amortization (288,281) (209,128)
----------- -----------
Property and equipment, net 409,056 219,045
----------- -----------
Intangible and other assets, net 916,282 634,528
----------- -----------
$ 1,424,518 $ 904,285
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 3,060 $ 1,250
Accounts payable 23,444 25,683
Accrued restructuring 18,239 11,909
Accrued interest 31,861 20,997
Accrued expenses and other liabilities 93,110 27,175
----------- -----------
Total current liabilities 169,714 87,014
----------- -----------
Long-term debt 1,357,743 1,003,499
----------- -----------
Other long-term liabilities 77,953 27,235
----------- -----------
Stockholders' equity (deficit):
Preferred stock-- $.01 par value 3 3
Common stock-- $.01 par value 481 71
Additional paid-in capital 639,559 378,218
Accumulated deficit (820,935) (591,755)
----------- -----------
Total stockholders' equity (deficit) (180,892) (213,463)
----------- -----------
$ 1,424,518 $ 904,285
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
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,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service, rental, and maintenance revenues $ 190,798 $ 93,546 $ 403,607 $ 277,826
Product sales 15,391 10,506 36,963 31,811
---------- ---------- ---------- ----------
Total revenues 206,189 104,052 440,570 309,637
Cost of products sold (10,459) (7,173) (24,988) (21,863)
---------- ---------- ---------- ----------
195,730 96,879 415,582 287,774
---------- ---------- ---------- ----------
Operating expenses:
Service, rental, and maintenance 43,035 20,403 91,421 60,812
Selling 26,545 12,658 57,589 36,902
General and administrative 60,622 28,011 123,643 84,527
Depreciation and amortization 94,803 56,590 222,836 164,990
Restructuring charge (2,200) -- (2,200) 14,700
---------- ---------- ---------- ----------
Total operating expenses 222,805 117,662 493,289 361,931
---------- ---------- ---------- ----------
Operating income (loss) (27,075) (20,783) (77,707) (74,157)
Interest expense, net (39,740) (26,863) (98,927) (76,658)
Other expense (924) (348) (44,396) (1,676)
Equity in loss of affiliate -- -- (3,200) (2,219)
---------- ---------- ---------- ----------
Income (loss) before extraordinary item and
accounting change (67,739) (47,994) (224,230) (154,710)
---------- ---------- ---------- ----------
Extraordinary charge from early extinguishment of
debt -- -- -- (1,720)
Cumulative effect of accounting change -- -- (3,361) --
---------- ---------- ---------- ----------
Net income (loss) (67,739) (47,994) (227,591) (156,430)
Preferred stock dividend (546) (515) (1,589) (515)
---------- ---------- ---------- ----------
Net income (loss) to common stockholders $ (68,285) $ (48,509) $ (229,180) $ (156,945)
========== ========== ========== ==========
Basic/diluted net income (loss) per common share
before extraordinary charge and accounting change
$ (1.42) $ (6.91) $ (9.00) $ (22.20)
Extraordinary charge per basic/diluted common share
-- -- -- (0.25)
Cumulative effect of accounting change per
basic/diluted common share -- -- (0.13) --
---------- ---------- ---------- ----------
Basic/diluted net income (loss) per common share $ (1.42) $ (6.91) $ (9.13) $ (22.45)
========== ========== ========== ==========
Basic/diluted weighted average number of common
shares outstanding 48,060,782 7,022,370 25,088,969 6,989,427
========== ========== ========== ==========
</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)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 76,422 $ 61,276
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (65,035) (58,029)
Additions to intangible and other assets (18,151) (27,756)
Net proceeds from tower site sale 3,046 30,139
Acquisition of paging company, net of cash acquired (518,729) --
--------- ---------
Net cash used for investing activities (598,869) (55,646)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 466,058 455,964
Repayment of long-term debt (140,999) (484,013)
Net proceeds from sale of preferred stock -- 25,000
Net proceeds from sale of common stock 217,243 662
--------- ---------
Net cash provided by (used for) financing activities 542,302 (2,387)
--------- ---------
Net increase in cash and cash equivalents 19,855 3,243
Cash and cash equivalents, beginning of period 1,633 3,328
--------- ---------
Cash and cash equivalents, end of period $ 21,488 $ 6,571
========= =========
Supplemental disclosure:
Interest paid $ 58,734 $ 42,962
Accretion of discount on senior notes $ 30,995 $ 27,430
Issuance of common stock in acquisition of paging company $ 20,083 $ --
Liabilities assumed in acquisition of paging company $ 135,676 $ --
</TABLE>
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,
1998, 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, 1998 has been derived from, but does not include all the
disclosures contained in, the audited consolidated financial statements for the
year ended December 31, 1998. 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, 1998. 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 comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Goodwill $ 259,877 $ 271,808
Purchased FCC licenses 367,014 256,519
Purchased subscriber lists 258,530 56,825
Deferred financing costs 25,318 22,072
Investment in Benbow PCS Ventures, Inc. ("Benbow") -- 11,347
Investment in CONXUS Communications, Inc. ("CONXUS") -- 6,500
Non-competition agreements 1,063 1,790
Other 4,480 7,667
---------- ----------
$ 916,282 $ 634,528
========== ==========
</TABLE>
In June 1999, Arch, Benbow and Ms. June Walsh, who holds a 50.1% equity interest
in Benbow, agreed that:
the shareholders agreement, the management agreement and the employment
agreement governing the establishment and operation of Benbow will be
terminated
Benbow will not make any further FCC payments and will not pursue
construction of an N-PCS system
Arch will not be obligated to fund FCC payments or construction of an N-PCS
system by Benbow
the parties will seek FCC approval of the forgiveness of Benbow's remaining
payment obligations and the transfer of Ms. Walsh's equity interest in
Benbow to Arch
the closing of the transaction will occur on the earlier of January 23,
2001 or receipt of FCC approval o Arch will pay Ms. Walsh, in installments,
an aggregate amount of $3.5 million (if the transaction closes before
January 23, 2001) or $3.8 million (if the transaction closes on January 23,
2001)
As a result of these arrangements, Benbow will not have any meaningful business
operations and is unlikely to retain its N-PCS licenses. Therefore, Arch has
written off substantially all of its investment in Benbow in the amount of $8.2
million. Arch has also accrued the payment to Ms. Walsh of $3.8 million and
legal and other expenses of approximately $1.0 million which is included in
accrued expenses. In addition, Arch guaranteed Benbow's obligations in
conjunction with Benbow's purchase of the stock of PageCall in June 1998. Since
it is unlikely that Benbow will be able to meet these obligations and Arch is
currently required to settle the obligation in stock, Arch has recorded the
issuance of $22.8 million of its common stock in additional paid-in capital as a
charge to operations, to satisfy the obligation in April 2000.
6
<PAGE>
On May 18, 1999, CONXUS filed for Chapter 11 protection in the U.S.
Bankruptcy Court in Delaware, which case was converted to a case under Chapter 7
on August 17, 1999. In June 1999, Arch wrote-off its $6.5 million investment in
CONXUS. On November 3, 1999, in order to document its disposition of any
interest it has, if any, in CONXUS, Arch offered to transfer to CONXUS its
shares in CONXUS for no consideration.
