QUARTERLY REPORT UNDER SECTION 13 0R 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
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: 63,694,324 shares of the
Company's Common Stock ($.01 par value) and 2,712,185 Shares of the Company's
Class B Common Stock ($.01 par value) were outstanding as of May 9, 2000.
<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 March 31,
2000 and December 31, 1999 3
Consolidated Condensed Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,222 $ 3,161
Accounts receivable, net 59,071 61,167
Inventories 9,514 9,101
Prepaid expenses and other 12,772 11,874
----------- -----------
Total current assets 85,579 85,303
----------- -----------
Property and equipment, at cost 742,440 714,644
Less accumulated depreciation and amortization (357,319) (314,445)
----------- -----------
Property and equipment, net 385,121 400,199
----------- -----------
Intangible and other assets, net 824,768 867,543
----------- -----------
$ 1,295,468 $ 1,353,045
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 11,154 $ 8,060
Accounts payable 41,586 30,016
Accrued restructuring 14,556 17,111
Accrued interest 31,322 30,294
Accrued expenses and other liabilities 70,358 79,330
----------- -----------
Total current liabilities 168,976 164,811
----------- -----------
Long-term debt, less current maturities 1,169,954 1,322,508
----------- -----------
Other long-term liabilities 81,051 83,285
----------- -----------
Stockholders' equity (deficit):
Preferred stock-- $.01 par value 3 3
Common stock-- $.01 par value 632 512
Additional paid-in capital 817,478 661,413
Accumulated deficit (942,626) (879,487)
----------- -----------
Total stockholders' equity (deficit) (124,513) (217,559)
----------- -----------
$ 1,295,468 $ 1,353,045
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed 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>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Service, rental, and maintenance revenues $ 177,660 $ 90,529
Product sales 12,335 10,359
------------ ------------
Total revenues 189,995 100,888
Cost of products sold (8,880) (6,926)
------------ ------------
181,115 93,962
------------ ------------
Operating expenses:
Service, rental, and maintenance 39,115 20,293
Selling 25,045 13,011
General and administrative 53,934 25,626
Depreciation and amortization 90,707 51,118
------------ ------------
Total operating expenses 208,801 110,048
------------ ------------
Operating income (loss) (27,686) (16,086)
Interest expense, net (42,506) (26,477)
Equity in loss of affiliate -- (3,200)
------------ ------------
Income (loss) before extraordinary item and
accounting change (70,192) (45,763)
Extraordinary gain from early extinguishment of debt 7,615 --
Cumulative effect of accounting change -- (3,361)
------------ ------------
Net income (loss) (62,577) (49,124)
Preferred stock dividend (562) (513)
------------ ------------
Net income (loss) to common stockholders $ (63,139) $ (49,637)
============ ============
Basic/diluted net income (loss) per common share
before extraordinary item and accounting change $ (1.28) $ (6.54)
Extraordinary gain per basic/diluted common share 0.14 --
Cumulative effect of accounting change per
basic/diluted common share -- (0.48)
------------ ------------
Basic/diluted net income (loss) per common share $ (1.14) $ (7.02)
============ ============
Basic/diluted weighted average number of
common shares outstanding 55,316,698 7,071,861
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 31,915 $ 12,379
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (30,858) (21,125)
Additions to intangible and other assets (1,996) (4,403)
Net proceeds from sale of tower site assets -- 618
--------- ---------
Net cash used for investing activities (32,854) (24,910)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 18,000 23,000
Repayment of long-term debt (16,000) --
--------- ---------
Net cash provided by financing activities 2,000 23,000
--------- ---------
Net increase in cash and cash equivalents 1,061 10,469
Cash and cash equivalents, beginning of period 3,161 1,633
--------- ---------
Cash and cash equivalents, end of period $ 4,222 $ 12,102
========= =========
Supplemental disclosure:
Interest paid $ 29,057 $ 20,212
========= =========
Accretion of discount on senior notes $ 9,428 $ 9,942
========= =========
Issuance of common stock in exchange for debt $ 155,623 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed 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. 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, 1999, 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, 1999
has been derived from, but does not include all the disclosures contained in,
