QUARTERLY REPORT UNDER SECTION 13 0R 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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: 63,961,997 shares of the
Company's Common Stock ($.01 par value) and 2,508,652 shares of the Company's
Class B Common Stock ($.01 par value) were outstanding as of August 2, 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 June 30, 2000 and
December 31, 1999 3
Consolidated Condensed Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999 4
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 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 14
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
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>
June 30, December 31,
2000 1999
---- ----
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,858 $ 3,161
Accounts receivable, net 63,368 61,167
Inventories 7,246 9,101
Prepaid expenses and other 16,306 11,874
----------- -----------
Total current assets 90,778 85,303
----------- -----------
Property and equipment, at cost 781,021 714,644
Less accumulated depreciation and amortization (398,783) (314,445)
----------- -----------
Property and equipment, net 382,238 400,199
----------- -----------
Intangible and other assets, net 778,210 867,543
----------- -----------
$ 1,251,226 $ 1,353,045
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 14,310 $ 8,060
Accounts payable 48,122 30,016
Accrued restructuring 12,754 17,111
Accrued interest 30,200 30,294
Accrued expenses and other liabilities 64,235 79,330
----------- -----------
Total current liabilities 169,621 164,811
----------- -----------
Long-term debt 1,104,011 1,322,508
----------- -----------
Other long-term liabilities 78,772 83,285
----------- -----------
Redeemable convertible preferred stock 43,953 --
----------- -----------
Stockholders' equity (deficit):
Preferred stock-- $.01 par value 3 3
Common stock-- $.01 par value 661 512
Additional paid-in capital 817,116 661,413
Accumulated deficit (962,911) (879,487)
----------- -----------
Total stockholders' equity (deficit) (145,131) (217,559)
----------- -----------
$ 1,251,226 $ 1,353,045
=========== ===========
</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 June 30, Six Months Ended June 30,
---------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service, rental, and maintenance revenues $ 175,631 $ 122,280 $ 353,291 $ 212,809
Product sales 12,221 11,213 24,556 21,572
------------ ------------ ------------ ------------
Total revenues 187,852 133,493 377,847 234,381
Cost of products sold (8,381) (7,603) (17,261) (14,529)
------------ ------------ ------------ ------------
179,471 125,890 360,586 219,852
------------ ------------ ------------ ------------
Operating expenses:
Service, rental, and maintenance 37,839 28,093 76,954 48,386
Selling 24,333 18,033 49,378 31,044
General and administrative 55,362 37,395 109,296 63,021
Depreciation and amortization 89,882 76,915 180,589 128,033
------------ ------------ ------------ ------------
Total operating expenses 207,416 160,436 416,217 270,484
------------ ------------ ------------ ------------
Operating income (loss) (27,945) (34,546) (55,631) (50,632)
Interest expense, net (35,399) (33,373) (76,699) (59,187)
Other expense (804) (42,809) (2,010) (43,472)
Equity in loss of affiliate -- -- -- (3,200)
------------ ------------ ------------ ------------
Income (loss) before extraordinary item and
accounting change (64,148) (110,728) (134,340) (156,491)
------------ ------------ ------------ ------------
Extraordinary gain from early extinguishment of
debt 44,436 -- 52,051 --
Cumulative effect of accounting change -- -- -- (3,361)
------------ ------------ ------------ ------------
Net income (loss) (19,712) (110,728) (82,289) (159,852)
Accretion of redeemable preferred stock (1,261) -- (1,261) --
Preferred stock dividend (573) (530) (1,135) (1,043)
------------ ------------ ------------ ------------
Net income (loss) to common stockholders $ (21,546) $ (111,258) $ (84,685) $ (160,895)
============ ============ ============ ============
Basic/diluted net income (loss) per common share
before extraordinary charge and accounting
change $ (1.01) $ (5.65) $ (2.26) $ (11.75)
Extraordinary item per basic/diluted common share
0.68 -- 0.86 --
Cumulative effect of accounting change per
basic/diluted common share -- -- -- (0.25)
------------ ------------ ------------ ------------
Basic/diluted net income (loss) per common share $ (0.33) $ (5.65) $ (1.40) $ (12.00)
============ ============ ============ ============
Basic/diluted weighted average number of common
shares outstanding 65,794,673 19,683,837 60,555,685 13,412,689
============ ============ ============ ============
</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>
