<PAGE> 1
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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, 1996
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 number 33-72646
USA MOBILE COMMUNICATIONS, INC. II
(Exact name of Registrant as specified in its Charter)
DELAWARE 31-1236804
(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)
The registrant meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
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 / /
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 748.7501 shares of the Company's
Common Stock ($.01 par value) were outstanding as of August 8, 1996.
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USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF 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, 1996
and December 31, 1995 3
Consolidated Condensed Statements of Operations for the
Three and Six Months Ended June 30, 1996 4
Predecessor Consolidated Condensed Statements of Operations
for the Three and Six Months Ended June 30, 1995 5
Consolidated Condensed Statement of Cash Flows for the
Six Months Ended June 30, 1996 6
Predecessor Consolidated Condensed Statement of Cash
Flows for the Six Months Ended June 30, 1995 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION 16
-----------------
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
---------------------
USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
<TABLE>
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,847 $ 1,543
Accounts receivable, net 7,527 5,994
Inventories 11,701 11,581
Prepaid expenses and other 1,902 1,797
-------- --------
Total current assets 29,977 20,915
-------- --------
Property and equipment, at cost 122,462 95,090
Less accumulated depreciation and amortization (19,231) (5,244)
-------- --------
Property and equipment, net 103,231 89,846
-------- --------
Intangible and other assets, net 459,695 495,737
-------- --------
$592,903 $606,498
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 9,054 $ 10,678
Accrued expenses 6,590 5,944
Accrued interest 7,403 7,399
Customer deposits 4,909 3,928
Deferred revenue 2,260 1,570
Payable to Arch Communications Enterprises, Inc. 576 -
Payable to Arch Communications Group, Inc. 2,131 497
-------- --------
Total current liabilities 32,923 30,016
-------- --------
Long-term debt 268,500 264,500
-------- --------
Deferred income taxes 51,617 60,522
-------- --------
Stockholder's equity:
Common stock - $.01 par value - -
Additional paid-in capital 283,353 268,353
Accumulated deficit (43,490) (16,893)
-------- --------
Total stockholder's equity 239,863 251,460
-------- --------
$592,903 $606,498
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited and in thousands)
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
------------- -------------
<S> <C> <C>
Service, rental, and maintenance revenues $ 31,143 $ 60,131
Product sales 3,633 7,509
-------- --------
Total revenues 34,776 67,640
Cost of products sold (2,348) (4,712)
-------- --------
32,428 62,928
-------- --------
Operating expenses:
Service, rental, and maintenance 6,731 13,051
Selling 5,887 11,427
General and administrative 7,367 13,761
Depreciation and amortization 23,307 45,135
-------- --------
Total operating expenses 43,292 83,374
-------- --------
Operating income (loss) (10,864) (20,446)
Interest expense, net 7,491 15,056
-------- --------
Income (loss) before income tax benefit (18,355) (35,502)
Benefit from income taxes 4,590 8,905
-------- --------
Net income (loss) $(13,765) $(26,597)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
USA MOBILE COMMUNICATIONS, INC. II
<TABLE>
PREDECESSOR CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited and in thousands)
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1995
------------- -------------
<S> <C> <C>
Service, rental and maintenance revenues $26,866 $ 51,217
Product sales 4,158 7,185
------- --------
Total revenues 31,024 58,402
Cost of products sold (2,386) (4,779)
------- --------
28,638 53,623
------- --------
Operating expenses:
Service, rental and maintenance 5,220 9,614
Selling 4,705 8,753
General and administrative 7,503 13,733
Depreciation and amortization 10,919 20,645
------- --------
Total operating expenses 28,347 52,745
------- --------
Operating income 291 878
Interest expense, net 6,831 13,235
Non-operating expenses 1,972 3,445
------- --------
Income (loss) before income tax benefit (8,512) (15,802)
Benefit from income taxes 974 1,949
------- --------
Net income (loss) $(7,538) $(13,853)
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
<TABLE>
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1996