the audited consolidated financial statements for the year ended December 31,
1999. 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, 1999. 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):
March 31, December 31,
2000 1999
----------- ----------
(unaudited)
Goodwill $238,149 $249,010
Purchased FCC licenses 341,419 354,246
Purchased subscriber lists 219,947 239,114
Deferred financing costs 20,293 19,915
Other 4,960 5,258
-------- --------
$824,768 $867,543
======== ========
(c) Divisional Reorganization - As of March 31, 2000, 423 employees had
been terminated due to the divisional reorganization and restructuring. The
Company's restructuring activity as of March 31, 2000 is as follows (in
thousands):
Reserve Balance Utilization of
at December 31, Reserve in Remaining
1999 2000 Reserve
------------ ------------ ------------
Severance costs $1,030 $ 159 $ 871
Lease obligation costs 5,198 585 4,613
------ ------ ------
Total $6,228 $ 744 $5,484
====== ====== ======
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(d) MobileMedia Acquisition Reserve - As of March 31, 2000, 229 former
MobileMedia employees had been terminated. The Company's restructuring activity
as of March 31, 2000 is as follows (in thousands):
Reserve Balance Utilization of
at December 31, Reserve in Remaining
1999 2000 Reserve
------------ ------------ ------------
Severance costs $ 2,678 $1,339 $1,339
Lease obligation costs 7,828 454 7,374
Other costs 377 18 359
------- ------ ------
Total $10,883 $1,811 $9,072
======= ====== ======
(e) Debt Exchanged for Equity - In February and March 2000, Arch completed
transactions in which Arch issued an aggregate of 11,926,036 shares of Arch
common stock in exchange for approximately $160.9 million accreted value of debt
securities. Under one of the exchange agreements, Arch issued 285,715 shares of
common stock in exchange for $3.5 million principal amount of Arch convertible
debentures. Arch recorded $2.4 million of non-cash interest expense in
conjunction with this transaction. Under the other exchange agreements, Arch
issued 11,640,321 shares of common stock in exchange for $157.4 million accreted
value ($176.0 million maturity value) of its senior discount notes. Arch
recorded an extraordinary gain of $7.6 million on the early extinguishment of
debt as a result of these transactions.
(f) Subsequent Event - On May 10, 2000, Arch announced it had completed its
agreement with Resurgence Asset Management L.L.C. for the exchange of $91.1
million accreted value ($100.0 million maturity value) of senior discount notes
held by various Resurgence entities for 1,000,000 shares of a new class of
Arch's preferred stock to be called Series D preferred stock. The Series D
preferred stock will:
o be convertible at the holder's option, at any time, into an aggregate of
6,613,180 shares of common stock;
o be subject to mandatory conversion into an aggregate of 6,613,180 shares
of common stock upon completion of Arch's pending merger with PageNet;
o if not earlier converted, commencing March 15, 2001, bear semi-annual
dividends at the rate of 107/8% per annum, payable at Arch's option in
cash or through the issuance of a new class of Arch's preferred stock to
be called Series E preferred stock;
o be subject to mandatory redemption on March 15, 2008 if redemption is then
permitted by applicable law;
o vote with the common stock on an as converted basis; and
o rank upon liquidation senior to the common stock and on a parity with
Arch's existing Series C preferred stock.
If Arch issues Series E preferred stock as a dividend on the Series D
preferred stock, the Series E preferred stock will be identical to the Series D
preferred stock except that it will not (1) be subject to conversion into common
stock, (2) have any voting rights as required by law or (3) bear dividends.
Resurgence has agreed to sell approximately $53.9 million maturity value of
senior discount notes to a third party to be selected by Resurgence that will,
in turn, exchange such notes for 3,562,189 shares of common stock at an exchange
ratio of 66.1318 shares per $1,000 note. This transaction is expected to be
completed in mid-June.
7
<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".
PENDING PAGENET MERGER
In November 1999, Arch signed a definitive agreement with Paging Network,
Inc. (PageNet) pursuant to which PageNet will merge with a wholly-owned
subsidiary of Arch. Each outstanding share of PageNet common stock will be
converted into 0.1247 shares of Arch common stock.
The merger will be accompanied by recapitalizations of Arch and PageNet
through exchange offers by Arch and PageNet to exchange common stock for debt.