(c) Acquisition of MobileMedia - On June 3, 1999 Arch completed its
acquisition of MobileMedia Communications, Inc. ("MobileMedia") for $674.5
million, consisting of cash paid of $518.7 million, including direct transaction
costs, 4,781,656 shares of Arch common stock valued at $20.1 million and the
assumption of liabilities of $135.7 million. The cash payments were financed
through the issuance of approximately 36.2 million shares of Arch common stock
in a rights offering for $6.00 per share, the issuance of $147.0 million
principal amount of 13 3/4% senior notes due 2008 (see note (d)) and additional
borrowings under the Company's credit facility.
The purchase price was allocated based on the fair values of assets acquired
and liabilities assumed. The allocation is subject to change based on
finalization of asset appraisals. The acquisition has been accounted for as a
purchase, and the results of MobileMedia's operations have been included in the
consolidated financial statements from the date of the acquisition. Goodwill
resulting from the acquisition is being amortized over a ten-year period using
the straight-line method.
The liabilities assumed, referred to above, include an unfavorable lease
accrual related to MobileMedia's rentals on communications towers which were in
excess of market rental rates. This accrual amounted to approximately $52.4
million and is included in other long-term liabilities. This accrual will be
amortized over the remaining lease term of 14 1/4 years.
Concurrent with the consummation of the acquisition, Arch commenced the
development of a plan to integrate the operations of MobileMedia. The
liabilities assumed, referred to above, also included a $13.1 million
restructuring accrual to cover the costs to eliminate redundant headcount and
facilities in connection with the overall integration of operations (see note
(h)).
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition had occurred at the beginning of the periods
presented, after giving effect to certain adjustments, including depreciation
and amortization of acquired assets and interest expense on acquisition debt.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
been made at the beginning of the period presented, or of results that may occur
in the future.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
(in thousands,
except per share amounts)
<S> <C> <C>
Revenues $ 616,432 $ 643,665
Income (loss) before extraordinary item (251,632) (127,165)
Net income (loss) (251,632) (128,885)
Basic/diluted net income(loss) per common share (5.27) (2.67)
</TABLE>
In connection with the acquisition of MobileMedia, Arch issued approximately
48.3 million warrants to purchase Arch common stock. Each warrant represents the
right to purchase one-third of one share of Arch common stock at an exercise
price of $3.01 ($9.03 per share). The warrants expire on September 1, 2001.
7
<PAGE>
(d) Senior Notes -- On June 3, 1999, Arch Communications, Inc. ("ACI"), a
wholly-owned subsidiary of Arch, received the proceeds of an offering of $147.0
million principal amount at maturity of 13 3/4% Senior Notes due 2008 (the "13
3/4% Notes") to qualified institutional buyers under Rule 144A promulgated under
the Securities Act of 1933, as amended. The 13 3/4% Notes were sold at an
initial price to investors of 95.091% for net proceeds of $134.6 million (after
deducting the discount to the Initial Purchasers and offering expenses). The 13
3/4% Notes mature on April 15, 2008 and bear interest at a rate of 13 3/4% per
annum, payable semi-annually in arrears on April 15 and October 15 of each year,
commencing October 15, 1999.
The indenture governing the 13 3/4% 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) Reverse Stock Split - On June 28, 1999, Arch effected a one for three
reverse stock split. All share and per share data included in this Quarterly
Report for all periods presented have been adjusted to give effect to this
reverse split.
(f) Change in Accounting Principle - 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. Arch adopted SOP 98-5 effective January 1,
1999. Initial application of SOP 98-5 resulted in a $3.4 million charge, which
was reported as the cumulative effect of a change in accounting principle. This
charge represents the unamortized portion of start-up and organization costs,
which had been deferred in prior years.
(g) Divisional Reorganization - In conjunction with the completion of the
MobileMedia merger, the timing and implementation of the divisional
reorganization announced in June 1998 was reviewed by Arch management. The plan
was reviewed within the context of the combined company integration plan which
was approved by the Company in the third quarter of 1999. After a thorough
review it was decided that significant changes needed to be made to the
divisional reorganization plan. In the quarter ended September 30, 1999 the
Company identified certain of its facilities and network leases that will not be
utilized following the integration of the Company and MobileMedia, resulting in
an additional charge of $2.6 million. This charge was offset by reductions to
previously provided severance and other costs of $4.8 million. As of September
30, 1999, 426 employees had been terminated due to the divisional
reorganization.
The Company's restructuring activity as of September 30, 1999 was as follows
(in thousands):
<TABLE>
<CAPTION>
Reserve
Initially Utilization Reserve Remaining
Established of Reserve Adjustment Reserve
----------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Severance costs $ 9,700 $ 4,541 $ (3,547) $ 1,612
Lease obligation costs 3,500 737 2,570 5,333
Other costs 1,500 277 (1,223) --
---------- ---------- ---------- ----------
Total $ 14,700 $ 5,555 $ (2,200) $ 6,945
========== ========== ========== ==========
</TABLE>
(h) MobileMedia Acquisition Reserve - On June 3,1999, Arch completed its
acquisition of MobileMedia and commenced the development of plans to integrate
the operations of MobileMedia. During the third quarter of 1999, Arch approved
plans covering the elimination of redundant headcount and facilities in
connection with the overall integration of operations. To the extent that it is
determined that headcount and facilities acquired with MobileMedia should be
eliminated, the purchase price of the acquisition will be increased to cover the
costs of executing the plan. It is expected that the integration activity
relating to the MobileMedia merger, which commenced on July 1, 1999, will take
approximately 18 months.
8
<PAGE>
In connection with the MobileMedia acquisition, Arch anticipates a net
reduction of approximately 10% of MobileMedia's workforce and the closing of
certain facilities and tower sites. This resulted in the establishment a $13.1
million acquisition reserve which is included as part of the purchase price of
MobileMedia. The initial acquisition reserve consisted of approximately (i) $5.6
million for employee severance, (ii) $7.0 million for lease obligations and
terminations and (iii) $0.5 million of other costs. As of September 30, 1999, 77
former MobileMedia employees had been terminated due to the acquisition. The
acquisition reserve will continue to be evaluated in the event that certain
assumptions change in the future.
The MobileMedia acquisition reserve activity as of September 30, 1999 was as
follows (in thousands):
<TABLE>
<CAPTION>
Reserve
Initially Utilization Remaining
Established of Reserve Reserve
<S> <C> <C> <C>
Severance costs $ 5,658 $ 1,839 $ 3,819
Lease obligation costs 6,975 -- 6,975
Other costs 500 -- 500
----------- ----------- -----------
Total $ 13,133 $ 1,839 $ 11,294
=========== =========== ===========
</TABLE>
(i) Subsequent Event -- Equity Issued in Exchange for Debt - In October
1999, Arch completed transactions with four bondholders in which Arch issued an
aggregate of 3,136,665 shares of Arch common stock and warrants to purchase
540,487 shares of Arch common stock for $9.03 per share in exchange for $25.2
million accreted value of debt securities. Under two of the exchange agreements,
Arch issued 809,545 shares of Arch common stock and warrants to purchase 540,487
shares of Arch common stock for $9.03 per share in exchange for $8.9 million
principal amount of Arch 6 3/4% Convertible Subordinated Debentures Due 2003
(the "Convertible Debentures"). Under the remaining exchange agreements, Arch
issued 2,327,120 shares of Arch common stock in exchange for $16.3 million
accreted value ($19.0 million maturity value) of its 107/8% Senior Discount
Notes due 2008 (the "Senior Discount Notes"). Following these transactions, Arch
has $4.5 million in principal amount of the Convertible Debentures and $387.1
million accreted value (at October 31, 1999) ($448.4 million maturity value) of
the Senior Discount Notes outstanding.