(unaudited and in thousands)
<CAPTION>
<S> <C>
Net cash provided by operating activities $ 8,726
-------
Cash flows from investing activities:
Additions to property and equipment, net (30,146)
Additions to intangible and other assets (676)
Sale of paging assets to Arch Communications Enterprises, Inc. 10,400
-------
Net cash used for investing activities (20,422)
-------
Cash flows from financing activities:
Issuance of long-term debt 51,500
Repayment of long-term debt (47,500)
Proceeds from Arch Communications Enterprises, Inc. demand loan 32,500
Repayment of demand loan to Arch Communications Enterprises, Inc. (32,500)
Capital contribution from Arch Communications Group, Inc. 15,000
-------
Net cash provided by financing activities 19,000
-------
Net increase in cash and cash equivalents 7,304
Cash and cash equivalents, beginning of period 1,543
-------
Cash and cash equivalents, end of period $ 8,847
=======
Supplemental disclosure - Interest paid $ 14,313
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 7
USA MOBILE COMMUNICATIONS, INC. II
<TABLE>
PREDECESSOR CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1995
(unaudited and in thousands)
<S> <C>
Net cash provided by operating activities $ 3,544
--------
Cash flows from investing activities:
Sale of investment in repurchase agreements 29,600
Acquisitions of paging companies, net of cash acquired (28,684)
Release of pending acquisition escrow deposits 14,234
Additions to property and equipment, net (24,126)
Additions to intangible and other assets (606)
--------
Net cash used for investing activities (9,582)
--------
Cash flows from financing activities:
Issuance of long-term debt 6,830
Repayment of long-term debt (490)
Capital contributions 54
--------
Net cash used for financing activities (6,394)
--------
Net increase in cash 356
Cash, beginning of period 420
--------
Cash, end of period $ 776
========
Supplemental disclosure - Interest paid $ 10,955
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 8
USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC. )
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(a) Preparation of Interim Financial Statements - The consolidated
condensed financial statements of USA Mobile Communications, Inc. II ("USA
Mobile II") 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,
1995, has been prepared by management without audit by independent accountants.
The consolidated condensed balance sheet at December 31, 1995 has been derived
from, but does not include all the disclosures contained in, the audited
consolidated financial statements for the year ended December 31, 1995. 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 financial statements should be read in conjunction
with the consolidated financial statements and accompanying notes included in
USA Mobile II's Annual Report on Form 10-K for the year ended December 31, 1995.
The results of operations for the periods presented are not necessarily
indicative of the results that may be expected for a full year.
(b) Basis of Accounting - On September 7, 1995, Arch Communications Group,
Inc. ("Arch") completed its acquisition of USA Mobile Communications Holdings,
Inc. ("USA Mobile") and its wholly-owned subsidiary, USA Mobile II. The
transaction has been accounted for using the purchase method of accounting. Arch
is treated as the acquirer in the transaction for accounting and financial
reporting purposes. The fair values of USA Mobile II's assets and liabilities at
the effective time of the transaction represent a new cost basis for those
assets and liabilities that has been pushed down to the accompanying separate
financial statements of USA Mobile II dated subsequent to September 7, 1995. The
principal effect of push down accounting was to increase the carrying values of
intangible assets by $374.1 million and to decrease the carrying values of
property and equipment by $9.2 million. Substantially all USA Mobile's assets
and liabilities were composed of the assets and liabilities of USA Mobile II on
the transaction date.
The aggregate consideration paid or exchanged in the transaction was
$582.2 million, consisting of cash paid of $88.9 million (including direct
transaction costs), 7,599,493 shares of Arch common stock valued at $209.0
million and the assumption of liabilities of $284.3 million, including $241.2
million of long-term debt. Resulting goodwill is being amortized over a ten-year
period using the straight-line method. The accompanying consolidated condensed
statements of operations and of cash flows for the three months ended June 30,
1995, are collectively referred to herein as "Predecessor Financial Statements".
