<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 September 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 November 8, 1996.
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<PAGE> 2
USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
<TABLE>
QUARTERLY REPORT ON FORM 10-Q
INDEX
<CAPTION>
PART I. FINANCIAL INFORMATION Page
--------------------- ----
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of September 30, 1996 and
December 31, 1995 3
Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 1996 and the
Period from September 8, 1995 to September 30, 1995 4
Predecessor Consolidated Condensed Statements of Operations
for the Period from July 1, 1995 to September 7, 1995 and the Period
from January 1, 1995 to September 7, 1995 5
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and the Period from
September 8, 1995 to September 30, 1995 6
Predecessor Consolidated Condensed Statement of Cash Flows for the
Period from January 1, 1995 to September 7, 1995 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
PART II. OTHER INFORMATION 16
-----------------
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
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>
September 30, 1996 December 31, 1995
------------------ -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 340 $ 1,543
Accounts receivable, net 7,923 5,994
Inventories 13,504 11,581
Prepaid expenses and other 1,676 1,797
-------- --------
Total current assets 23,443 20,915
-------- --------
Property and equipment, at cost 137,610 95,090
Less accumulated depreciation and amortization (28,055) (5,244)
-------- --------
Property and equipment, net 109,555 89,846
-------- --------
Intangible and other assets, net 444,857 495,737
-------- --------
$577,855 $606,498
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 11,285 $ 10,678
Accrued expenses 7,193 5,944
Accrued interest 7,916 7,399
Customer deposits 5,114 3,928
Deferred revenue 2,299 1,570
Payable to Arch Communications Enterprises, Inc. 1,389 -
Payable to Arch Communications Group, Inc. 2,378 497
-------- --------
Total current liabilities 37,574 30,016
-------- --------
Long-term debt 268,500 264,500
-------- --------
Deferred income taxes 46,522 60,522
-------- --------
Stockholder's equity:
Common stock - $.01 par value - -
Additional paid-in capital 283,353 268,353
Accumulated deficit (58,094) (16,893)
-------- --------
Total stockholder's equity 225,259 251,460
-------- --------
$577,855 $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>
Period from
Three Months Ended Nine Months Ended September 8, 1995 to
September 30, 1996 September 30, 1996 September 30, 1995
------------------ ------------------ --------------------
<S> <C> <C> <C>
Service, rental and maintenance revenues $ 32,723 $ 92,854 $ 7,355
Product sales 3,576 11,085 1,004
-------- -------- -------
Total revenues 36,299 103,939 8,359
Cost of products sold (2,409) (7,121) (832)
-------- -------- -------
33,890 96,818 7,527
-------- -------- -------
Operating expenses:
Service, rental and maintenance 7,438 20,489 1,506
Selling 5,817 17,244 1,273
General and administrative 7,521 21,282 1,802
Depreciation and amortization 25,345 70,480 4,652
-------- -------- -------
Total operating expenses 46,121 129,495 9,233
-------- -------- -------
Operating income (loss) (12,231) (32,677) (1,706)
Interest expense, net (7,468) (22,524) (1,861)
-------- -------- -------
Income (loss) before income tax benefit (19,699) (55,201) (3,567)
Benefit from income taxes 5,095 14,000 -
-------- -------- -------
Net income (loss) $(14,604) $(41,201) $(3,567)
======== ======== =======
</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>
Period from Period from
July 1, 1995 to January 1, 1995 to
September 7, 1995 September 7, 1995
----------------- ------------------
<S> <C> <C>
Service, rental and maintenance revenues $20,968 $ 72,185
Product sales 2,811 9,996
------- --------
Total revenues 23,779 82,181
Cost of products sold (1,947) (6,726)
------- --------
21,832 75,455
------- --------
Operating expenses:
Service, rental and maintenance 4,261 13,875
Selling 3,163 11,916
General and administrative 5,534 19,267
Depreciation and amortization 8,594 29,239
------- --------
Total operating expenses 21,552 74,297
------- --------
Operating income 280 1,158
Interest expense, net (5,287) (18,522)
Non-operating expenses (4,399) (7,844)
------- --------
Income (loss) before income tax benefit (9,406) (25,208)
Benefit from income taxes 726 2,675
------- --------
Net income (loss) $(8,680) $(22,533)
======= ========
</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 STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
<CAPTION>
Period from
Nine Months Ended September 8, 1995 to
September 30, 1996 September 30, 1995
------------------ --------------------
<S> <C> <C>
Net cash provided by operating activities $ 16,680 $ (2,190)
-------- --------
Cash flows from investing activities:
Additions to property and equipment, net (46,174) (2,066)
Additions to intangible and other assets (1,109) (12,103)
Sale of paging assets to Arch Communications Enterprises, Inc. 10,400 -
-------- --------
Net cash used for investing activities (36,883) (14,169)
-------- --------
Cash flows from financing activities:
Issuance of long-term debt 51,500 29,000