(j) Subsequent Event -- Merger Agreement - In November 1999, Arch signed a
definitive agreement (the "Merger Agreement") with Paging Network, Inc.
("PageNet") pursuant to which PageNet will merge with a wholly owned subsidiary
of Arch (the "Merger"). Each outstanding share of PageNet common stock will be
converted into 0.1247 share of Arch common stock in the Merger.
Under the Merger Agreement, PageNet is required to make an exchange offer
(the "PageNet Exchange Offer") of PageNet common stock to holders of its
outstanding 8.875% Senior Subordinated Notes due 2006 (the "8.875% Notes"), its
10.125% Senior Subordinated Notes due 2007 (the "10.125% Notes") and its 10%
Senior Subordinated Notes due 2008 (the "10% Notes"), having an aggregate
outstanding principal amount of $1.2 billion. Under the PageNet Exchange Offer,
an aggregate of 616,830,757 shares of PageNet common stock, together with 68.9%
of the equity interest in PageNet's subsidiary, Vast Solutions, would be
exchanged for all of the 8.875% Notes, 10.125% Notes and 10% Notes
(collectively, the "PageNet Notes"), in the aggregate. In connection with the
Merger, PageNet would distribute to its stockholders (other than holders who
received shares in the PageNet Exchange Offer), 11.6% of the equity interests in
Vast Solutions. After the Merger, PageNet would retain 19.5% of the equity
interests of Vast Solutions.
Under the Merger Agreement Arch is required to make an exchange offer (the
"Arch Exchange Offer") of 29,651,980 shares of its common stock (in the
aggregate) for all of its Senior Discount Notes, and to convert all of its
outstanding shares of Series C Convertible Preferred Stock ("Series C Preferred
Stock") into 2,104,142 shares of its common stock.
9
<PAGE>
If the PageNet Exchange Offer and the Arch Exchange Offer were fully
subscribed, immediately following the Merger (and the issuance of Arch common
stock in exchange for PageNet common stock, in the Arch Exchange Offer and upon
the conversion of Series C Preferred Stock), current holders of Arch's common
stock would own approximately 29.6% of the outstanding Arch common stock,
holders of Series C Preferred Stock would own approximately 1.2% of the
outstanding Arch common stock, holders of the Senior Discount Notes would own
approximately 17.6% of the outstanding Arch common stock, current holders of
PageNet common stock would own approximately 7.5% of the outstanding Arch common
stock and current holders of the PageNet Notes (in the aggregate) would own
approximately 44.5% of the outstanding Arch common stock. In addition, following
the Merger Arch would have, on a pro forma basis, total debt of approximately
$1.8 billion.
Under the Merger Agreement, the Arch Board of Directors at the closing would
consist of 12 individuals, at least six of whom would be designated by the
existing Arch Board of Directors. The PageNet Board of Directors would designate
three members, and the three largest holders of PageNet Notes would each be
entitled to designate one member. To the extent any such holder of PageNet Notes
did not elect to designate a director, the number of directors designated by the
Arch Board of Directors would increase.
Arch expects the Merger, which has been approved by the Boards of Directors
of Arch and PageNet, but is subject to customary regulatory review, shareholder
approval, other third-party consents and the completion of the exchange offers
and preferred stock conversion, to be completed during the first half of 2000.
Each of the PageNet Exchange Offer and the Arch Exchange Offer is conditioned
upon acceptance by the holders of 97.5% of the PageNet Notes and Senior Discount
Notes, respectively.
Under the Merger Agreement, PageNet is required to include a "prepackaged"
plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
materials relating to the PageNet Exchange Offer, and to solicit consents for
this prepackaged plan from holders of the PageNet Notes and its senior
creditors. In certain circumstances PageNet has agreed either to file the
prepackaged plan in lieu of completing the PageNet Exchange Offer or to pay to
Arch a termination fee.
The Merger Agreement provides that under certain circumstances a fee may be
payable by Arch or PageNet upon termination of the agreement. These
circumstances include withdrawal of the recommendation or approval of the Merger
Agreement or the Merger by the Arch or PageNet Board of Directors, the failure
of shareholders or noteholders to approve the transaction or exchange followed
by the making of an alternative proposal and Arch or PageNet entering into an
agreement with a third party within 12 months of such termination, and PageNet's
failure to file a prepackaged plan in certain circumstances. The termination fee
payable by Arch or PageNet under the Merger Agreement is $40.0 million.
The Merger Agreement provides that either party may terminate the agreement
if the Merger is not consummated by June 30, 2000. This termination date is
subject to extension for 90 days for regulatory approval and is subject to
extension to as late as December 31, 2000 under certain circumstances where
PageNet files for protection under the U.S. Bankruptcy Code.
10
<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 within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. 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".
PROPOSED PAGENET MERGER
In November 1999, Arch signed a definitive agreement (the "Merger Agreement")
with Paging Network, Inc. ("PageNet") pursuant to which PageNet will merge with
a wholly owned subsidiary of Arch (the "Merger"). Each outstanding share of
PageNet common stock will be converted into 0.1247 share of Arch common stock in
the Merger.
Under the Merger Agreement, PageNet is required to make an exchange offer
(the "PageNet Exchange Offer") of PageNet common stock to holders of its
outstanding 8.875% Senior Subordinated Notes due 2006 (the "8.875% Notes"), its
10.125% Senior Subordinated Notes due 2007 (the "10.125% Notes") and its 10%
Senior Subordinated Notes due 2008 (the "10% Notes"), having an aggregate
outstanding principal amount of $1.2 billion. Under the PageNet Exchange Offer,
an aggregate of 616,830,757 shares of PageNet common stock, together with 68.9%
of the equity interest in PageNet's subsidiary, Vast Solutions, would be
exchanged for all of the 8.875% Notes, 10.125% Notes and 10% Notes
(collectively, the "PageNet Notes"), in the aggregate. In connection with the
Merger, PageNet would distribute to its stockholders (other than holders who
received shares in the PageNet Exchange Offer), 11.6% of the equity interests in
Vast Solutions. After the Merger, PageNet would retain 19.5% of the equity
interests of Vast Solutions.
Under the Merger Agreement Arch is required to make an exchange offer (the
"Arch Exchange Offer") of 29,651,980 shares of its common stock (in the
aggregate) for all of its Senior Discount Notes, and to convert all of its
outstanding shares of Series C Convertible Preferred Stock ("Series C Preferred
Stock") into 2,104,142 shares of its common stock.
If the PageNet Exchange Offer and the Arch Exchange Offer were fully
subscribed, immediately following the Merger (and the issuance of Arch common
stock in exchange for PageNet common stock, in the Arch Exchange Offer and upon
the conversion of Series C Preferred Stock), current holders of Arch's common
stock would own approximately 29.6% of the outstanding Arch common stock,
holders of Series C Preferred Stock would own approximately 1.2% of the
outstanding Arch common stock, holders of the Senior Discount Notes would own
approximately 17.6% of the outstanding Arch common stock, current holders of
PageNet common stock would own approximately 7.5% of the outstanding Arch common
stock and current holders of the PageNet Notes (in the aggregate) would own
approximately 44.5% of the outstanding Arch common stock. In addition, following
the Merger Arch would have, on a pro forma basis, total debt of approximately
$1.8 billion.