In the Arch exchange offer, Arch will offer to exchange shares of Arch common
stock for each of Arch's outstanding 107/8% senior discount notes. In the
PageNet exchange offer, PageNet will offer to exchange shares of PageNet common
stock and shares of Class B common stock of PageNet's subsidiary, Vast
Solutions, Inc., for PageNet's outstanding senior subordinated notes. The shares
of PageNet common stock received by PageNet noteholders will immediately be
converted into shares of Arch common stock as a result of the merger.
The merger agreement also provides that PageNet will distribute up to 11.6%
of the total equity of Vast to its current stockholders. As a result of the
related exchange offer, PageNet's note holders will receive up to 68.9% of the
equity interest in Vast. The combined company will retain up to 19.5% of the
equity interest in Vast following the merger.
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, the Anti-Trust Division of the Department of Justice and
the Federal Communications Commission, but is subject to shareholder approval,
other third-party consents and the completion of the exchange offers, to be
completed in the third quarter of 2000.
Under the merger agreement, PageNet is required to include a "prepackaged"
plan of reorganization under Chapter 11 of the 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 Arch a termination fee.
POTENTIAL EFFECTS OF THE PAGENET MERGER
If Arch acquires PageNet on the terms described above, the combined company
will have substantially larger assets, liabilities, revenues and expenses. On a
pro forma basis at December 31, 1999, the combined company would have had
approximately 15.5 million units in service, total assets of $2.9 billion and
total long term debt of $1.8 billion, assuming that all of the outstanding
discount notes are exchanged for common stock.
The PageNet merger is subject to stockholder, noteholder and lender consents
and many other conditions and, therefore, it may not take place. If Arch does
not acquire PageNet, the contemplated benefits of the merger will not be
realized, despite the incurrence of substantial transaction costs, which are
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estimated at $10.0 million each for Arch and PageNet. If the merger agreement is
terminated after Arch pursues an alternative offer, Arch may be required to pay
PageNet a termination fee of $40.0 million.
RESULTS OF OPERATIONS
Total revenues increased $89.1 million, or 88.3%, to $190.0 million in the
three months ended March 31, 2000 from $100.9 million in the three months ended
March 31, 1999, as the number of units in service increased from 4.3 million at
March 31, 1999 to 6.9 million at March 31, 2000 entirely due to the MobileMedia
acquisition in June 1999. Net revenues (total revenues less cost of products
sold) increased to $181.1 million, a 92.8% increase, in the three months ended
March 31, 2000 from $94.0 million for the corresponding 1999 period. Total
revenues and net revenues in 1999 and 2000 were adversely affected by (1) the
declining demand for basic paging services and (2) subscriber cancellations
which led to a decrease of 80,000 units in service during the three months ended
March 31, 2000.
Arch expects revenue to continue to be adversely affected in 2000 by
declining demand for basic numeric and alphanumeric paging services. Arch
believes that the basic paging industry grew by only 4% during 1999, that demand
for basic paging services will decline in 2000 and the following years and that
any significant future growth in the industry will be attributable to advanced
messaging services. As a result, Arch believes that it will experience a net
decline in the number of its units in service in 2000, excluding the addition of
subscribers from the pending PageNet acquisition, as Arch's addition of advanced
messaging subscribers is likely to be exceeded by its loss of basic paging
subscribers.
Service, rental and maintenance revenues, which consist primarily of
recurring revenues associated with the sale or lease of messaging services,
increased to $177.7 million in the three months ended March 31, 2000 from $90.5
million in the three months ended March 31, 1999. This increase was due entirely
to the acquisition of MobileMedia in June 1999. Maintenance revenues represented
less than 10% of total service, rental and maintenance revenues in the three
months ended March 31, 2000 and 1999. Arch does not differentiate between
service and rental revenues.
Service, rental and maintenance expenses, which consist primarily of
telephone, third party carrier fees and site rental expenses, increased to $39.1
million, 21.6% of net revenues, in the three months ended March 31, 2000 from
$20.3 million, 21.6% of net revenues, in the three months ended March 31, 1999.
The increase was due primarily to increased expenses associated with the
provision of wireless messaging services to a greater number of units due to the
MobileMedia acquisition. Annualized service, rental and maintenance expenses per
unit in service increased to $23 in the three months ended March 31, 2000 from
$19 in the three months ended March 31, 1999. This increase is due primarily to
the provision of alphanumeric and nationwide messaging services to a higher
percentage of customers due to the MobileMedia acquisition.