Repayment of long-term debt (47,500) (16,214)
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 12,786
-------- --------
Net decrease in cash and equivalents (1,203) (3,573)
Cash and equivalents, beginning of period 1,543 4,197
-------- --------
Cash and equivalents, end of period $ 340 $ 624
======== ========
Supplemental disclosure - Interest paid $ 21,226 $ 433
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
USA MOBILE COMMUNICATIONS, INC. II
<TABLE>
PREDECESSOR CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Period from January 1, 1995 to September 7, 1995
(unaudited and in thousands)
<CAPTION>
<S> <C>
Net cash provided by operating activities $ 5,659
--------
Cash flows from investing activities:
Sale of investment in repurchase agreements 37,000
Acquisitions of paging companies, net of cash acquired (28,684)
Release of pending acquisition escrow deposits 14,234
Additions to property and equipment, net (34,032)
Additions to intangible and other assets (2,643)
---------
Net cash used for investing activities (14,125)
---------
Cash flows from financing activities:
Issuance of long-term debt 12,840
Repayment of long-term debt (651)
Capital contributions 54
--------
Net cash provided by financing activities 12,243
--------
Net increase in cash 3,777
Cash, beginning of period 420
--------
Cash, end of period $ 4,197
========
Supplemental disclosure - Interest paid $ 17,108
</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 periods prior to September 8,
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>
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
Goodwill $249,516 $267,398
Purchased FCC licenses 120,768 133,790
Purchased subscriber lists 70,006 86,519
Non-competition agreements 3,149 3,749
Deferred financing costs 586 1,824
Other 832 2,457
-------- --------
$444,857 $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>
Nine Months Ended
September 30, 1995
------------------
(in thousands)
<S> <C>
Total revenues $ 91,849
Net income (loss) (54,494)
</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 of $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 an
intercompany demand 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 nine months ended September 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 various forward-looking statements which
involve risks and uncertainties. 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 acquisition represent a new cost basis.
Therefore, operating results subsequent to the acquisition are not comparable to
the operating results prior to the acquisition, 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 nine months ended September 30, 1996 and 1995 is presented on a pro forma
basis as if the acquisition 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
nine months ended September 30, 1995. The pro forma effect of other paging
companies acquired by USA Mobile II prior to the acquisition 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
acquisition 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.
<TABLE>
The following table presents the unaudited consolidated statements of
operations for the three and nine months ended September 30, 1996 (historical)
and 1995 (pro forma) (dollars in thousands):
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 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..... $ 32,723 96.6% $ 28,323 97.7% $ 92,854 95.9% $ 79,540 97.7%
Product sales....................... 3,576 10.5 3,815 13.2 11,085 11.4 11,000 13.5
-------- ----- -------- ----- -------- ----- -------- -----
Total revenues................. 36,299 107.1 32,138 110.9 103,939 107.3 90,540 111.2
Cost of products sold............... (2,409) (7.1) (3,161) (10.9) (7,121) (7.3) (9,116) (11.2)
-------- ----- -------- ----- -------- ----- -------- -----
33,890 100.0 28,977 100.0 96,818 100.0 81,424 100.0
-------- ----- -------- ----- -------- ----- -------- -----
Operating expenses:
Service, rental and maintenance.. 7,438 21.9 5,767 19.9 20,489 21.2 15,381 18.9
Selling.......................... 5,817 17.2 4,436 15.3 17,244 17.8 13,189 16.2
General and administrative....... 7,521 22.2 7,336 25.3 21,282 22.0 21,069 25.9
Depreciation & amortization...... 25,345 74.8 18,608 64.2 70,480 72.8 55,217 67.8
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses....... 46,121 136.1 36,147 124.7 129,495 133.8 104,856 128.8
-------- ----- -------- ----- -------- ----- -------- -----
Operating income (loss)............. (12,231) (36.1) (7,170) (24.7) (32,677) (33.8) (23,432) (28.8)
Interest expense, net............... (7,468) (22.0) (7,683) (26.5) (22,524) (23.3) (21,543) (26.5)
Non-operating expenses.............. - - - - - - (123) (0.1)
Benefit from income taxes........... 5,095 15.0 - - 14,000 14.5 - -
-------- ----- -------- ----- -------- ----- -------- -----
Net income (loss)................... $(14,604) (43.1)% $(14,853) (51.2)% $(41,201) (42.6)% $(45,098) (55.4)%
======== ===== ======== ===== ======== ===== ======== =====
EBITDA.............................. $ 13,114 38.7% $ 11,438 39.5% $ 37,803 39.0% $ 31,785 39.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
10
<PAGE> 11
Total revenues increased to $36.3 million (a 12.9% increase) and $103.9
million (a 14.8% increase) for the three and nine months ended September 30,