Under the Merger Agreement, the Arch Board of Directors at the closing would
consist of 12 individuals, at least six of whom would be designated by the
existing Arch Board of Directors. The PageNet Board of Directors would designate
three members, and the three largest holders of PageNet Notes would each be
entitled to designate one member. To the extent any such holder of PageNet Notes
did not elect to designate a director, the number of directors designated by the
Arch Board of Directors would increase.
Arch expects the Merger, which has been approved by the Boards of Directors
of Arch and PageNet, but is subject to customary regulatory review, shareholder
approval, other third-party consents and the completion of the exchange offers
and preferred stock conversion, to be completed during the first half of 2000.
Each of the PageNet Exchange Offer and the Arch Exchange Offer is conditioned
upon acceptance by the holders of 97.5% of the PageNet Notes and Senior Discount
Notes, respectively.
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Under the Merger Agreement, PageNet is required to include a "prepackaged"
plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
materials relating to the PageNet Exchange Offer, and to solicit consents for
this prepackaged plan from holders of the PageNet Notes and its senior
creditors. In certain circumstances PageNet has agreed either to file the
prepackaged plan in lieu of completing the PageNet Exchange Offer or to pay to
Arch a termination fee.
The agreement provides that each party may be obligated to pay the other a
termination fee equal to $40.0 million under the terms described under Note (j)
to the Notes to Consolidated Financial Statements.
MOBILEMEDIA MERGER
On June 3, 1999 a wholly owned subsidiary of the Company merged with
MobileMedia Communications, Inc. ("MobileMedia") pursuant to a merger agreement
with MobileMedia (the "MobileMedia Merger").
Pursuant to the MobileMedia Merger, Arch: (i) issued certain stock and
warrants; (ii) paid $479.0 million in cash to certain creditors of MobileMedia;
(iii) paid approximately $40.0 million of administrative, transaction and
related costs; (iv) raised $217.2 million in cash through offerings of rights to
purchase its common stock; and (v) caused its wholly owned subsidiary, ACI and
ACI's principal operating subsidiary, Arch Paging Inc. ("API"), to borrow a
total of approximately $320.8 million. After consummation of the MobileMedia
Merger on June 3, 1999, MobileMedia became a wholly owned subsidiary of API. See
Note (c) to the Notes to Consolidated Condensed Financial Statements.
During the third quarter of 1999 Arch approved plans covering the elimination
of redundant headcount and facilities in connection with the overall integration
of MobileMedia's operations. To the extent that it is determined that headcount
and facilities acquired with MobileMedia should be eliminated, the purchase
price of the acquisition will be increased to cover the costs of executing the
plan. It is expected that the integration activity relating to the MobileMedia
Merger, which commenced on July 1, 1999, will take approximately 18 months.
In connection with the MobileMedia acquisition, Arch anticipates a net
reduction of approximately 10% of MobileMedia's workforce and the closing of
certain facilities and tower sites. This resulted in the establishment a $13.1
million acquisition reserve which is included as part of the purchase price of
MobileMedia. The initial acquisition reserve consisted of approximately (i) $5.6
million for employee severance, (ii) $7.0 million for lease obligations and
terminations and (iii) $0.5 million of other costs. The acquisition reserve will
continue to be evaluated in the event that certain assumptions change in the
future. There can be no assurance that the desired cost savings will be achieved
or that the integration of the two companies will be accomplished smoothly,
expeditiously or successfully. See Note (h) to the Notes to Consolidated
Condensed Financial Statements.
DIVISIONAL REORGANIZATION
In June 1998, the Arch Board approved a divisional reorganization (the
"Divisional Reorganization"). As part of the Divisional Reorganization, which
was originally expected to be 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 take advantage of
various operating efficiencies. In conjunction with the completion of the
MobileMedia merger, Arch management reviewed the timing and implementation of
the Divisional Reorganization. The plan was reviewed within the context of the
combined company integration plan which was approved by the Company in the third
quarter of 1999. After a thorough review it was decided that significant changes
needed to be made to the Divisional Reorganization plan. It is anticipated that
the impact of the MobileMedia Merger will extend the cash outlays of the
Divisional Reorganization plan to December 31, 2000.
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In connection with the Divisional Reorganization, Arch (i) anticipated a net
reduction of approximately 10% of its workforce, (ii) closed certain office
locations and redeployed other real estate assets and (iii) recorded a
restructuring charge of $14.7 million during 1998. The restructuring charge
consisted of approximately (i) $9.7 million for employee severance, (ii) $3.5
million for lease obligations and terminations, and (iii) $1.5 million of other
costs. In light of the MobileMedia Merger, the Divisional Reorganization was
reevaluated. In the quarter ended September 30, 1999 the Company identified
certain of its facilities and network leases that will not be utilized following
the merger integration, resulting in an additional charge of $2.6 million. This
charge was offset by reductions to previously provided severance and other costs
of $4.8 million. There can be no assurance that the desired cost savings will be
achieved or that the anticipated reorganization will be accomplished smoothly,
expeditiously or successfully. See Note (g) to the Notes to Consolidated
Condensed Financial Statements.
RESULTS OF OPERATIONS
Total revenues increased to $206.2 million (a 98.2% increase) and $440.6
million (a 42.3% increase) in the three and nine months ended September 30,
1999, respectively, from $104.1 million and $309.6 million in the three and nine
months ended September 30, 1998, respectively. Net revenues (total revenues less
cost of products sold) increased to $195.7 million (a 102.0% increase) and
$415.6 million (a 44.4% increase) in the three and nine months ended September
30, 1999, respectively, from $96.9 million and $287.8 million in the three and
nine months ended September 30, 1998, respectively. Total revenues and net
revenues in the 1999 period increased primarily due to the MobileMedia Merger,
but were also adversely affected by a general slowing of paging industry growth,
compared to prior years. Revenues were also adversely affected by: (i) Arch's
decision in the fourth quarter of 1998, in anticipation of the MobileMedia
Merger, not to replace normal attrition among direct sales personnel; (ii) the
reduced effectiveness of the reseller channel of distribution; and (iii) reduced
sales through Arch's company owned stores. Arch expects revenue to continue to
be adversely affected in 1999 due to these factors. Service, rental and
maintenance revenues, which consist primarily of recurring revenues associated
with the sale or lease of pagers, increased to $190.8 million (a 104.0%
increase) and $403.6 million (a 45.3% increase) in the three and nine months
ended September 30, 1999, respectively, from $93.5 million and $277.8 million in
the three and nine months ended September 30, 1998, respectively. These
increases in revenues were due primarily to the acquisition of MobileMedia on
June 3, 1999. Maintenance revenues represented less than 10% of total service,
rental and maintenance revenues in the three and nine months ended September 30,
1999 and 1998. Arch does not differentiate between service and rental revenues.