Six Months Ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 53,006 $ 36,378
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (74,061) (38,685)
Additions to intangible and other assets (3,602) (18,679)
Net proceeds from tower site sale -- 3,041
Acquisition of company, net of cash acquired -- (519,105)
--------- ---------
Net cash used for investing activities (77,663) (573,428)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 58,000 466,058
Repayment of long-term debt (33,000) (125,999)
Net proceeds from sale of common stock 354 217,243
--------- ---------
Net cash provided by financing activities 25,354 557,302
--------- ---------
Net increase in cash and cash equivalents 697 20,252
Cash and cash equivalents, beginning of period 3,161 1,633
--------- ---------
Cash and cash equivalents, end of period $ 3,858 $ 21,885
========= =========
Supplemental disclosure:
Interest paid $ 60,461 $ 35,809
Accretion of discount on senior notes $ 14,696 $ 20,316
Issuance of common stock in exchange for debt $ 155,624 $ --
Issuance of preferred stock in exchange for debt $ 42,692 $ --
Accretion of redeemable preferred stock $ 1,261 $ --
Issuance of common stock in acquisition of company $ -- $ 20,083
Liabilities assumed in acquisition of company $ -- $ 122,543
</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. 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):
June 30, December 31,
2000 1999
----------- -----------
(unaudited)
Goodwill $227,760 $249,010
Purchased FCC licenses 328,663 354,246
Purchased subscriber lists 201,749 239,114
Deferred financing costs 15,391 19,915
Other 4,647 5,258
-------- --------
$778,210 $867,543
======== ========
(c) Divisional Reorganization - As of June 30, 2000, 428 employees had
been terminated due to the divisional reorganization and restructuring. The
Company's restructuring activity as of June 30, 2000 is as follows (in
thousands):
Reserve Balance Utilization of
at December 31, Reserve in Remaining
1999 2000 Reserve
---- ---- -------
Severance costs $ 1,030 $ 265 $ 765
Lease obligation costs 5,198 1,148 4,050
------- ------- -------
Total $ 6,228 $ 1,413 $ 4,815
======= ======= =======
6
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(d) MobileMedia Acquisition Reserve - As of June 30, 2000, 261 former
MobileMedia employees had been terminated. The Company's restructuring activity
as of June 30, 2000 is as follows (in thousands):
Reserve Balance Utilization of
at December 31, Reserve in Remaining
1999 2000 Reserve
---- ---- -------
Severance costs $ 2,678 $ 1,882 $ 796
Lease obligation costs 7,828 1,023 6,805
Other costs 377 39 338
------- ------- -------
Total $10,883 $ 2,944 $ 7,939
======= ======= =======
(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.
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 10 7/8% 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 at $100 per preferred share 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.
Arch recorded an extraordinary gain of $44.4 million on the early
extinguishment of debt as a result of this transaction based on the difference
between the carrying value of the exchanged debt and the fair value of the
preferred stock issued. As of June 30, 2000, the Series D preferred stock is
stated at its accreted redemption value after recording $1.3 million of
accretion in the quarter ended June 30, 2000.
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) providing for the merger of PageNet with a wholly-owned
subsidiary of Arch. On July 14, 2000, before the merger could take place,
creditors of PageNet commenced a proceeding against PageNet under Chapter 11 of
the U.S. Bankruptcy Code in the U.S. Bankruptcy Court in the District of
Delaware. PageNet has filed a bankruptcy plan in order to implement the merger
on modified terms agreed to by Arch and PageNet.
In the merger, each outstanding share of PageNet's common stock will be
exchanged for 0.08365112 shares of Arch's common stock. In order to strengthen
the balance sheet of the combined company, the merger will be accompanied by a
recapitalization of Arch and PageNet involving the exchange of common stock for
outstanding debt. PageNet's bankruptcy plan provides for the exchange of a total
of approximately 89,917,844 shares of Arch's common stock for all of PageNet's
outstanding senior subordinated notes as well as all of PageNet's outstanding
common stock. Arch is offering to exchange a total of 29,651,984 shares of its
common stock for all of its outstanding 107/8% senior discount notes that were
outstanding on November 7, 1999. Arch has already exchanged shares of its common
stock for a significant portion of these discount notes so that approximately
$159.6 million in accreted value of discount notes remained outstanding at June
30, 2000.
