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, 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
ARCH COMMUNICATIONS, INC.
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 848.7501 shares of the
Company's Common Stock ($.01 par value) were outstanding as of November 11,
1998.
<PAGE> 2
ARCH COMMUNICATIONS, INC.
(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 September 30, 1998 and
December 31, 1997 3
Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 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 10
PART II. OTHER INFORMATION 18
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
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,534 $ 1,887
Accounts receivable, net 34,496 30,147
Inventories 10,578 12,633
Prepaid expenses and other 4,170 4,917
----------- -----------
Total current assets 53,778 49,584
----------- -----------
Property and equipment, at cost 421,305 388,035
Less accumulated depreciation and amortization (197,416) (146,542)
----------- -----------
Property and equipment, net 223,889 241,493
----------- -----------
Intangible and other assets, net 654,129 718,969
----------- -----------
$ 931,796 $ 1,010,046
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ -- $ 24,513
Accounts payable 23,571 22,486
Accrued restructuring 14,810 --
Accrued interest 18,466 11,174
Accrued expenses and other liabilities 29,212 26,831
----------- -----------
Total current liabilities 86,059 85,004
----------- -----------
Long-term debt 619,534 623,000
----------- -----------
Other long-term liabilities 28,639 --
----------- -----------
Stockholder's equity:
Common stock - $.01 par value -- --
Additional paid-in capital 642,225 617,563
Accumulated deficit (444,661) (315,521)
----------- -----------
Total stockholder's equity 197,564 302,042
----------- -----------
$ 931,796 $ 1,010,046
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited and in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service, rental, and maintenance
revenues $ 93,546 $ 89,592 $ 277,826 $ 261,570
Product sales 10,506 11,739 31,811 34,029
--------- --------- --------- ---------
Total revenues 104,052 101,331 309,637 295,599
Cost of products sold (7,173) (7,753) (21,863) (22,044)
--------- --------- --------- ---------
96,879 93,578 287,774 273,555
--------- --------- --------- ---------
Operating expenses:
Service, rental, and maintenance 20,403 21,116 60,812 59,227
Selling 12,658 12,387 36,902 39,019
General and administrative 28,011 27,533 84,527 78,878
Depreciation and amortization 56,375 59,507 164,290 179,188
Restructuring charge -- -- 16,100 --
--------- --------- --------- ---------
Total operating expenses 117,447 120,543 362,631 356,312
--------- --------- --------- ---------
Operating income (loss) (20,568) (26,965) (74,857) (82,757)
Interest expense, net (17,641) (16,002) (50,344) (47,015)
Equity in loss of affiliate -- (1,016) (2,219) (2,828)
--------- --------- --------- ---------
Income (loss) before income tax
benefit and extraordinary item (38,209) (43,983) (127,420) (132,600)
Benefit from income taxes -- 5,300 -- 15,900
--------- --------- --------- ---------
Income (loss) before extraordinary
item (38,209) (38,683) (127,420) (116,700)
Extraordinary charge from early
extinguishment of debt -- -- (1,720) --
--------- --------- --------- ---------
Net income (loss) $ (38,209) $ (38,683) $(129,140) $(116,700)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 91,819 $ 45,135
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net (58,029) (63,694)
Additions to intangible and other assets (27,756) (10,978)
--------- ---------
Net cash used for investing activities (85,785) (74,672)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 455,964 91,000
Repayment of long-term debt (484,013) (56,035)
Capital contribution from (distribution to) Arch
Communications Group, Inc. 24,662 (3,535)
--------- ---------
Net cash (used for) provided by financing activities (3,387) 31,430
--------- ---------
Net increase in cash and cash equivalents 2,647 1,893
Cash and cash equivalents, beginning of period 1,887 1,271
--------- ---------
Cash and cash equivalents, end of period $ 4,534 $ 3,164
========= =========
Supplemental disclosure:
Interest paid $ 42,511 $ 44,915
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC. )
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(a) Merger and Name Change -- On June 29, 1998, Arch Communications Group,
Inc. ("Parent") effected a number of restructuring transactions involving
certain of its direct and indirect wholly-owned subsidiaries. Arch
Communications Enterprises, Inc. ("ACE") was merged (the "Merger") into a
subsidiary of USA Mobile Communications, Inc. II ("USAM") named Arch Paging,
Inc. ("API"). In connection with the Merger, USAM changed its name to Arch
Communications, Inc. ("Arch" or the "Company") and issued 100 shares of its
common stock to Parent. Immediately prior to and in connection with the Merger:
(i) USAM contributed its operating assets and liabilities to an existing
subsidiary of USAM; (ii) The Westlink Company, which held ACE's 49.9% equity
interest in Benbow PCS Ventures, Inc. ("Benbow"), distributed its Benbow assets
and liabilities to a new subsidiary of ACE, The Westlink Company II; (iii) ACE
contributed its operating assets and liabilities to an existing subsidiary of
ACE; (iv) all of USAM's subsidiaries were merged into API; and (v) The Westlink
Company II was merged into a new API subsidiary, Benbow Investments, Inc.