1996, respectively, as compared to $32.1 million and $90.5 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 15.5% to $32.7 million and 16.7% to $92.9 million,
respectively, for the three and nine months ended September 30, 1996, from $28.3
million and $79.5 million for the three and nine months ended September 30,
1995, respectively. These increases in revenues were primarily due to the
increase in the number of pagers in service from September 30, 1995 to September
30, 1996. Maintenance revenues represented less than 10% of total service,
rental and maintenance revenues in the three and nine months ended September 30,
1996 and 1995. USA Mobile II does not differentiate between service and rental
revenues. Product sales, less cost of products sold, increased to $1.2 million
and $4.0 million in the three and nine months ended September 30, 1996,
respectively, from $0.7 million and $1.9 million in the three and nine months
ended September 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 $7.4 million and $20.5
million in the three and nine months ended September 30, 1996, respectively,
from $5.8 million and $15.4 million in the three and nine months ended September
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 $5.8 million and $17.2 million in the
three and nine months ended September 30, 1996, respectively, from $4.4 million
and $13.2 million in the three and nine months ended September 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 nine months ended September 30, 1995 to the three and nine
months ended September 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 $7.5 million and $21.3
million in the three and nine months ended September 30, 1996, respectively,
from $7.3 million and $21.1 million in the three and nine months ended September
30, 1995, respectively. These increases were due primarily to increased expenses
associated with supporting more pagers in service.
Depreciation and amortization expenses increased to $25.3 million and
$70.5 million in the three and nine months ended September 30, 1996,
respectively, from $18.6 million and $55.2 million in the three and nine months
ended September 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 $12.2 million and $32.7 million in the
three and nine months ended September 30, 1996, respectively, from $7.2 million
and $23.4 million in the three and nine months ended September 30, 1995,
respectively, as a result of the factors outlined above.
Net interest expense decreased to $7.5 million in the three months
ended September 30, 1996 from $7.7 million in the corresponding 1995 period. The
decrease is the result of a decrease in interest rates. Net interest expense
increased to $22.5 million in the nine months ended September 30, 1996 from
$21.5 million in the corresponding 1995 period. The increase is attributable to
an increase in USA Mobile II's outstanding debt.
Non-operating expenses of $123,000 in the nine months ended September
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 nine months ended September 30, 1996, USA Mobile
II recognized an income tax benefit of $5.1 million and $14.0 million,
respectively, representing the tax benefit of operating losses 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 $14.6 million and $41.2 million for the
three and nine months ended September 30, 1996, respectively, as compared to
$14.9 million and $45.1 million for the three and nine months ended September
30, 1995, respectively, as a result of factors outlined above.
11
<PAGE> 12
Earnings before interest, taxes, depreciation and amortization,
("EBITDA"), increased 14.7% to $13.1 million and increased 18.9% to $37.8
million in the three and nine months ended September 30, 1996, respectively,
from $11.4 million and $31.8 million in the three and nine months ended
September 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 $60 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. In October 1996, USA
Mobile II exercised its option to increase the size of the USA Mobile Credit
Facility from $50 million to $60 million.
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 September 30, 1996, $43.5 million was outstanding under the USA
Mobile II Credit Facility. At September 30, 1996, such advances bore interest at
an average annual rate of 8.5%. At October 31, 1996, $16.5 million was available
under the USA Mobile II Credit Facility.
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.
12
<PAGE> 13
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
$577.9 million, respectively, at September 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.
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 assets acquired through acquisitions
of paging companies, 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.
13
<PAGE> 14
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 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
14
<PAGE> 15
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
September 30, 1996, to be signed on its behalf by the undersigned thereunto duly
authorized.
USA MOBILE COMMUNICATIONS, INC. II
Dated: November 14, 1996 By: /s/ William A. Wilson
------------------------------------
William A. Wilson
Executive Vice President and
Chief Financial Officer
17
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