Product sales, less cost of products sold, increased to $4.9 million (a 48.0%
increase) and $12.0 million (a 20.4% decrease) in the three and nine months
ended September 30, 1999, respectively, from $3.3 million and $9.9 million in
the three and nine months ended September 30, 1998, respectively, as a result of
the MobileMedia acquisition.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, were $43.0 million (22.0% of net
revenues) and $91.4 million (22.0% of net revenues) in the three and nine months
ended September 30, 1999, respectively, compared to $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. The increases in the three and nine
month periods were due primarily to increased expenses associated with the
provision of paging services to a greater number of units. The acquisition of
MobileMedia added approximately 2.8 million units in service. Although as
existing paging systems become more populated through the addition of new paging
units, the fixed costs of operating these paging systems are spread over a
greater unit base, annualized service, rental and maintenance expenses per unit
increased to $24 and $22 in the three and nine months ended September 30, 1999,
respectively, compared to $20 in both the corresponding 1998 periods. This
increase is due primarily to the increase in paging systems and associated
expenses as a result of the MobileMedia Merger, however, the per unit costs
should decrease in the future once synergies are achieved.
Selling expenses were $26.5 million (13.6% of net revenues) and $57.6 million
(13.9% of net revenues) in the three and nine months ended September 30, 1999,
respectively, compared to $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. The increases in absolute dollars were primarily due to
increased headcount and the increases as a percentage of net revenues were
primarily due to redundant headcount as a result of the MobileMedia Merger.
General and administrative expenses increased to $60.6 million (31.0% of net
revenues) and $123.6 million (29.8% of net revenues) in the three and nine
months ended September 30, 1999, respectively, from $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. The increases in absolute dollars were
primarily due to increased headcount, administrative and facility costs and the
increases as a percentage of net revenues were primarily due to the redundant
headcount, administrative and facility costs associated with MobileMedia.
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Depreciation and amortization expenses increased to $94.8 million and
$222.8 million in the three and nine months ended September 30, 1999,
respectively, from $56.6 million and $165.0 million in the three and nine months
ended September 30, 1998, respectively. These expenses principally reflect the
acquisition of MobileMedia, as well as 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. Additionally, depreciation expense
for the nine months ended September 30, 1999 includes the write-off of
approximately $7.1 million of costs associated with the development of an
integrated billing and management system. The Company decided to discontinue
development efforts due to the capabilities of the system acquired in
conjunction with the MobileMedia Merger.
Operating losses were $27.1 million and $77.7 million in the three and nine
months ended September 30, 1999, respectively, compared to $20.8 million and
$74.2 million in the three and nine months ended September 30, 1998,
respectively, as a result of the factors outlined above.
Net interest expense increased to $39.7 million and $98.9 million in the
three and nine months ended September 30, 1999, respectively, from $26.9 million
and $76.7 million in the three and nine months ended September 30, 1998,
respectively. The increases were principally attributable to an increase in
Arch's outstanding debt. Interest expense for the nine months ended September
30, 1999 and 1998 include approximately $30.4 million and $27.4 million,
respectively, of non-cash interest accretion on the Senior Discount Notes under
which semi-annual interest payments commence on September 15, 2001.
Other expense increased to $0.9 million and $44.4 million in the three and
nine months ended September 30, 1999, respectively, from $0.3 million and $1.7
million in the three and nine months ended September 30, 1998, respectively. In
the nine months ended September 30, 1999, other expense includes $6.5 million
representing the write-off of Arch's investment in CONXUS (see Note (b) to the
Notes to Consolidated Condensed Financial Statements) and $35.8 million
associated with the arrangements made between Arch, Benbow and Ms. Walsh in June
1999 (see Note (b) to the Notes to Consolidated Condensed Financial Statements).
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.
On January 1, 1999, Arch adopted SOP 98-5. SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. Initial
application of SOP 98-5 resulted in a $3.4 million charge which was reported as
the cumulative effect of a change in accounting principle. This charge
represents the unamortized portion of start-up and organization costs which had
been deferred in prior years.
Net loss increased to $67.7 million and $227.6 million in the three and nine
months ended September 30, 1999, respectively, from $48.0 million and $156.4
million in the three and nine months ended September 30, 1998, respectively, as
a result of the factors outlined above.
LIQUIDITY AND CAPITAL RESOURCES
Arch's business strategy requires the availability of substantial funds to
finance the expansion of existing operations, to fund capital expenditures for
pagers and paging system equipment, to service debt and to finance acquisitions.
Capital Expenditures and Commitments
Arch's capital expenditures decreased from $85.8 million in the nine months
ended September 30, 1998 to $83.2 million in the nine months ended September 30,
1999. Arch generally has funded its capital expenditures with net cash provided
by operating activities and the incurrence of debt. Arch believes that it will
have sufficient cash available from operations and credit facilities to fund its
capital expenditures for the remainder of the year.
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Arch was formerly obligated to advance to Benbow sufficient funds to service
debt obligations incurred by Benbow in connection with its acquisition of its
N-PCS licenses and to finance construction of an N-PCS system unless funds were
available to Benbow from other sources. This obligation was subject to approval
of Arch's designee on Benbow's board of directors. As of March 31, 1999, Arch
had advanced approximately $23.7 million to Benbow. In June 1999, Arch, Benbow,
and Benbow's majority stockholder, Ms. June Walsh, agreed that:
the shareholders agreement, the management agreement and the employment
agreement governing the establishment and operation of Benbow will be
terminated
Benbow will not make any further FCC payments and will not pursue
construction of an N-PCS system
Arch will not be obligated to fund FCC payments or construction of an
N-PCS system by Benbow
the parties will seek FCC approval of the forgiveness of Benbow's
remaining payment obligations and the transfer of Ms. Walsh's equity
interest in Benbow to Arch
the closing of the transaction will occur on the earlier of January 23,
2001 or receipt of FCC approval
Arch will pay Ms. Walsh, in installments, an aggregate amount of $3.5
million (if the transaction closes before January 23, 2001) or $3.8
million (if the transaction closes on January 23, 2001)
As a result of these arrangements, Benbow will not have any meaningful
business operations and is unlikely to retain its N-PCS licenses. The closing of
the transaction will not affect the funding obligations of Arch in connection
with Benbow's acquisition of Page Call in June 1998.
Pursuant to the Merger Agreement, Arch may be obligated to pay PageNet a
termination fee of $40.0 million in certain specified circumstances. See Note
(j) to the Notes to Consolidated Condensed Financial Statements.
Sources of Funds
Arch's net cash provided by operating activities was $76.4 million and $61.3
million in the nine months ended September 30, 1999 and 1998, 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.
Secured Credit Facility
In March 1999, Arch amended an existing credit facility to establish senior
secured revolving credit and term loan facilities with a wholly owned subsidiary
of Arch as borrower in the aggregate amount of $581.0 million consisting of:
Tranche A: a $175.0 million reducing revolving credit facility;
Tranche B: a $100.0 million 364-day revolving credit facility under which
the principal amount outstanding on June 27, 1999 was converted into a
term loan; and
Tranche C: a $306.0 million term loan of which $125.0 million was made
available in a single drawing on June 29, 1998 and $181.0 million was made
available in a single drawing on June 3, 1999.
The amount of these facilities will reduce as time passes.
