<PAGE>1
QUARTERLY REPORT UNDER SECTION 13 0R 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
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 May 14,1998.
<PAGE>2
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 March 31, 1998
and December 31, 1997 3
Consolidated Condensed Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION 13
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.)
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
MARCH 31, DECEMBER 31,
1998 1997
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 91 $ 1,291
Accounts receivable, net 8,656 8,353
Inventories 9,862 10,591
Prepaid expenses and other 390 390
Due from Arch Communications Group, Inc. 3,580 5,232
--------- ---------
Total current assets 22,579 25,857
--------- ---------
Property and equipment, at cost 157,173 150,246
Less accumulated depreciation and amortization (58,060) (51,569)
--------- ---------
Property and equipment, net 99,113 98,677
--------- ---------
Intangible and other assets, net 353,957 368,912
--------- ---------
$ 475,649 $ 493,446
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,519 $ 9,882
Accrued interest 8,069 7,537
Accrued expenses and other liabilities 12,338 12,233
Payable to Arch Communications Enterprises, Inc. 870 2,079
--------- ---------
Total current liabilities 29,796 31,731
--------- ---------
Long-term debt 289,500 288,000
--------- ---------
Deferred income taxes 19,559 19,559
--------- ---------
Stockholders' equity:
Common stock - $.01 par value -- --
Additional paid-in capital 283,353 283,353
Accumulated deficit (146,559) (129,197)
--------- ---------
Total stockholders' equity 136,794 154,156
--------- ---------
$ 475,649 $ 493,446
========= =========
The accompanying notes are an integral part of these
consolidated condensed financial statements
3
<PAGE>4
USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
(unaudited and in thousands)
1998 1997
---- ----
Service, rental, and maintenance revenues $ 37,148 $ 34,156
Product sales 4,536 4,902
-------- --------
Total revenues 41,684 39,058
Cost of products sold (3,151) (3,502)
-------- --------
38,533 35,556
-------- --------
Operating expenses:
Service, rental, and maintenance 8,360 7,239
Selling 4,698 5,523
General and administrative 8,962 7,697
Depreciation and amortization 25,863 27,934
-------- --------
Total operating expenses 47,883 48,393
-------- --------
Operating income (loss) (9,350) (12,837)
Interest expense, net (8,012) (7,788)
-------- --------
Income (loss) before income tax benefit (17,362) (20,625)
Benefit from income taxes -- 5,300
-------- --------
Net income (loss) $(17,362) $(15,325)
======== ========
The accompanying notes are an integral part of these
consolidated condensed financial statements
4
<PAGE>5
USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1997
(unaudited and in thousands)
1998 1997
---- ----
Net cash provided by operating activities $ 8,644 $ 9,773
-------- --------
Cash flows used for investing activities:
Additions to property and equipment, net (10,986) (13,521)
Additions to intangible and other assets (358) (1,099)
-------- --------
Net cash used for investing activities (11,344) (14,620)
-------- --------
Cash flows from financing activities:
Issuance of long-term debt 1,500 61,000
Repayment of long-term debt -- (56,000)
-------- --------
Net cash provided by financing activities 1,500 5,000
-------- --------
Net (decrease) increase in cash and cash equivalents (1,200) 153
Cash and cash equivalents, beginning of period 1,291 891
-------- --------
Cash and cash equivalents, end of period $ 91 $ 1,044
======== ========
Supplemental disclosure:
Interest paid $ 7,299 $ 7,444
The accompanying notes are an integral part of these
consolidated condensed financial statements
5
<PAGE>6
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,
1997, has been prepared by management without audit by independent accountants.
The consolidated condensed balance sheet at December 31, 1997 has been derived
from, but does not include all the disclosures contained in, the audited
consolidated financial statements for the year ended December 31, 1997. 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 USA Mobile II's Annual Report on Form 10-K for the year ended
December 31, 1997. 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 composed of the following (in thousands):
March 31, December 31,
1998 1997
---- ----
(unaudited)
Goodwill $207,299 $214,286
Purchased FCC licenses 100,203 103,580
Purchased subscriber lists 43,099 47,552
Non-competition agreements 1,933 2,133
Deferred financing costs 479 525
Other 944 836
-------- --------
$353,957 $368,912
======== ========
(c) Tower Site Sale - On April 13, 1998, Arch Communications Group, Inc.