Confirmation of the bankruptcy plan and implementation of the merger will
result in the issuance of a total of approximately 119,569,828 new shares of
Arch common stock to PageNet stockholders, PageNet noteholders and Arch
noteholders if all Arch senior discount notes are exchanged.
In connection with the merger, 80.5% of the total equity of PageNet's
subsidiary, Vast Solutions, Inc. will be issued to PageNet's current
stockholders and noteholders and the combined company will hold the remaining
19.5% of Vast's equity.
Under the merger agreement, the Arch board of directors at the closing would
consist of 12 individuals, 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 Arch stockholder
approval and approval of the Bankruptcy Court, to be completed in the fourth
quarter of 2000.
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 Arch's outstanding
discount notes are exchanged for common stock.
The PageNet merger is subject to Arch stockholder and Bankruptcy Court
approval, lender consents and certain other conditions and, therefore, it may
not take place. If Arch does not acquire PageNet, the contemplated benefits of
8
<PAGE>
the merger will not be realized, despite the incurrence of substantial
transaction costs, which are 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 to $187.9 million (a 40.7% increase) and $377.8
million (a 61.2% increase) in the three and six months ended June 30, 2000,
respectively, from $133.5 million and $234.4 million in the three and six months
ended June 30, 1999, respectively as the number of units in service increased
from 4.3 million at March 31, 1999 to 6.7 million at June 30, 2000 entirely due
to the MobileMedia acquisition in June 1999. Net revenues (total revenues less
cost of products sold) increased to $179.5 million (a 42.6% increase) and $360.6
million (a 64.0% increase) in the three and six months ended June 30, 2000,
respectively, from $125.9 million and $219.9 million in the three and six months
ended June 30, 1999, respectively. 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 and unit in service definition changes
which led to a decrease of 277,000 units in service during the six months ended
June 30, 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 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 two-way 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 pagers, increased to
$175.6 million (a 43.6% increase) and $353.3 million (a 66.0% increase) in the
three and six months ended June 30, 2000, respectively, from $122.3 million and
$212.8 million in the three and six months ended June 30, 1999, respectively.
These increases in revenues were due entirely to the acquisition of MobileMedia
on June 3, 2000. Maintenance revenues represented less than 10% of total
service, rental and maintenance revenues in the three and six months ended June
30, 2000 and 1999. Arch does not differentiate between service and rental
revenues. Product sales, less cost of products sold, increased to $3.8 million
(a 6.4% increase) and $7.3 million (a 3.6% increase) in the three and six months
ended June 30, 2000, respectively, from $3.6 million and $7.0 million in the
three and six months ended June 30, 1999, respectively, as a result of the
MobileMedia acquisition.
Service, rental and maintenance expenses, which consist primarily of
telephone, third party carrier fees and site rental expenses, were $37.8 million
(21.1% of net revenues) and $77.0 million (21.3% of net revenues) in the three
and six months ended June 30, 2000, respectively, compared to $28.1 million
(22.3% of net revenues) and $48.4 million (22.0% of net revenues) in the three
and six months ended June 30, 1999, respectively. 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 were $22 and $23 in
the three and six months ended June 30, 2000, respectively, compared to $21 and
$20 in the corresponding 1999 periods. 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 were $24.3 million (13.6% of net revenues) and $49.4 million
(13.7% of net revenues) in the three and six months ended June 30, 2000,
respectively, compared to $18.0 million (14.3% of net revenues) and $31.0
million (14.1% of net revenues) in the three and six months ended June 30, 1999,
respectively. These increases were due primarily to the MobileMedia acquisition.
General and administrative expenses increased to $55.4 million (30.8% of net
revenues) and $109.3 million (30.3% of net revenues) in the three and six months
ended June 30, 2000, respectively, from 37.4 million (29.7% of net revenues) and
$63.0 million (28.7% of net revenues) in the three and six months ended June 30,
1999, respectively. The increases were due primarily to the MobileMedia
acquisition.
9
<PAGE>
Depreciation and amortization expenses increased to $89.9 million and $180.6
million in the three and six months ended June 30, 2000, respectively, from
$76.9 million and $128.0 million in the three and six months ended June 30,
1999, respectively. 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. Additionally, depreciation expense for the
three and six months ended June 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 acquisition.
Operating losses were $27.9 million and $55.6 million in the three and six
months ended June 30, 2000, respectively, compared to $34.5 million and
$50.6million in the three and six months ended June 30, 1999, respectively, as a
result of the factors outlined above.