Application of the purchase method of accounting at the transaction date
resulted in higher values assigned to intangible assets which will have the
effect of increased amortization expense charged in future periods. Accordingly,
Predecessor Financial Statements are not comparable to the financial statements
of USA Mobile II subsequent to the transaction date. Certain amounts in the
Predecessor Financial Statements, however, were reclassified to conform with the
current period presentation.
(c) Net Income (Loss) Per Common Share - Net income (loss) per common
share data has not been presented. Because USA Mobile II is a wholly-owned
subsidiary of Arch, such per share data is not considered meaningful.
8
<PAGE> 9
<TABLE>
(d) Intangible and Other Assets - Intangible and other assets, net of
accumulated amortization, are composed of the following (in thousands):
<CAPTION>
June 30, December 31,
1996 1995
-------- --------
(unaudited)
<S> <C> <C>
Goodwill $256,063 $267,398
Purchased FCC licenses 124,203 133,790
Purchased subscriber lists 74,462 86,519
Non-competition agreements 3,349 3,749
Deferred financing costs 980 1,824
Other 638 2,457
-------- --------
$459,695 $495,737
======== ========
</TABLE>
<TABLE>
(e) Acquisitions - On March 3, 1995, USA Mobile II acquired PCI Holding
Company, Inc. (PCI). The following unaudited pro forma summary presents the
consolidated results of operations as if the acquisition of PCI and the
push-down accounting effect of the acquisition of USA Mobile by Arch had
occurred on January 1, 1995, after giving effect to certain adjustments,
including depreciation and amortization of acquired assets and interest expense
on acquisition debt. These pro forma results do not purport to be indicative of
what would have occurred had the acquisitions been completed on January 1, 1995,
or of the results that may occur in the future. Net income (loss) per share is
not presented because it is not considered meaningful.
<CAPTION>
Six Months Ended
June 30, 1995
-------------
(in thousands)
<S> <C>
Total revenues $ 59,711
Net income (loss) (23,249)
</TABLE>
(f) Intercompany transactions with Arch Communications Group, Inc and
Subsidiaries. - In March 1996, Arch completed a public offering of 10 7/8%
Senior Discount Notes due March 2008 generating net proceeds to $266.1 million.
Arch used $47.5 million of the net proceeds (of which $15.0 million was a
capital contribution from Arch to USA Mobile II and $32.5 million was a demand
intercompany loan from Arch Communications Enterprises Inc. ("Arch
Enterprises"), a wholly-owned subsidiary of Arch, to USA Mobile II) to repay all
then outstanding indebtedness under USA Mobile II's credit facility. The demand
intercompany loan was repaid to Arch Enterprises in May 1996, through borrowings
under USA Mobile II's credit facility.
During the six months ended June 30, 1996, USA Mobile II sold certain
paging assets to Arch Enterprises for $10.4 million. The fair values of assets
and liabilities transferred ($10.7 million and $0.3 million, respectively)
approximated the net book values of those assets and liabilities; hence, no gain
or loss was recognized.
9
<PAGE> 10
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 USA Mobile II's actual results to differ materially
from those indicated or suggested by such forwarding-looking statements. These
factors include, without limitation, those set forth below under the caption
"Factors Affecting Future Operating Results".
RESULTS OF OPERATIONS
As described in Note b to the Consolidated Financial Statements, on
September 7, 1995, Arch completed its acquisition of USA Mobile and its
wholly-owned subsidiary, USA Mobile II. The consolidated financial statements
for the periods prior to September 8, 1995 have been prepared in accordance with
the historical cost basis of USA Mobile II. Due to the application of the
purchase method of accounting, the fair values of USA Mobile II's assets and
liabilities at the effective time of the Merger represent a new cost basis.