("Arch") announced an agreement to sell the tower site assets (the "Tower Site
Sale") owned by its subsidiaries, including tower site assets owned by USA
Mobile II, for approximately $38.0 million in cash (subject to adjustment), of
which $1.3 million will be paid to Benbow PCS Ventures, Inc. ("Benbow"), in
which Arch holds a 49.9% equity interest, in payment of certain assets owned by
Benbow and included in the Tower Site Sale. Arch and its subsidiaries will sell
communications towers, real estate, site management contracts and/or leasehold
interests involving a total of 134 sites in 22 states, and will lease back space
on the towers on which they currently operate communications equipment to
service their own paging network. The closing of the Tower Site Sale is subject
to receipt of customary regulatory approvals and other conditions. Arch
currently expects to complete the Tower Site Sale in the second quarter of 1998.
(d) Pending Accounting Pronouncements - In April 1998, the Accounting
Standards Executive Committee of the Financial Accounting Standards Board issued
Statement of Position 98-5 ("SOP 98-5" ) "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. Initial application of SOP 98-5 will be
reported as the cumulative effect of a change in accounting principle. USA
Mobile II intends to adopt SOP 98-5 effective January 1, 1999. The adoption of
SOP 98-5 is not expected to have a material effect on USA Mobile II's financial
position or results of operations.
6
<PAGE>7
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".
SHIFT IN OPERATING FOCUS
In April 1997, Arch reordered its operating priorities to improve capital
efficiency and strengthen its balance sheet by placing a higher priority on
leverage reduction than subscriber unit growth. As part of its reordered
operating priorities, Arch has implemented and is continuing to implement
various initiatives to reduce capital costs while sustaining acceptable levels
of unit and revenue growth. As a result, USA Mobile II's rate of internal growth
in pagers in service has slowed and is expected to remain below the rates of
internal growth previously achieved by USA Mobile II. Additionally, Arch has
considered the possible sale of non-strategic assets. In April 1998, Arch
announced the Tower Site Sale, in which Arch and USA Mobile II will sell
communications towers, real estate, site management contracts and/or leasehold
interests involving 134 sites in 22 states, and will lease back space on the
towers on which they currently operate communications equipment to service their
own paging network. Arch and USA Mobile II will use their proceeds from the
Tower Site Sale to repay indebtedness under their bank credit facilities. The
pending Tower Site Sale, if completed, will result in a reduction in USA Mobile
II's rental income, an increase in its operating expenses and the elimination of
future interest expense on the repaid debt.
RESULTS OF OPERATIONS
Total revenues increased to $41.7 million or 6.7% for the three months
ended March 31, 1998, as compared to $39.1 million for the corresponding 1997
period. Service, rental and maintenance revenues, which consist primarily of
recurring revenues associated with the sale or lease of pagers, increased 8.8%
to $37.1 million for the three months ended March 31, 1998, from $34.2 million
for the three months ended March 31, 1997. These increases in revenues were
primarily due to an increase in the number of pagers in service from March 31,
1997 to March 31, 1998. Maintenance revenues represented less than 10% of total
service, rental and maintenance revenues in the three months ended March 31,
1998 and 1997. USA Mobile II does not differentiate between service and rental
revenues.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $8.4 million in the three
months ended March 31, 1998 from $7.2 million in the three months ended March
31, 1997. The increase was due primarily to increased expenses associated with
system expansions and the provision of paging services to a greater number of
subscribers.
Selling expenses decreased to $4.7 million in the three months ended March
31, 1998 from $5.5 million for the three months ended March 31, 1997. Most
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.
7
<PAGE>8
General and administrative expenses increased to $9.0 million in the three
months ended March 31, 1998 from $7.7 million in the three months ended March
31, 1997. The increase was due primarily to administrative and facility costs
associated with supporting more pagers in service.
Depreciation and amortization expenses decreased to $25.9 million in the
three months ended March 31, 1998 from $27.9 million in the three months ended
March 31, 1997. These expenses reflect USA Mobile II's investment in pagers and
other system expansion capital to support growth.