Selling expenses increased to $25.0 million, 13.8% of net revenues, in the
three months ended March 31, 2000 from $13.0 million, 13.8% of net revenues, in
the three months ended March 31, 1999 due primarily to the MobileMedia
acquisition.
General and administrative expenses increased to $53.9 million, 29.8% of net
revenues, in the three months ended March 31, 2000 from $25.6 million, 27.3% of
net revenues, in the three months ended March 31, 1999. The increase was due
primarily to the MobileMedia acquisition.
Depreciation and amortization expenses increased to $90.7 million in the
three months ended March 31, 2000 from $51.1 million in the three months ended
March 31, 1999. The increase in these expenses was principally attributable to
additional depreciation associated with assets purchased in the MobileMedia
acquisition and amortization expense associated with intangibles which resulted
from the MobileMedia acquisition.
Operating loss increased to $27.7 million in the three months ended March 31,
2000 from $16.1 million in the three months ended March 31, 1999 as a result of
the factors outlined above.
Net interest expense increased to $42.5 million in the three months ended
March 31, 2000 from $26.5 million in the three months ended March 31, 1999. The
increase was attributable to an increase in Arch's average outstanding debt due
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<PAGE>
to the MobileMedia acquisition and to a lesser extent to a one-time charge of
$2.4 million in relation to the convertible debt for equity exchange. Interest
expense in the three months ended March 31, 2000 and 1999 includes approximately
$9.4 million and $9.9 million, respectively, of non-cash interest accretion on
Arch's discount notes.
In the three months ended March 31, 2000, Arch recognized an extraordinary
gain of $7.6 million on the retirement of debt exchanged for common stock.
On January 1, 1999, Arch adopted the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants Statement of Position
98-5 (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 losses increased to $62.6 million in the three months ended March 31,
2000 from $49.1 million in the three months ended March 31, 1999 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
messaging devises and system equipment, to service debt and to finance
acquisitions.
Capital Expenditures and Commitments
Arch's capital expenditures increased from $25.5 million in the three months
ended March 31, 1999 to $32.9 million in the three months ended March 31, 2000.
These capital expenditures primarily include the purchase of wireless messaging
devices, system and transmission equipment, information systems and capitalized
financing costs. 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.
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.
Continued net losses are likely and Arch cannot predict whether it will ever be
profitable
Arch has reported net losses in the past. Arch expects that it will continue
to report net losses and cannot give any assurance about when, if ever, it is
likely to attain profitability.
Arch has reported net losses in all of the periods shown in the table below:
Three
Months Ended
Year Ended December 31, March 31,
1997 1998 1999 2000
---- ---- ---- ----
(dollars in millions)
Net income (loss) $(181.9) $(206.1) $(285.6) $(62.6)
These historical net losses have resulted principally from substantial
depreciation and amortization expense, primarily related to intangible assets
and messaging device depreciation, interest expense and other costs of growth.
Many of the factors that will determine whether or not Arch attains
profitability are inherently difficult to predict. These include competition,
subscriber turnover, new service developments and technological change.
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Declines in units in service are likely
Cancellation of units in service can significantly affect the results of
operations of wireless communications 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 wireless
communications business is characterized by high fixed costs, cancellations
directly and adversely affect earnings before interest, taxes, depreciation and
amortization. In the three months ended March 31, 2000, Arch experienced a
decrease of 80,000 units in service. Arch believes that the traditional paging
industry grew by only 4% during 1999, that demand for basic paging services will
continue to decline in 2000 and in the following years and that any significant
future growth in the paging industry will be attributable to advanced messaging
services. As a result, Arch believes that it will experience a net decline in
the number of units in service in 2000, excluding the addition of subscribers
from the PageNet acquisition, as Arch's addition of advanced messaging
subscribers is likely to be exceeded by its loss of basic paging subscribers.
Revenues and operating results may fluctuate, leading to fluctuations in trading
prices and possible liquidity problems
Arch believes that future fluctuations in its revenues and operating results
may occur due to many factors. Arch's current and planned expenses and 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.
Leverage may continue to burden operations
Arch has been highly leveraged, and will remain leveraged to a substantial
degree following the PageNet merger. The following table compares the total
debt, total assets and latest three-month annualized adjusted earnings before
interest, taxes, depreciation and amortization (EBITDA) of Arch at or as of
March 31, 2000.