Therefore, operating results subsequent to the Merger are not comparable to the
operating results prior to the Merger, primarily due to increased amounts of
depreciation expense, amortization of intangible assets and cost of products
sold. The following discussion of results of operations for the three and six
months ended June 30, 1996 and 1995 is presented on a pro forma basis as if the
Merger had occurred on January 1, 1995 and gives effect to pro forma adjustments
resulting in increases to the historical amounts of depreciation and
amortization expense and cost of products sold in the three and six months ended
June 30, 1995. The pro forma effect of other paging companies acquired by USA
Mobile II prior to the Merger have not been considered in this presentation and
the actual results of their operations have been included from the dates of the
respective acquisitions. The following unaudited pro forma presentation is
presented for illustrative purposes only and is not necessarily indicative of
the operating results of USA Mobile II had the Merger been consummated on
January 1, 1995 or of the future operating results of USA Mobile II. The pro
forma adjustments give effect to available information and assumptions that USA
Mobile II believes are reasonable.
10
<PAGE> 11
<TABLE>
The following table presents the unaudited consolidated statements of
operations for the three and six months ended June 30, 1996 (historical) and
1995 (pro forma) (dollars in thousands):
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
---------------- ---------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service, rental and maintenance ...... $ 31,143 96.0 % $ 26,866 97.4 % $ 60,131 95.6 % $ 51,217 97.7 %
Product sales ........................ 3,633 11.2 4,158 15.1 7,509 11.9 7,185 13.7
-------- ----- -------- ----- -------- ----- -------- -----
Total revenues .................... 34,776 107.2 31,024 112.5 67,640 107.5 58,402 111.4
Cost of products sold ................ (2,348) (7.2) (3,451) (12.5) (4,712) (7.5) (5,963) (11.4)
-------- ----- -------- ----- -------- ----- -------- -----
32,428 100.0 27,573 100.0 62,928 100.0 52,439 100.0
-------- ----- -------- ----- -------- ----- -------- -----
Operating expenses:
Service, rental and maintenance .... 6,731 20.8 5,219 18.9 13,051 20.7 9,614 18.3
Selling ............................ 5,887 18.2 4,705 17.1 11,427 18.2 8,753 16.7
General and administrative ......... 7,367 22.7 7,503 27.2 13,761 21.9 13,733 26.2
Depreciation & amortization ........ 23,307 71.8 17,747 64.4 45,135 71.7 35,494 67.7
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses .......... 43,292 133.5 35,174 127.6 83,374 132.5 67,594 128.9
-------- ----- -------- ----- -------- ----- -------- -----
Operating income (loss) .............. (10,864) (33.5) (7,601) (27.6) (20,446) (32.5) (15,155) (28.9)
Interest expense, net ................ (7,491) (23.1) (6,831) (24.7) (15,056) (23.9) (13,235) (25.2)
Non-operating expenses ............... - - - - - - 123 0.2
Benefit from income taxes ............ 4,590 14.2 - - 8,905 14.1 - -
-------- ----- -------- ----- -------- ----- -------- -----
Net income (loss) .................... $(13,765) (42.4)% $(14,432) (52.3)% $(26,597) (42.3)% $(28,267) (53.9)%
======== ===== ======== ===== ======== ===== ======== =====
EBITDA ............................... $ 12,443 38.4 % $ 10,146 36.8 % $ 24,689 39.2 % $ 20,339 38.8 %
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Total revenues increased to $34.8 million (a 12.1% increase) and $67.6
million (a 15.8% increase) for the three and six months ended June 30, 1996,
respectively, as compared to $31.0 million and $58.4 million for the
corresponding 1995 periods. Service, rental and maintenance revenues, which
consist primarily of recurring revenues associated with the sale or lease of
pagers, increased 15.9% to $31.1 million and 17.4% to $60.1 million,
respectively, for the three and six months ended June 30, 1996, from $26.9
million and $51.2 million for the three and six months ended June 30, 1995,
respectively. These increases in revenues were primarily due to the increase in
the number of pagers in service from June 30, 1995 to June 30, 1996. Maintenance
revenues represented less than 10% of total service, rental and maintenance
revenues in the three and six months ended June 30, 1996 and 1995. USA Mobile II
does not differentiate between service and rental revenues. Product sales, less
cost of products sold, increased to $1.3 million and $2.8 million in the three
and six months ended June 30, 1996, respectively, from $0.7 million and $1.2
million in the three and six months ended June 30, 1995, respectively, as a
result of a greater number of pager unit sales.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $6.7 million and $13.1
million in the three and six months ended June 30, 1996, respectively, from $5.2
million and $9.6 million in the three and six months ended June 30, 1995,
respectively. The increases were due primarily to increased expenses associated
with system expansions and the provision of paging services to a greater number
of subscribers.