Operating loss decreased to $9.4 million in the three months ended March
31, 1998 from $12.8 million in the three months ended March 31, 1997, as a
result of the factors outlined above.
Net interest expense increased to $8.0 million in the three months ended
March 31, 1998 from $7.8 million in the corresponding 1997 period. The increase
was attributable to an increase in USA Mobile II's average outstanding debt.
During the three months ended March 31, 1997, USA Mobile II recognized an
income tax benefit of $5.3 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 $17.4 million for the three months ended March
31, 1998 as compared to $15.3 million for the three months ended March 31, 1997
as a result of factors outlined above.
Earnings Before Interest, Taxes, Depreciation and Amortization, ("EBITDA"),
increased 9.4% to $16.5 million in the three months ended March 31, 1998 from
$15.1 million in the three months ended March 31, 1997, 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, net. One of USA Mobile's financial objectives is to increase
EBITDA, as such earnings are a significant source of funds for servicing
indebtedness and for investments in continued growth, including the purchase of
pagers and paging system equipment, construction and expansion of paging
systems.
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. At March 31, 1998, USA Mobile II had
outstanding $289.5 million of total debt. USA Mobile II's high degree of
leverage may have important consequences for USA Mobile II, including: (i) the
ability of USA Mobile II and its subsidiaries 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) the USA Mobile II Notes
and USA Mobile II's credit facilities contain financial and restrictive
covenants, the failure to comply with which may result in an event of default
which, if not cured or waived, could have a material adverse effect on USA
Mobile II; (iv) USA Mobile II may be more highly leveraged than its competitors
8
<PAGE>9
which may place it at a competitive disadvantage; and (v) USA Mobile II's high
degree of leverage will make it more vulnerable to a downturn in its business or
the economy generally. In April 1997, Arch reordered its operating priorities to
improve capital efficiency and strengthen its balance sheet by placing a higher
priority on leverage reduction than subscriber unit growth. As part of its
reordered operating priorities, Arch has implemented and is continuing to
implement various initiatives to reduce capital costs while sustaining
acceptable levels of unit and revenue growth and reviewing the possible sale of
non-strategic assets. As a result, USA Mobile II's rate of internal growth in
pagers in service has slowed and is expected to remain below the rates of
internal growth previously achieved by USA Mobile II, but USA Mobile II has not
yet reduced its financial leverage significantly. There can be no assurance that
USA Mobile II will be able to reduce its financial leverage significantly or
that USA Mobile II will achieve an appropriate balance between growth which it
considers acceptable and future reductions in financial leverage.
FUTURE CAPITAL NEEDS
USA Mobile II's business strategy requires the availability of substantial
funds to service debt and 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 material adverse affect on USA Mobile II. USA Mobile II expects to
continue to report net losses for the foreseeable future.
POSSIBLE ACQUISITION TRANSACTIONS
Arch believes that the paging industry will undergo further consolidation,
and Arch expects to participate in such consolidation, either as an acquirer or
an acquiree. Arch evaluates possible acquisition transactions on an ongoing
basis and, from time to time, is engaged in discussions with respect to possible
acquisitions or other business combinations. The process of integrating acquired
paging businesses may involve unforeseen difficulties and may require a
disproportionate amount of the time and attention of Arch's management and the
financial and other resources of Arch. No assurance can be given that suitable
acquisition transactions can be identified, financed and completed on acceptable
terms, that Arch's future acquisitions will be successful, or that Arch will
participate in any future consolidation of the paging industry.
9
<PAGE>10
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 or key man insurance with any
of its current executive officers, although all current executive officers have
entered into non-competition and retention agreements with Arch. The loss or
unavailability of one or more of its executive officers or the inability to
attract or retain key employees in the future could have 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 primarily focused on voice services currently are in
use or under development. Although such technologies generally are higher priced
than paging services, 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 and broadband PCS, and specialized mobile radio services, also compete
with the paging services that USA Mobile II provides. Technological change also
may affect the value of the pagers owned by USA Mobile II and leased to its
subscribers. If USA Mobile II's subscribers requested more technologically
advanced pagers, USA Mobile II could incur additional inventory costs and
capital expenditures if it were required to replace pagers leased to its
subscribers within a short period of time. 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.