(dollars in millions)
Total debt $ 1,181.1
Total assets $ 1,295.5
Annualized adjusted EBITDA $ 252.1
Adjusted EBITDA is not a measure defined by 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.
Leverage may have the following adverse consequences for Arch:
o This leverage may impair 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 Any degree of leverage will make Arch more vulnerable to a downturn in its
business or the economy generally than if it were not as leveraged.
Arch may not be able to reduce its financial leverage as it intends, and may not
be able to achieve an appropriate balance between growth which it considers
acceptable and future reductions in financial leverage. If Arch is not able to
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achieve continued growth in adjusted EBITDA, it may be precluded from incurring
additional indebtedness due to cash flow coverage requirements under existing or
future debt instruments.
Growth and acquisition strategy
Arch believes that the wireless communications industry has experienced, and
will continue to experience, consolidation due to factors that favor larger,
multi-market companies, including:
o the ability to obtain additional radio spectrum;
o greater access to capital markets and lower costs of capital;
o broader geographic coverage of wireless messaging systems;
o economies of scale in the purchase of capital equipment;
o operating efficiencies; and
o enhanced access to executive personnel.
Arch has pursued, and may continue to pursue, acquisitions of wireless
communications businesses as a key component of its growth strategy. However,
the process of integrating acquired businesses may involve unforeseen
difficulties and may require a disproportionate amount of the time and attention
of Arch's management. No assurance can be given that suitable acquisitions can
be identified, financed and completed on acceptable terms, or that any future
acquisitions by Arch will be successful.
Implementation of Arch's growth strategy will be subject to numerous other
contingencies beyond the control of its management. These contingencies include
national and regional economic conditions, interest rates, competition, changes
in regulation or technology and the ability to attract and retain skilled
employees. Accordingly, no assurance can be given that Arch's growth strategy
will prove effective or that its goals will be achieved.
Amortization charges from the PageNet merger and the earlier MobileMedia
acquisition may reduce Arch's earnings sooner than management expects
Under the purchase method of accounting for the pending PageNet merger and
the acquisition of MobileMedia Communications, Inc. in June 1999, Arch must
record a substantial amount of goodwill and other intangible assets. This will
result in substantial amortization charges to the consolidated income of Arch
over the useful lives of those assets. Arch estimates the amount of those
charges will total approximately $57.0 million per year for ten years. However,
actual charges in the early years could adversely affect reported results of
operations more than is currently anticipated if the useful lives of the assets
are less than currently estimated.
The PageNet merger may not take place. If it does not take place, Arch will
incur substantial costs and its investors will not enjoy the anticipated
benefits of the merger
The PageNet merger will not take place unless many conditions are satisfied
or waived. These conditions include stockholder and noteholder approvals and the
availability of senior credit facilities. If the PageNet merger does not take
place, the contemplated benefits of the merger will not be realized, and Arch
will not enjoy the anticipated benefits of the merger despite incurring
substantial transaction costs. If the PageNet merger agreement is terminated
after Arch pursues an alternative offer, Arch may be required to pay a
termination fee of $40.0 million.
Arch may need additional capital to expand its business which could be difficult
to obtain
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. Arch's future capital requirements
will depend on factors that include:
o subscriber growth;
o the type of wireless communications devices and services demanded by
customers;
o technological developments;
12
<PAGE>
o marketing and sales expenses;
o competitive conditions;
o the nature and timing of Arch's narrowband personal communications service
strategy; and
o acquisition strategies and opportunities.
Arch cannot be certain 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, Arch may be unable to develop or enhance
its products, take advantage of future opportunities, grow its business or
respond to competitive pressures or unanticipated needs.
Competition and technological change may undermine Arch's market position and
adversely affect its results of operations
Arch may not be able to compete successfully with current and future
competitors in the wireless communications business or with competitors offering
alternative communication technologies. In particular:
Competition from large companies may intensify and may reduce Arch's revenues
and operating margins
Arch may face significant additional competition in the future. This could
have a material adverse effect on its revenues and earnings before interest,
taxes, depreciation and amortization. Some competitors possess greater
financial, technical and other resources than those of Arch. Increased
competition from broadband personal communications service providers,
cellular providers, digital specialized mobile radio providers, dedicated
data networks and wireless information delivery service providers has led to
competition from increasingly larger and better capitalized competitors. In
addition, Arch competes with the many other providers of paging and advanced
messaging services. If any of such competitors were to devote additional
resources to the wireless communications business or focus on Arch's
historical business segments, they could secure Arch's customers and reduce
demand for its products. This could materially reduce Arch's revenue and
operating margins.