Selling expenses increased to $5.9 million and $11.4 million in the three
and six months ended June 30, 1996, respectively, from $4.7 million and $8.8
million in the three and six months ended June 30, 1995, respectively. These
increases in selling expenses were due to the addition of sales personnel to
support continued growth in the subscriber base, as the number of net new pagers
in service resulting from internal growth increased from the three and six
months ended June 30, 1995 to the three and six months ended June 30, 1996.
Selling expenses are directly related to the number of net new subscribers
added. Therefore, such expenses may increase in the future if pagers in service
are added at a more rapid rate than in the past.
General and administrative expenses increased to $7.4 million and $13.8
million in the three and six months ended June 30, 1996, respectively, from $7.5
million and $13.7 million in the three and six months ended June 30, 1995,
respectively. These increases were due primarily to increased expenses
associated with supporting more pagers in service.
11
<PAGE> 12
Depreciation and amortization expenses increased to $23.3 million
and $45.1 million in the three and six months ended June 30, 1996, respectively,
from $17.7 million and $35.5 million in the three and six months ended June 30,
1995, respectively. These expenses reflect USA Mobile II's continued investment
in pagers and other system expansion capital to support continued growth.
Operating loss increased to $10.9 million and $20.4 million in the three
and six months ended June 30, 1996, respectively, from $7.6 million and $15.2
million in the three and six months ended June 30, 1995, respectively, as a
result of the factors outlined above.
Net interest expense increased to $7.5 million and $15.1 million in the
three and six months ended June 30, 1996, respectively, from $6.8 million and
$13.2 million in the corresponding 1995 periods. The increases were attributable
to an increase in USA Mobile II's outstanding debt.
Non-operating expenses of $123,000 in the six months ended June 30, 1995,
were primarily attributable to expenses incurred in connection with evaluating
various strategic corporate alternatives and defending a hostile takeover
attempt.
During the three and six months ended June 30, 1996, USA Mobile II
recognized an income tax benefit of $4.6 million and $8.9 million, respectively,
representing the tax benefit of operating losses subsequent to September 7, 1995
which were available to offset previously established deferred tax liabilities
arising from Arch's acquisition of USA Mobile.
USA Mobile II's net loss was $13.8 million and $26.6 million for the three
and six months ended June 30, 1996, respectively, as compared to $15.9 million
and $32.1 million for the three and six months ended June 30, 1995,
respectively, as a result of factors outlined above.
Earnings Before Interest, Taxes, Depreciation and Amortization,
("EBITDA"), increased 22.6% to $12.4 million and increased 21.3% to $24.7
million in the three and six months ended June 30, 1996, respectively, from
$10.1 million and $20.3 million in the three and six months ended June 30, 1995,
respectively, as a result of the factors outlined above. EBITDA is a standard
measure of financial performance in the paging industry and is also one of the
financial measures used to calculate whether USA Mobile II is in compliance with
the covenants under its credit facility, but should not be construed as an
alternative to operating income or cash flows from operating activities as
determined in accordance with generally accepted accounting principles. EBITDA
does not reflect income tax benefit and interest expense.
USA MOBILE II CREDIT FACILITY
USA Mobile II and the direct subsidiaries of USA Mobile II (the "USA
Mobile II Borrowing Subsidiaries") are parties to a Credit Agreement dated
September 8, 1995, as amended, with a bank and other lenders establishing the
USA Mobile II Credit Facility.