Net interest expense increased to $35.4 million and $76.7 million in the
three and six months ended June 30, 2000, respectively, from $33.4 million and
$59.2 million in the three and six months ended June 30, 1999, respectively. The
increases were principally attributable to an increase in Arch's outstanding
debt. Interest expense for the six months ended June 30, 2000 and 1999 include
approximately $14.7 million and $20.3 million, respectively, of non-cash
interest accretion on Arch's discount notes.
Other expense decreased to $0.8 million and $2.0 million in the three and six
months ended June 30, 2000, respectively, from $42.8 million and $43.5 million
in the three and six months ended June 30, 1999, respectively. In the 1999
periods, other expense includes $42.3 million representing the write-off of
Arch's investments in narrowband PCS.
In 2000, Arch recognized an extraordinary gain of $52.1 million on the
retirement of debt exchanged for common and preferred stock.
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 in the quarter ended
March 31, 1999 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 decreased to $19.7 million and $82.3 million in the three and six
months ended June 30, 2000, respectively, from $110.7 million and $159.9 million
in the three and six months ended June 30, 1999, 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
messaging devices and system equipment, to service debt and to finance
acquisitions.
Capital Expenditures and Commitments
Arch's capital expenditures increased from $57.4 million in the six months
ended June 30, 1999 to $77.7 million in the six months ended June 30, 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.
10
<PAGE>
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.
Recent declines in Arch's units in service may continue or even accelerate; this
trend may impair Arch's financial results
In 1999, Arch experienced a decrease of 89,000 units in service, excluding
the addition of subscribers from the MobileMedia acquisition. For the six months
ended June 30, 2000 Arch experienced a further decrease of 277,000 units in
service due to subscriber cancellations and definitional changes. Arch believes
that the basic paging industry did not grow during 1999, that demand for basic
paging services will 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 its units in service during the remainder of
2000, excluding the addition of subscribers from the PageNet acquisition, as
Arch's addition of two-way messaging subscribers is likely to be exceeded by its
loss of traditional paging subscribers. However, the magnitude of the expected
decline cannot be predicted.
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 wireless messaging
business is characterized by high fixed costs, cancellations directly and
adversely affect earnings before interest, income taxes, depreciation and
amortization.
Competition from large telephone, cellular and PCS companies is intensifying and
may reduce Arch's revenues and operating margins
Traditional paging companies like Arch, whose units in service have been
declining, increasingly compete for market share against large telephone,
cellular and PCS providers like MCI WorldCom, AT&T, Nextel, BellSouth Wireless
Data and Motient, Inc., formerly known as American Mobile Satellite Corporation.
Arch will also compete with other paging companies that continue to offer
messaging and two-way messaging services. Some competitors possess greater
financial, technical and other resources than those available to Arch. If any of
such competitors were to devote additional resources to their 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 revenues and operating margins and have a material
adverse effect on earnings before interest, income taxes, depreciation and
amortization.
Mobile, cellular and PCS telephone companies have introduced phones and phone
services with substantially the same features and functions as the two-way
messaging products and services provided by Arch, and have priced such devices
and services competitively. The future growth and profitability of Arch depends
on the success of its two-way messaging services.
Arch's two-way messaging services will compete with other available mobile
wireless services which have already demonstrated high levels of market
acceptance, including cellular, PCS and other mobile phone services, such as
those offered by Nextel, whose hand-held devices can send and receive messages.
Many of these other mobile wireless phone services now include wireless
messaging as an adjunct service or may replace send-and-receive messaging
services entirely. It is less expensive for an end user to enhance a cellular,
PCS or other mobile phone with modest data capability than to use both a mobile
phone and a pager. This is because the nationwide cellular, PCS and other mobile
phone carriers have subsidized the purchase of mobile phones and because prices
for mobile wireless services have been declining rapidly. In addition, the
availability of coverage for these services has increased, making the two types
of services and product offerings more comparable. Thus, companies other than
Arch seeking to provide wireless messaging services may be able to bring their
products to market faster or in packages of products that consumers and
businesses find more valuable than those to be provided by Arch. If this occurs,
Arch's market share will erode and financial operations will be impaired.
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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. Many of the factors that will determine whether
or not Arch attains profitability are inherently difficult to predict. These
include the decreased demand for basic paging services and the uncertain market
for two-way messaging services which compete against services offered by
telephone, cellular and PCS providers, new service developments and
technological change.