New send and receive wireless messaging technology may adversely affect
Arch's competitive position
Competitors are currently using and developing a variety of send and
receive wireless messaging technologies. Arch currently resells such send and
receive services over the network of a competitor. Due to the relatively
recent availability of send and receive messaging products and services,
there have not yet been sales which would be sufficient to fully indicate a
proven demand for such services among business or consumer subscribers. Such
services will compete with other available methods of telecommunications,
including cellular and broadband personal communications services, which are
commonly referred to as PCS, as well as specialized mobile radio services and
services provided over dedicated data networks which use hand-held devices to
send and receive data. Although these services are primarily focused on send
and receive voice communications, they may include wireless messaging as an
adjunct service or may replace the need for send and receive messaging
entirely. It is less expensive for an end user to obtain a cellular or PCS
unit with data capability than the send and receive messaging units currently
available. This is because the nationwide cellular and PCS carriers have
subsidized the purchase of these units and because prices for broadband
services have been declining rapidly, making the two types of services and
product offerings more comparable.
Future technological advances in the telecommunications industry,
including these send and receive messaging technologies, as well as wireless
information and machine to machine and machine to person messaging, among
others, could increase the number and type of new services or products which
compete with the wireless messaging services historically offered by Arch.
Firms seeking to provide wireless communications through these and other
technologies may bring their products to market faster or in packages of
products that consumers find more valuable than those which Arch proposes to
provide.
13
<PAGE>
Obsolescence in company-owned units may impose additional costs on Arch
Technological change may also adversely affect the value of the units
owned by Arch that are leased to its subscribers. If Arch's current
subscribers request more technologically advanced units, including send and
receive 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 costs or capital expenditures could
have a material adverse effect on Arch's results of operations.
All of these factors could reduce Arch's market share and adversely affect
its revenues and operating margins.
Government regulation may burden operations
Licenses may not be automatically renewed
Arch's Federal Communications Commission paging licenses are for varying
terms of up to 10 years. Before the end of each license term, renewal
applications must be approved by the Federal Communications Commission. To
date, the Commission has approved each assignment and transfer of control for
which Arch has sought approval, but no assurance can be given that any future
renewal applications will be free of challenge or will be granted by the
Commission. Loss of licenses would impair Arch's operations.
Regulatory changes could add burdens or benefit competing technologies
The Federal Communications Commission continually reviews and revises its
rules affecting wireless communications 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 Federal Communications Commission, as well as
their parent companies. 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 Federal Communications
Commission 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 charter permits the redemption of shares of
Arch's capital stock from foreign stockholders where necessary to protect
Federal Communications Commission 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 corporation statute. These restrictions currently would not permit
any such redemptions. The failure to redeem shares promptly could jeopardize
the Federal Communications Commission licenses held by Arch or its
subsidiaries.
Because Arch depends on third parties, that it does not control, for products
and services, Arch's operations may be disrupted
Arch does not manufacture any of the equipment customers need to take
advantage of its services. It is dependent primarily on Motorola, Inc. and NEC
America Inc. to obtain sufficient equipment inventory for new subscribers 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 equipment, terminals or transmitters, such as
MobileMedia experienced before its bankruptcy filing, could lead to disruptions
in operations and adverse financial consequences. Motorola has announced its
intention to discontinue manufacturing transmitters and other paging
infrastructure during 2000, although it will continue to maintain and service
existing infrastructure into the future. Arch's purchase agreement with Motorola
expires on March 17, 2001. There can be no assurance that the agreement with
Motorola will be renewed or, if renewed, that the renewed agreement will be on
terms and conditions as favorable to the combined company as those under the
current agreement.
14
<PAGE>
Arch relies on third parties to provide satellite transmission for some
aspects of its wireless communications 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 due to customer complaints.
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.