Under the USA Mobile II Credit Facility, a bank and the other lenders have
agreed to advance up to $50 million to the USA Mobile II Borrowing Subsidiaries
for working capital purposes under a reducing revolving credit facility, subject
to annual reductions commencing December 31, 1998, with a final maturity of
December 31, 2000. Upon the closing of the USA Mobile II Credit Facility, the
bank and the other lenders did not require the contemporaneous grant of a
security interest in the assets of USA Mobile II and its subsidiaries but they
have reserved the right to require such a security interest upon the occurrence
of certain triggering events. Arch and USA Mobile II have guaranteed the
obligations of the USA Mobile II Borrowing Subsidiaries under the USA Mobile II
Credit Facility. Arch's guarantee is secured by the pledge of the stock of Arch
Enterprises and USA Mobile II.
12
<PAGE> 13
Obligations under the USA Mobile II Credit Facility bear interest at
either (i) the bank's alternative reference rate or (ii) the Bank's
reserve-adjusted LIBOR rate, in each case plus a margin keyed to the ratio of
USA Mobile II's total indebtedness to annualized operating cash flow from time
to time. The margin applicable to alternative reference rate loans ranges from
1.375% to 2.00%. The margin applicable to LIBOR rate loans ranges from 2.625% to
3.25%. Interest is payable quarterly in arrears. The USA Mobile II Borrowing
Subsidiaries are required to pay an annual commitment fee of 0.50% of the
average daily unused portion on the USA Mobile II Credit Facility, payable
quarterly in arrears, and an annual agency fee.
The obligation of the Bank and the other lenders to provide advances under
the USA Mobile II Credit Facility is subject to the fulfillment of certain
conditions, including the absence of a material adverse change in the financial
condition, operations, prospects or property of USA Mobile II and its
subsidiaries, taken as a whole, or of Arch, USA Mobile II and its subsidiaries,
taken as a whole.
The covenants under the USA Mobile II Credit Facility limit the ability of
USA Mobile II and its subsidiaries to pay dividends to Arch and the ability of
Arch to pay dividends to its stockholders. In addition, the USA Mobile II Credit
Facility imposes limitations on the incurrence of indebtedness, whether secured
or unsecured, on acquisitions, mergers and investments, and on the sale of
assets. The USA Mobile II Credit Facility also contains various financial
covenants that require USA Mobile II and its subsidiaries to meet certain
specified financial ratios, including a fixed charge coverage ratio, a pro forma
debt service coverage ratio, an interest coverage ratio and a leverage ratio.
As of June 30, 1996, $43.5 million was outstanding under the USA Mobile II
Credit Facility and an additional $6.5 million was available thereunder. At June
30, 1996, such advances bore interest at an average annual rate of 8.5%.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The following important factors, among others, could cause USA Mobile II'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
USA Mobile II's management from time to time.
INDEBTEDNESS AND HIGH DEGREE OF LEVERAGE
USA Mobile II is highly leveraged. USA Mobile II had total debt (exclusive
of intercompany transactions) and total assets of $268.5 million and $592.9
million, respectively, at June 30, 1996. Many factors, some of which will be
beyond USA Mobile II's control, such as prevailing economic conditions, will
affect the performance of USA Mobile II. In addition, covenants imposed by the
credit facility and other indebtedness of USA Mobile II restrict the ability of
USA Mobile II to incur additional indebtedness and prohibit certain activities
and may limit other aspects of USA Mobile II's operations. There can be no
assurance that USA Mobile II will be able to generate sufficient cash flow to
cover required interest and principal payments on its indebtedness. If USA
Mobile II is unable to meet interest and principal payments in the future, it
may, depending upon the circumstances which then exist, seek additional equity
or debt financing, attempt to refinance its existing indebtedness or sell all or
part of its business or assets to raise funds to repay its indebtedness. There
can be no assurance that sufficient equity or debt financing will be available
or, if available, that it will be on terms acceptable to USA Mobile II, that USA
Mobile II will be able to refinance its existing indebtedness or that sufficient
funds could be raised through asset sales. USA Mobile II's high degree of
leverage may have important consequences for USA Mobile II, including: (i) the
ability of USA Mobile to obtain additional financing for acquisitions, working
capital, capital expenditures or other purposes, if necessary, may be impaired
or such financing may not be on favorable terms; (ii) a substantial portion of
the cash flow of USA Mobile II will be used to pay interest expense, which will
reduce the funds which would otherwise be available for operations and future
business opportunities; (iii) USA Mobile II may be more highly leveraged than
its competitors which may place it at a competitive disadvantage; and (iv) USA
Mobile II's high degree of leverage will make it more vulnerable to a downturn
in its business or the economy generally.