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, particularly the decreased demand for basic
paging services and the uncertain market for two-way messaging services. 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 is significant and may continue to burden Arch's operations, impair its
ability to obtain additional financing, reduce the amount of cash available for
operations and make Arch more vulnerable to financial downturns
Arch has been highly leveraged, and will remain leveraged to a substantial
degree following the PageNet merger. Arch's ratio of total debt to latest
quarter annualized adjusted earnings before interest, income taxes, depreciation
and amortization was 4.5 to 1 as of June 30, 2000.
Adjusted earnings before interest, income taxes, depreciation and
amortization 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 earnings before interest, income taxes, depreciation and
amortization, as determined by Arch, may not necessarily be comparable to
similarly titled data of other wireless messaging companies.
Leverage may:
o impair Arch's ability to obtain additional financing necessary for working
capital, capital expenditures or other purposes on acceptable terms, if at
all.
o require a substantial portion of Arch's cash flow to be used to pay
interest expense; this will reduce the funds which would otherwise be
available for operations and future business opportunities.
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
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.
Restrictions under debt instruments may prevent Arch from declaring dividends,
incurring or repaying debt, making acquisitions, altering lines of business or
taking actions which its management considers beneficial
Various debt instruments impose operating and financial restrictions on Arch.
Arch's 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. It also 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;
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o engage in mergers, consolidations, acquisitions and asset sales; or
o alter its lines of business or accounting methods, even though these
actions would otherwise benefit Arch.
A breach of any of these covenants could result in a default under the 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 lenders could proceed against any
collateral securing the indebtedness. If the lenders under the 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.
Arch may need additional capital to expand its business which could be difficult
to obtain. Failure to obtain additional capital may preclude Arch from
developing or enhancing its products, taking advantage of future opportunities,
growing its business or responding to competitive pressures
Arch's business strategy requires substantial funds to be available to
finance the continued development and future growth and expansion of its
operations, including the development and implementation of two-way messaging
services and possible acquisitions. Arch's future capital requirements will
depend on factors that include:
o subscriber growth;
o the type of wireless messaging devices and services demanded by customers;
o technological developments;
o marketing and sales expenses;
o competitive conditions;
o the nature and timing of Arch's strategy for developing technical
resources to provide two-way messaging services; 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.
Amortization charges from the PageNet merger and the earlier MobileMedia
acquisition may occur sooner than management expects; resulting in earlier
decrease in earnings
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 $73.2 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.
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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 pagers that can send and
receive messages, 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.
Because Arch depends on Motorola for pagers and on Glenayre and Motorola for
other equipment, Arch's operations may be disrupted if it is unable to obtain
equipment from them in the future
Arch does not manufacture any of the equipment customers need to take
advantage of its services. It is dependent primarily on Motorola, 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 any of this equipment, 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 during 2000, although it will continue to
maintain and service existing equipment into the future. Arch's purchase
agreement with Motorola for pagers expires on March 17, 2001. There can be no
assurance that the agreement with Motorola for pagers will be renewed or, if
renewed, that the renewed agreement 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 wireless 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 due to customer complaints.
In addition to the specific risks described above, an investment in Arch is
also subject to many risks which affect all companies, or all companies in its
industry.
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.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 16, 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 elect three directors of the Company
1. John B. Saynor 32,193,471 9,180 -- --
2. John A. Shane 32,192,953 9,698 -- --
3. H. Sean Mathis 32,193,637 9,014 -- --
4. To approve amendments to Arch's Non-Employee Director's
Stock Option Plan increasing the number of shares of
common stock issuable under such plan from 46,733 to
196,733. 32,062,341 133,073 7,237 --
5. To approve Arch's 2000 Stock Incentive Plan. 26,675,669 5,520,545 6,437 --
6. To ratify the selection by the Board of Directors of
Arthur Andersen LLP as the independent public accountants
for the Company for the fiscal year ending December 31,
2000. 32,196,024 1,244 5,383 --
</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
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) No reports on Form 8-K were filed for the quarter for which this
report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q for the quarter ended June
30, 2000, to be signed on its behalf by the undersigned thereunto duly
authorized.
ARCH COMMUNICATIONS GROUP, INC.
Dated: August , 2000 By: /s/ J. Roy Pottle
-----------------
J. Roy Pottle
Executive Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit Description
------- -----------
27.1* - Financial Data Schedule.
* Filed herewith