10
<PAGE>11
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 purchase agreement with Motorola expires in December 1998,
with a provision for automatic renewal for one-year terms. 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 affect USA Mobile
II's results of operations. 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. The Communications Act of
1934, as amended, limits foreign ownership of entities that hold certain
licenses from the FCC. Because Arch, through its subsidiaries, holds FCC
licenses, in general, no more than 25% of Arch's stock can be owned or voted by
aliens or their representatives, a foreign government or its representative or a
foreign corporation. An FCC licensee may, however, make prior application to the
FCC for a determination that it is not in the public interest to deny an
individual licensee's foreign ownership in excess of the 25% foreign ownership
benchmark. Most recently, the FCC substantially liberalized its authorization
process for foreign entities investing in paging companies that are domiciled in
countries which are signatories to the World Trade Organization agreement.
Arch's Restated Certificate of Incorporation permits the redemption of shares of
Arch's capital stock from foreign stockholders where necessary to protect the
Arch's regulatory licenses, but such redemption would be subject to the
availability of capital to Arch and any restrictions contained in the debt
instruments of Arch and its subsidiaries and under Delaware law (which currently
would not permit any such redemptions). The failure to redeem such shares
promptly could jeopardize USA Mobile II's FCC licenses. From time to time,
legislation and regulations which could potentially adversely affect USA Mobile
II are proposed or enacted by federal and state legislators and regulators. For
example, the FCC and certain states require paging companies to contribute a
portion of specified revenues to support telecommunications public purposes.
Additional states and localities may in the future seek to impose similar
requirements and the FCC recently adopted an order requiring paging companies to
compensate pay telephone providers for 800 and similar telephone calls. USA
Mobile II has generally passed these costs on to its subscribers, which makes
USA Mobile II's services more expensive and which could affect the attraction or
retention of subscribers. There can be no assurance that USA Mobile II will be
able to pass on these costs. Although these requirements have not to date had a
material impact on USA Mobile II, these or similar requirements could in the
future have a material adverse effect on USA Mobile II.
11
<PAGE>12
IMPACT OF THE YEAR 2000 ISSUE
USA Mobile II is currently upgrading its information systems in a manner
which will also resolve the potential impact of the year 2000 problem on the
processing of date-sensitive information by USA Mobile II's computerized systems
and transmission equipment. The year 2000 problem is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. Any of USA Mobile II's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. Based on preliminary information, costs of addressing potential
problems are not currently expected to have a material adverse impact on USA
Mobile II's financial position, results of operations or cash flows in future
periods. The ability of third parties with whom USA Mobile II transacts business
to adequately address their year 2000 issues is outside USA Mobile II's control.
If USA Mobile II, its customers or vendors are unable to resolve such processing
issues in a timely manner, there could be a material adverse effect on USA
Mobile II.
12
<PAGE>13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
USA Mobile II is involved in various lawsuits and claims arising in the
normal course of business. USA Mobile II believes that none of such matters will
have a material adverse effect on the USA Mobile II's business or financial
condition.
ITEM 5. OTHER INFORMATION
None.
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) None.
13
<PAGE>14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q for the quarter ended March
31, 1998, to be signed on its behalf by the undersigned thereunto duly
authorized.
USA MOBILE COMMUNICATIONS, INC. II
Dated: May 14, 1998 By: /S/ J. ROY POTTLE
----------------------
J. Roy Pottle
Executive Vice President and
Chief Financial Officer
14
<PAGE>15
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
10.4! - Amendment 2 dated April 2, 1998 to Letter Agreement dated
January 7, 1997 between Arch and Motorola, Inc.
27.1* - Financial Data Schedule.
* Filed herewith
! Incorporated by reference from the Quarterly Report on Form 10-Q of Arch for
the quarter ended March 31, 1998. Confidential treatment requested with
respect to portions of this exhibit.
+ Identifies exhibits constituting a management contract or compensatory plan.
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<NAME> USA MOBILE COMMUNICATIONS, INC. II
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 91
<SECURITIES> 0
<RECEIVABLES> 9,996
<ALLOWANCES> 1,340
<INVENTORY> 9,862
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0
0
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</TABLE>