13
<PAGE> 14
FUTURE CAPITAL NEEDS
USA Mobile II's business strategy requires the availability of substantial
funds to finance the continued development and future growth and expansion of
its operations. The amount of capital required by USA Mobile II will depend upon
a number of factors, including subscriber growth, technological developments,
marketing and sales expenses, competitive conditions, acquisition strategy and
acquisition opportunities. No assurance can be given that additional equity or
debt financing will be available to USA Mobile II on acceptable terms, if at
all. The unavailability of sufficient financing when needed would have a
material adverse effect on USA Mobile II.
HISTORY OF LOSSES
USA Mobile II has not reported any net income since its inception, except
that USA Mobile II reported net income of $17.6 million in the year ended
December 31, 1991 resulting from an extraordinary gain of $42.2 million
attributable to the restructuring of its debt. USA Mobile II's historical net
losses have resulted principally from (i) substantial depreciation and
amortization expenses, primarily related to intangible assets and pager
depreciation, and (ii) interest expense on debt incurred primarily to finance
acquisitions of paging operations and other costs of growth. Substantial and
increased amounts of debt are expected to be outstanding for the foreseeable
future, which will result in significant additional interest expense which could
have a substantial negative impact on USA Mobile II. USA Mobile II expects to
continue to report net losses for the foreseeable future.
GROWTH AND ACQUISITION STRATEGY
USA Mobile II has pursued and intends to continue to pursue acquisitions
of paging businesses as well as the continued internal growth of USA Mobile II's
paging business. The process of integrating acquired paging businesses may
involve unforeseen difficulties and may require a disproportionate amount of the
time and attention of USA Mobile II's management and the financial and other
resources of USA Mobile II. No assurance can be given that suitable additional
acquisitions can be identified, financed and completed on acceptable terms, or
that USA Mobile II's future acquisitions will be successful. Implementation of
USA Mobile II's growth strategies will be subject to numerous other
contingencies beyond the control of USA Mobile II, including general 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 USA Mobile II's growth strategies
will prove effective or that the goals of USA Mobile II will be achieved.
DEPENDENCE ON KEY PERSONNEL
The success of USA Mobile II will be dependent, to a significant extent,
upon the continued services of a relatively small group of executive personnel.
USA Mobile II does not have employment agreements with any of its current
executive officers, although all current executive officers have entered into
non-competition agreements with USA Mobile II. 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 an adverse effect upon USA Mobile II's
operations.
COMPETITION AND TECHNOLOGICAL CHANGE
USA Mobile II faces competition from other paging service providers in all
markets in which it operates as well as from certain competitors who hold
nationwide licenses. USA Mobile II believes that competition for paging
subscribers is based on quality of service, geographic coverage and price and
that USA Mobile II generally competes effectively based on these factors.