Arch's secured credit facility and other debt instruments contain
restrictions that limit, among other things, declaration and payment of
dividends and the incurrence of debt. See "-- Debt instruments restrict
operations"
Recent Issuance of Notes
On June 3, 1999, ACI received the proceeds of an offering of $147.0 million
principal amount of 13 3/4% Senior Notes due 2008 (the "13 3/4% Notes") to
qualified institutional buyers under Rule 144A promulgated under the Securities
Act of 1933, as amended. The 13 3/4% Notes were sold at an initial price to
investors of 95.091% for net proceeds of $134.6 million (after deducting the
discount to the Initial Purchasers and offering expenses). The 13 3/4% Notes
mature on April 15, 2008 and bear interest at a rate of 13 3/4% per annum,
payable semi-annually in arrears on April 15 and October 15 of each year,
commencing October 15, 1999.
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Equity Issued in Exchange for Debt
In October 1999, Arch completed transactions with four bondholders in which
Arch issued an aggregate of 3,136,665 shares of Arch common stock and warrants
to purchase 540,487 shares of Arch common stock for $9.03 per share in exchange
for $25.2 million accreted value of debt securities. Under two of the exchange
agreements, Arch issued 809,545 shares of Arch common stock and warrants to
purchase 540,487 shares of Arch common stock for $9.03 per share in exchange for
$8.9 million principal amount of the Convertible Subordinated Debentures. Under
the remaining exchange agreements, Arch issued 2,327,120 shares of Arch common
stock in exchange for $16.3 million accreted value ($19.0 million maturity
value) of the Senior Discount Notes. Following these transactions, Arch has $4.5
million in principal amount of the Convertible Debentures and $387.1 million
accreted value (at October 31, 1999) ($448.4 million maturity value) of the
Senior Discount Notes outstanding.
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.
Relating to Operations
Integrating Arch and MobileMedia presents challenges
Arch may not be able to successfully integrate MobileMedia's operations. Any
difficulties or problems encountered in the integration process could have a
material adverse effect on Arch. Even if integrated in a timely manner, there
can be no assurance that Arch's operating performance will be successful or will
fulfill management's objectives. Until integration is complete, the two
companies will continue to operate with some autonomy. This degree of autonomy
may blunt the implementation of the combined company's operating strategy.
The combination of the two companies is requiring, among other things,
coordination of administrative, sales and marketing, distribution and accounting
and finance functions and expansion of information and management systems. The
integration process could cause the interruption of the activities of the two
businesses, or a loss of momentum. The difficulties of such integration are
initially increased by the necessity of coordinating geographically separate
organizations and integrating personnel with disparate business backgrounds and
corporate cultures. Arch may not be able to retain key employees. The process of
integrating the businesses of Arch and MobileMedia may require a
disproportionate amount of time and attention of Arch's management and financial
and other resources of Arch and may involve other, unforeseen difficulties.
Similar risks will attend future acquisition opportunities which Arch may
pursue. Furthermore, no assurance can be given that suitable acquisition
transactions can be identified, financed and completed on acceptable terms, or
that Arch will participate in any future consolidation of the paging industry.
Disruption of MobileMedia's operations that occurred during insolvency
proceedings may continue
MobileMedia's business operations were adversely affected by difficulties in
integrating the operations of certain businesses acquired in 1995 and 1996, by
liquidity problems arising prior to its January 30, 1997 bankruptcy filing and
by the reluctance of some customers and potential customers to do business with
MobileMedia while it operated under Chapter 11. Any continued deterioration of
MobileMedia's business, including the loss of significant numbers of key
employees, could have material adverse effects.
Downturn in MobileMedia's units in service may continue
Cancellation of units in service can significantly affect the results of
operations of wireless messaging service providers. The sales and marketing
costs associated with attracting new subscribers are substantial compared to the
costs of providing service to existing customers. Because the paging business is
characterized by high fixed costs, cancellations directly and adversely affect
EBITDA.
After filing for bankruptcy protection on January 30, 1997, MobileMedia
experienced a significant decline in units in service. At March 31, 1999,
MobileMedia had 3,106,775 units in service compared to 3,440,342 units in
service at December 31, 1997. A failure to correct this cancellation trend could
have a material adverse effect on the combined company.
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Competition and technological change may undermine Arch's business
There can be no assurance that Arch will be able to compete successfully with
current and future competitors in the wireless messaging business or with
competitors offering alternative communication technologies.
Competition may intensify and may adversely affect margins. Arch has faced
competition from other wireless messaging (including paging) service providers
in all markets in which it operates, including some competitors who hold
nationwide licenses. Due in part to competitive conditions, monthly fees for
basic paging services have generally declined in recent years. Arch may face
significant price-based competition in the future, not only with respect to
basic paging, but also advanced messaging services, which could have a material
adverse effect on its revenues and EBITDA. Some competitors possess greater
financial, technical and other resources than Arch. A trend towards increasing
consolidation in the wireless communications industry 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 wireless
messaging business or focus on Arch's historical markets, this could have a
material adverse effect on the Company.
New wireless messaging technology may adversely affect Arch's competitive
position. While Arch currently provides advanced messaging (including two-way
paging) services, it is currently providing those services primarily as a
reseller, and on a limited basis through its own network. Although these
services generally are higher priced than traditional one-way paging services,
this situation may change. Technological improvements could result in increased
capacity and efficiency for two-way paging technologies and this could result in
increased competition for Arch. Future technological advances in the
telecommunications industry could increase new services or products competitive
with the paging services historically provided, and the other messaging services
currently provided, by Arch. Future technological advances could also require
Arch to reduce the price of its core paging services or other messaging 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 also compete with the messaging services that Arch
provides. These include cellular and broadband personal communications services,
which are commonly referred to as PCS, as well as specialized mobile radio
services. Although these services are primarily focused on two-way voice
communications, many service providers are electing to provide paging and other
data messaging services as an adjunct to their primary services.
Obsolescence in company-owned units may impose additional costs on Arch.
Technological change may also adversely affect the value of the messaging units
owned by Arch that are leased to its subscribers. If Arch's current subscribers
request more technologically advanced units, including two-way units, Arch could
incur additional inventory costs and capital expenditures if required to replace
units leased to its subscribers within a short period of time. Such additional
investment or capital expenditures could have a material adverse effect on Arch.
Government regulation may burden operations
Licenses may not be automatically renewed. Arch's FCC paging licenses are for
varying terms of up to 10 years. When the licenses expire, renewal applications
must receive approval from the FCC. To date, the FCC has approved each
assignment and transfer of control for which Arch and MobileMedia have sought
approval; however, no assurance can be given that any of Arch's renewal
applications will be free of challenge or will be granted by the FCC.
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Regulatory changes could add burdens or benefit competing technologies. The
FCC continually reviews and revises its rules affecting paging companies.