Charter provisions may impede takeovers of Arch that might benefit Arch
stockholders
Arch's certificate of incorporation and bylaws provide for:
o a classified board of directors, divided into three classes who are
elected for three-year terms;
o the issuance of "blank check" preferred stock whose terms may be fixed by
Arch's board of directors without further stockholder approval;
o a prohibition on stockholder action by written consent in lieu of a
meeting; and
o procedural requirements governing stockholder meetings.
Arch also has a stockholders rights plan. In addition, Section 203 of the
Delaware corporations statute will, with some 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.
These provisions may have the effect of delaying, making more difficult or
preventing a change in control or acquisition of Arch even though a transaction
like that might be beneficial to Arch's stockholders.
Restrictions under debt instruments may prevent Arch from taking actions which
its board considers beneficial
Various debt instruments impose operating and financial restrictions on Arch.
Arch's senior credit facility requires various Arch operating subsidiaries to
maintain specified financial ratios, including a maximum leverage ratio, a
minimum interest coverage ratio, a minimum debt service coverage ratio and a
minimum fixed charge coverage ratio. The senior credit facility was amended and
restated on March 23, 2000 to permit the PageNet merger and includes a
restriction on capital expenditures and a minimum revenue test. In addition, the
senior credit facility limits or restricts, among other things, Arch's operating
subsidiaries' ability to:
o declare dividends or repurchase capital stock;
o incur or pay back indebtedness;
o engage in mergers, consolidations, acquisitions and asset sales; or
o alter its lines of business or accounting methods.
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 senior 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 senior creditors could proceed
against any collateral securing the indebtedness. If the lenders under the
senior 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 senior credit facility and other debt instruments limit
Arch's ability to engage in some types of transactions, Arch may be prohibited
from entering into transactions that could be beneficial to Arch.
15
<PAGE>
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 market 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
At the Company's Special Meeting of Stockholders held on April 3, 2000 the
following proposal was adopted by the vote specified below:
<TABLE>
<CAPTION>
Broker
Proposal For Against Abstain Nonvotes
-------- --- ------- ------- --------
<S> <C> <C> <C> <C>
To increase the number of authorized shares of common
stock from 65,000,000 to 150,000,000 shares.
32,013,424 364,548 526 --
</TABLE>
ITEM 5. OTHER INFORMATION
Stockholder Proposals for 2001 Annual Meeting
As set forth in the Company's Proxy Statement for its 2000 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 2001 Annual
Meeting of Stockholders must be received by the Secretary of the Company at the
principal offices of the Company no later than December 29, 2000.
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 2001 Annual Meeting is currently expected to
be held on May 15, 2001. Assuming that this date does not change, in order to
16
<PAGE>
comply with the time periods set forth in the Company's By-Laws, appropriate
notice would need to be provided no later than February 23, 2001.
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 April 12, 2000 (reporting
that the Company executed an Amendment to its Rights
Agreement) filed April 26, 2000.
Current Report on Form 8-K dated January 7, 2000 (reporting
that the Company executed an Amendment to its definitive
merger agreement with Paging Network, Inc) filed January 21,
2000.
<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 March
31, 2000, to be signed on its behalf by the undersigned thereunto duly
authorized.
ARCH COMMUNICATIONS GROUP, INC.
Dated: May 15, 2000 By: /s/ J. Roy Pottle
-----------------
J. Roy Pottle
Executive Vice President and
Chief Financial Officer
19
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
27.1* Financial Data Schedule.
* Filed herewith
<TABLE> <S> <C>
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<CIK> 0000915390
<NAME> Arch Communications Group, Inc.
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<CURRENCY> USD
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<EXCHANGE-RATE> 1
<CASH> 4,222
<SECURITIES> 0
<RECEIVABLES> 59,071
<ALLOWANCES> 0
<INVENTORY> 9,514
<CURRENT-ASSETS> 85,579
<PP&E> 742,440
<DEPRECIATION> 357,319
<TOTAL-ASSETS> 1,295,468
<CURRENT-LIABILITIES> 168,976
<BONDS> 1,169,954
0
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<OTHER-SE> (125,148)
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<OTHER-EXPENSES> 39,115
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<INTEREST-EXPENSE> 42,506
<INCOME-PRETAX> (70,192)
<INCOME-TAX> 0
<INCOME-CONTINUING> (70,192)
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<EXTRAORDINARY> 7,615
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<NET-INCOME> (62,577)
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