Monthly fees for basic paging services have, in general, declined since USA
Mobile II commenced operations, due in part to competitive conditions, and USA
Mobile II may face significant price-based competition in the future which could
adversely affect USA Mobile II. Some of USA Mobile II's competitors possess
greater financial, technical and other resources than USA Mobile II. A trend
towards increasing consolidation in the paging industry in particular and the
wireless communications industry in general in recent years has led to
competition from increasingly larger and better capitalized competitors. If any
of such competitors were to devote additional resources to the paging business
or focus its strategy on USA Mobile II's markets, USA Mobile II's results of
operations could be adversely
14
<PAGE> 15
affected. A variety of wireless two-way communication technologies currently are
in use or under development. Although such technologies generally are higher
priced than paging services or not widely available, technological improvements
could result in increased capacity and efficiency for wireless two-way
communication and, accordingly, could result in increased competition for USA
Mobile II. Two-way service providers also could elect to provide paging service
as an adjunct to their primary services. Future technological advances in the
telecommunications industry could increase new services or products competitive
with the paging services provided by USA Mobile II or could require USA Mobile
II to reduce the price of its paging services or incur additional capital
expenditures to meet competitive requirements. Recent and proposed regulatory
changes by the FCC are aimed at encouraging such technological advances and new
services. Entities offering service on wireless two-way communications
technology, including cellular telephones and specialized mobile radio services,
also compete with the paging services that USA Mobile II provides. There can be
no assurance that USA Mobile II will be able to compete successfully with its
current and future competitors in the paging business or with competitors
offering alternative communication technologies.
SUBSCRIBER TURNOVER
The results of operations of wireless messaging service providers, such as
USA Mobile II, can be significantly affected by subscriber cancellations. The
sales and marketing costs associated with attracting new subscribers are
substantial relative to the costs of providing service to existing customers.
Because the paging business is characterized by high fixed costs, disconnections
directly and adversely affect operating cash flow. An increase in its subscriber
cancellation rate may adversely affect USA Mobile II's results of operations.
DEPENDENCE ON SUPPLIERS
USA Mobile II does not manufacture any of the pagers used in its paging
operations. USA Mobile II buys pagers primarily from Motorola, Inc. ("Motorola")
and NEC America, Inc. ("NEC") and therefore is dependent on such manufacturers
to obtain sufficient pager inventory for new subscriber and replacement needs.
In addition, USA Mobile II purchases terminals and transmitters primarily from
Glenayre Technologies, Inc. ("Glenayre") and Motorola and thus is dependent on
such manufacturers for sufficient terminals and transmitters to meet its
expansion and replacement requirements. To date, USA Mobile II has not
experienced significant delays in obtaining pagers, terminals or transmitters,
but there can be no assurance that USA Mobile II will not experience such delays
in the future. USA Mobile II has never had a purchase agreement with Glenayre or
NEC. USA Mobile II's most recent one-year purchase agreement with Motorola
expired on December 31, 1995 and Arch is in the process of negotiating a new
agreement with Motorola covering pricing for Arch, including USA Mobile II.
Although Motorola has in the past entered into a new agreement with Arch and USA
Mobile II annually, there can be no assurance that Motorola will enter into a
new agreement with Arch or that the terms and conditions of a new agreement will
be as favorable to Arch as under past agreements with Motorola. Although USA
Mobile II believes that sufficient alternative sources of pagers, terminals and
transmitters exist, there can be no assurance that USA Mobile II would not be
adversely affected if it were unable to obtain these items from current supply
sources or on terms comparable to existing terms.
GOVERNMENT REGULATION, FOREIGN OWNERSHIP AND POSSIBLE REDEMPTION
The paging operations of USA Mobile II are subject to regulation by the
FCC and various state regulatory agencies. There can be no assurance that those
agencies will not propose or adopt regulations or take actions that would have a
material adverse effect on USA Mobile II's business. Changes in regulation of
USA Mobile II's paging business or the allocation of radio spectrum for services
that compete with USA Mobile II's business could adversely USA Mobile II's
results of operations. For example, the FCC has proposed adopting a market area
licensing scheme and the ability of USA Mobile II to make major modifications to
its current paging systems may be affected during the transition to the market
area licensing process. In addition, some aspects of the recently enacted
Telecommunications Act of 1996 could have a beneficial effect on USA Mobile II's
business, but other provisions may place additional burdens upon USA Mobile II
or subject USA Mobile II to increased competition.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) None.
(b) None.
16
<PAGE> 17
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, 1996, to be signed on its behalf by the undersigned thereunto duly
authorized.
USA MOBILE COMMUNICATIONS, INC. II
Dated: August 14, 1996 By: /s/ William A. Wilson
----------------------------
William A. Wilson
Executive Vice President and
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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