Therefore, regulatory requirements that apply to Arch may change significantly
over time. Acquisitions of Arch's stock by foreigners could jeopardize Arch's
licenses. The Communications Act limits foreign investment in and ownership of
radio common carriers licensed by the FCC. Arch may not have more than 25% of
its stock owned or voted by aliens or their representatives, a foreign
government or its representatives or a foreign corporation if the FCC finds that
the public interest would be served by denying such ownership. Arch's
subsidiaries that are radio common carrier licensees are subject to more
stringent requirements and may have only up to 20% of their stock owned or voted
by aliens or their representatives, a foreign government or their
representatives or a foreign corporation. This ownership restriction is not
subject to waiver. Arch's certificate of incorporation permits the redemption of
shares of its capital stock from foreign stockholders where necessary to protect
FCC licenses held by Arch or its subsidiaries, but such a redemption would be
subject to the availability of capital to Arch and any restrictions contained in
applicable debt instruments and under the Delaware corporations statute. These
restrictions currently would not permit any such redemptions. The failure to
redeem shares promptly could jeopardize the FCC licenses held by Arch or its
subsidiaries. See "--High degree of leverage burdens operations" and
"--Competition and technological change may undermine Arch's business".
Arch cannot control third parties on whom Arch depends for products and
services
Arch does not manufacture any of the messaging units used in its operations.
It is dependent primarily on Motorola and NEC America Inc. to obtain sufficient
pager inventory for new subscriber and replacement needs and on Glenayre
Electronics, Inc. and Motorola for sufficient terminals and transmitters to meet
its expansion and replacement requirements. Significant delays in obtaining
messaging units, terminals or transmitters, such as MobileMedia experienced
before its bankruptcy filing, could lead to disruptions in operations and
adverse financial consequences. Arch's purchase agreement with Motorola expires
on March 17, 2000. There can be no assurance that the agreement with Motorola
will be renewed or, if renewed, that such agreements will be on terms and
conditions as favorable to Arch as those under the current agreement.
Arch relies on third parties to provide satellite transmission for some
aspects of its messaging services. To the extent there are satellite outages or
if satellite coverage is impaired in other ways, Arch may experience a loss of
service until such time as satellite coverage is restored, which could have a
material adverse effect on Arch.
Loss of key personnel could adversely impact operations
Arch's success will depend, to a significant extent, upon the continued
services of a relatively small group of executive personnel. Arch does not have
employment agreements with any of its current executive officers, or maintain
life insurance on their lives, although all executive officers have entered into
executive retention agreements with Arch. 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 Arch.
Impact of the Year 2000 issue is not fully known
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 normal business activities.
To address this issue, Arch has created a cross-functional Y2K project group
that has analyzed and identified internal and external areas likely to be
affected by the Year 2000 problem. Arch has requested information from certain
mission critical vendors and has held discussions with paging equipment and
other mission critical vendors concerning their efforts to identify and address
potential issues associated with their equipment and/or software. While Arch has
made such inquiries, it is possible one or more mission critical vendors, such
as utility providers, telephone carriers, other paging carriers, satellite
carriers or other telecommunication providers, may not be Year 2000 ready. While
Arch has created certain contingency plans (as discussed below), due to the
unique nature of such vendors, alternative providers may not be available.
Furthermore, all paging and messaging units and messaging-related equipment used
by Arch and its customers are manufactured by third parties, and although Arch
has tested such equipment with generally favorable results, it has relied to a
large extent on the representations of its vendors with respect to their
readiness. Arch cannot offer assurance as to its ability to replicate its
testing results in a real time environment or the accuracy of its vendors'
representations.
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Arch is in the final stages of its inventory audit and is nearing completion
of appropriate modifications and/or replacements of its computerized systems and
applications to address the issue. The costs associated with such replacements
has been capitalized and amortized in accordance with Arch's existing accounting
policies and future replacement costs, if any, will be capitalized and amortized
in a similar manner. Maintenance or modification costs have been, and will be,
expensed as incurred. Based on Arch's costs incurred to date and projected
estimated costs, Arch does not expect that its remediation efforts will have a
material adverse effect on its results of operations or its financial condition.
Actual costs and results may vary significantly due to the uncertainties
associated with the problem, which may not be apparent until the second quarter
of 2000.
Although the Company began testing its applications in 1998, there can be no
assurance that such testing has detected all applications that may be affected
by the problem. While it is Arch's objective is to be Year 2000 ready by
year-end 1999, due to the uncertainties associated with the problem, there can
be no assurance that this objective will be met.
Arch is finalizing its contingency plans relating to the Year 2000 problem.
Such plans include, among other things, the use of (i) backup power generators
for certain of its operations, (ii) certain alternate vendors and (iii) various
communication channels to deploy its work force in a timely and efficient manner
to address potential problems that arise. While Arch believes it has used
commercially reasonable efforts in its approach to this issue, any failure of
its systems or products, whether due to internal or external factors, could have
a material adverse effect on its business as a whole, its financial condition,
results of operations and its prospects.
Continued losses are likely
Arch expects to continue to report net losses for the foreseeable future and
cannot predict when, if ever, it is likely to attain profitability.
Arch and MobileMedia have reported losses in all but one of the periods shown
in the table below:
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months
Ended
September 30,
1996 1997 1998 1999
---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss): (dollars in millions)
Arch............. $ (114.7) $(181.9) $(206.1) $(227.6)(a)
MobileMedia...... $(1,059.9) $(124.6) $ 35.6
------------------------------------
(a) Reflects the operations of MobileMedia commencing June 3, 1999.
</TABLE>
Furthermore, MobileMedia had net income during the year ended December 31,
1998 solely because of a $94.2 million gain on the sale of transmission towers
and related equipment. After giving effect to the MobileMedia acquisition, Arch
would have incurred, on a pro forma basis, losses before extraordinary item of
$193.2 million for the year ended December 31, 1998 and $251.6 million for the
nine months ended September 30, 1999. For both Arch and MobileMedia, these
historical net losses have resulted principally from substantial depreciation
and amortization expense, primarily related to intangible assets and pager
depreciation, interest expense, the impairment of long-lived assets in the case
of MobileMedia and other costs of growth. Substantial and increased amounts of
debt are expected to be outstanding for the foreseeable future. This will result
in significant additional interest expense which could have a material adverse
effect on Arch's future income or loss. See "--Funding for future capital needs
is not assured" and "--High degree of leverage burdens operations".
Revenues and operating results may fluctuate
Arch believes that future fluctuations in its revenues and operating results
may occur due to many factors, including competition, subscriber turnover, new
service developments and technological change. Arch's current and planned debt
repayment levels are, to a large extent, fixed in the short term, and are based
in part on its expectations as to future revenues and cash flow growth. Arch may
be unable to adjust spending in a timely manner to compensate for any revenue or
cash flow shortfall. It is possible that, due to future fluctuations, Arch's
revenue, cash flow or operating results may not meet the expectations of
securities analysts or investors. This may have a material adverse effect on the
price of Arch's common stock. If shortfalls were to cause Arch not to meet the
financial covenants contained in its debt instruments, the debtholders could
declare a default and seek immediate repayment.
19
<PAGE>
Relating to Liquidity, Capital Resources and Capital Structure.
High degree of leverage burdens operations
Each of Arch and MobileMedia has been highly leveraged, and Arch expects to
continue to be highly leveraged, unless it consummates a transaction, like the
merger with PageNet, which has the effect of reducing its leverage. The
following table compares the total debt, total assets and latest three-month
annualized adjusted pro forma EBITDA of Arch at or as of September 30, 1999.
(dollars in millions)
Total debt......................................... $1,360.8
Total assets....................................... $ 1,424.5
Annualized adjusted pro forma EBITDA............... $ 262.1
Adjusted EBITDA is not a measure defined in GAAP and should not be considered
in isolation or as a substitute for measures of performance prepared in
accordance with GAAP. Adjusted EBITDA, as determined by Arch, may not
necessarily be comparable to similarly titled data of other wireless messaging
companies. Arch's high degree of leverage may have adverse consequences for
Arch. These include the following:
o High leverage may impair or extinguish Arch's ability to obtain
additional financing necessary for acquisitions, working capital,
capital expenditures or other purposes on acceptable terms, if at all.
o A substantial portion of Arch's cash flow will be required to pay
interest expense; this will reduce the funds which would otherwise be
available for operations and future business opportunities.
o Arch's credit facilities and indentures contain financial and
restrictive covenants; the failure to comply with these covenants may
result in an event of default which could have a material adverse
effect on Arch if not cured or waived.
o Arch may be more highly leveraged than its competitors which may place
it at a competitive disadvantage.
o Arch's high degree of leverage will make it more vulnerable to a
downturn in its business or the economy generally.
There can be no assurance that Arch will be able to reduce its financial
leverage as it intends, or that Arch will achieve an appropriate balance between
acceptable growth 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.
Debt instruments restrict operations
Various debt instruments impose operating and financial restrictions on Arch.
Arch's secured credit facility requires various Arch operating subsidiaries to
maintain specified financial ratios, including a maximum leverage ratio and a
minimum fixed charge coverage ratio. In addition, the secured credit facility
limits or restricts, among other things, the operating subsidiaries' ability to:
o declare dividends or redeem or repurchase capital stock;
o prepay, redeem or purchase debt;
o incur liens and engage in sale/leaseback transactions;
o make loans and investments;
o incur indebtedness and contingent obligations;
20
<PAGE>
o amend or otherwise alter debt instruments and other material
agreements;
o engage in mergers, consolidations, acquisitions and asset sales;
o engage in transactions with affiliates; and
o alter its lines of business or accounting methods.
Other debt instruments limit, among other things:
o the incurrence of additional indebtedness by Arch and its subsidiaries;
o the payment of dividends and other restricted payments by Arch and its
subsidiaries;
o asset sales;
o transactions with affiliates;
o the incurrence of liens; and
o mergers and consolidations.
Arch's ability to comply with such covenants may be affected by events beyond
its control, including prevailing economic and financial conditions. A breach of
any of these covenants could result in a default under the secured credit
facility and/or other debt instruments. Upon the occurrence of an event of
default, the creditors could elect to declare all amounts outstanding to be
immediately due and payable, together with accrued and unpaid interest. If Arch
were unable to repay any such amounts, the secured creditors could proceed
against the collateral securing a portion of the indebtedness. If the lenders
under the secured credit facility or other debt instruments accelerated the
payment of such indebtedness, there can be no assurance that the assets of Arch
would be sufficient to repay in full such indebtedness and other indebtedness of
Arch. In addition, because the secured credit facility and other debt
instruments limit Arch's ability to engage in certain transactions except under
certain circumstances, Arch may be prohibited from entering into transactions
that could be beneficial to Arch.
Funding for future capital needs is not assured
Arch's business strategy requires substantial funds to be available to
finance the continued development and future growth and expansion of its
operations, including possible acquisitions. Future amounts of capital required
by Arch will depend upon a number of factors. These factors include unit in
service growth, the type of messaging devices and services demanded by
customers, service revenues, technological developments, marketing and sales
expenses, competitive conditions, the nature and timing of Arch's N-PCS strategy
and the nature and timing of any future acquisitions, including PageNet. No
assurance can be given that additional equity or debt financing will be
available to Arch when needed on acceptable terms, if at all. If sufficient
financing is unavailable when needed, this may have a material adverse effect on
Arch. See "--Liquidity and Capital Resources".
Charter provisions may impede takeovers of Arch
Arch's certificate of incorporation and by-laws provide for a classified
board of directors, the issuance of "blank check" preferred stock whose terms
may be fixed by Arch's board of directors without further stockholder approval,
a prohibition on stockholder action by written consent in lieu of a meeting and
certain procedural requirements governing stockholder meetings. Arch also has a
stockholders rights plan. In addition, Section 203 of the Delaware corporations
statute will, with certain exceptions, prohibit Arch from engaging in any
business combination with any "interested stockholder" for a three-year period
after such stockholder becomes an interested stockholder. Such provisions may
have the effect of delaying, making more difficult or preventing a change in
control or acquisition of Arch even though such a transaction might be
beneficial to Arch's stockholders.
Trading prices may be volatile
The market price of Arch's common stock has been experiencing significant
fluctuation and has declined materially since 1996. Between January 1, 1998 and
November 5, 1999, the reported sale price of common stock on the Nasdaq National
Market has ranged from a high of $20.8125 per share in April 1998 to a low of
$2.0625 per share in October 1998. The trading price of common stock will likely
21
<PAGE>
be affected by numerous factors. These include the factors affecting future
operating results set forth in this quarterly report, as well as prevailing
economic and financial trends and conditions in the public securities markets.
Share prices of paging companies such as Arch have exhibited a high degree of
volatility during recent periods. Shortfalls in revenues or EBITDA from the
levels anticipated by the public markets could have an immediate and significant
adverse effect on the trading price of Arch's common stock in any given period.
Shortfalls may result from events that are beyond Arch's immediate control and
can be unpredictable. The trading price of Arch's shares may also be affected by
developments which may not have any direct relationship with Arch's business or
long-term prospects. These include reported financial results and fluctuations
in trading prices of the shares of other publicly held companies in the paging
industry generally.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The majority of the Company's long-term debt is subject to fixed rates of
interest or interest rate protection. In the event that the interest rate on the
Company's non-fixed rate debt fluctuates by 10% in either direction, the Company
believes the impact on its results of operations would be immaterial. The
Company transacts infrequently in foreign currency and therefore is not exposed
to significant foreign currency exchange rate risk.
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 2000 Annual Meeting
As set forth in the Company's Proxy Statement for its 1999 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 2000 Annual
Meeting of Stockholders must be received by the Secretary of the Company at the
principal offices of the Company no later than December 17, 1999.
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 2000 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 2000 Annual Meeting is currently expected to
22
<PAGE>
be held on May 16, 2000. 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 25, 2000.
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.
23
<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
September 30, 1999, to be signed on its behalf by the undersigned thereunto duly
authorized.
ARCH COMMUNICATIONS GROUP, INC.
Dated: November 15, 1999 By: /s/ J. Roy Pottle
----------------------------------
J. Roy Pottle
Executive Vice President and
Chief Financial Officer
24
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
------- -----------
27.1 - Financial Data Schedule.
- -----------------
25
<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-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<EXCHANGE-RATE> 1
<CASH> 21,488
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<BONDS> 1,357,743
0
3
<COMMON> 481
<OTHER-SE> (181,376)
<TOTAL-LIABILITY-AND-EQUITY> 1,424,518
<SALES> 36,963
<TOTAL-REVENUES> 440,570
<CGS> 24,988
<TOTAL-COSTS> 24,988
<OTHER-EXPENSES> 91,421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,927
<INCOME-PRETAX> (224,230)
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<CHANGES> (3,361)
<NET-INCOME> (227,591)
<EPS-BASIC> (9.13)
<EPS-DILUTED> (9.13)
</TABLE>