The Merger has been accounted for as a pooling of interests due to the
common ownership of ACI, ACE and USAM. Accordingly, the Company's consolidated
financial statements have been restated to include the results of ACE for all
periods presented. All significant intercompany accounts and transactions have
been eliminated. The results of operations for the separate companies and the
combined amounts presented in the consolidated financial statements are
presented below (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31, September 30,
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
USAM $ 41,684 $ 120,233
ACE 60,355 175,366
------------ ------------
Combined $ 102,039 $ 295,599
============ ============
Net loss:
USAM $ (17,362) $ (45,671)
ACE (19,138) (71,029)
------------ ------------
Combined $ (36,500) $ (116,700)
============ ============
</TABLE>
(b) Preparation of Interim Financial Statements -- The consolidated
condensed financial statements of Arch have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. The financial
information included herein 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 and has been restated to reflect the Merger using the pooling
of interests method of accounting. 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 USAM'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.
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<PAGE> 7
(c) Intangible and Other Assets -- Intangible and other assets, net of
accumulated amortization, are composed of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Goodwill $ 281,847 $ 312,017
Purchased FCC licenses 265,873 293,922
Purchased subscriber lists 64,341 87,281
Investment in CONXUS Communications, Inc. 6,500 6,500
Investment in Benbow PCS Ventures, Inc. 12,362 6,189
Non-competition agreements 2,026 2,783
Deferred financing costs 13,352 526
Other 7,828 9,751
---------- ----------
$ 654,129 $ 718,969
========== ==========
</TABLE>
(d) Tower Site Sale -- In April 1998, Parent announced an agreement to sell
certain of Arch's tower site assets (the "Tower Site Sale") for approximately
$38 million in cash (subject to adjustment), of which $1.3 million was paid to
entities affiliated with Benbow, in payment for certain assets owned by such
entities and included in the Tower Site Sale. In the Tower Site Sale, Arch is
selling communications towers, real estate, site management contracts and/or
leasehold interests involving 133 sites in 22 states and will rent space on the
towers on which it currently operates communications equipment to service its
own paging network. Arch will use its net proceeds from the Tower Site Sale
(estimated to be $36 million) to repay indebtedness under the Amended Credit
Facility (see Note (f)). Arch held the initial closing of the Tower Site Sale on
June 26, 1998 with gross proceeds to Arch of approximately $12 million
(excluding the $1.3 million which was paid to entities affiliated with Benbow)
and held a second closing on September 29, 1998 with gross proceeds to Arch of
approximately $20.4 million. The final closing for the balance of the
transaction is expected to be completed in the fourth quarter of 1998, although
no assurance can be given that the final closing will be held as expected.
Arch entered into options to repurchase each site and until this continuing
involvement ends the gain is deferred and included in other long-term
liabilities. At September 30, 1998, Arch had sold 117 of the 133 sites which
resulted in a total gain of approximately $23.5 million and through September
30, 1998 approximately $1.5 million of this gain had been recognized in the
statement of operations and is included operating income.
(e) Senior Notes -- On June 29, 1998, Arch issued and sold $130.0 million
principal amount of 12 3/4% Senior Notes due 2007 (the "Notes") for net proceeds
of $122.6 million (after deducting the discount to the Initial Purchasers and
offering expenses paid by Arch) in a private placement (the "Note Offering")
under Rule 144A promulgated under the Securities Act of 1933, as amended. The
Notes were sold at an initial price to investors of 98.049%. The Notes mature on
July 1, 2007 and bear interest at a rate of 12 3/4% per annum, payable
semi-annually in arrears on January 1 and July 1 of each year, commencing
January 1, 1999.
The indenture governing the Notes (the "Indenture") contains certain
covenants that, among other things, limit the ability of Arch to incur
additional indebtedness, issue preferred stock, pay dividends or make other
distributions, repurchase Capital Stock (as defined in the Indenture), repay
subordinated indebtedness or make other Restricted Payments (as defined in the
Indenture), create certain liens, enter into certain transactions with
affiliates, sell assets, issue or sell Capital Stock of Arch's Restricted
Subsidiaries (as defined in the Indenture) or enter into certain mergers and
consolidations.
(f) Amended Credit Facility -- Contemporaneously with the Merger, ACE's
existing credit facility was amended and restated to establish senior secured
revolving credit and term loan facilities with API, as borrower, in the
aggregate amount of $400.0 million (collectively, the "Amended Credit Facility")
consisting of (i) a $175.0 million reducing revolving credit facility (the
"Tranche A Facility"), (ii) a $100.0 million 364-day revolving credit facility
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<PAGE> 8
under which the principal amount outstanding on the 364th day following the
closing will convert to a term loan (the "Tranche B Facility") and (iii) a
$125.0 million term loan which was available in a single drawing on the closing
date (the "Tranche C Facility").
The Tranche A Facility is subject to scheduled quarterly reductions
commencing on September 30, 2000 and will mature on June 30, 2005. The term loan
portion of the Tranche B Facility will be amortized in quarterly installments
commencing September 30, 2000, with an ultimate maturity date of June 30, 2005.
The Tranche C Facility will be amortized in annual installments commencing
December 31, 1999, with an ultimate maturity date of June 30, 2006.
API's obligations under the Amended Credit Facility are secured by its
pledge of the capital stock of the former ACE operating subsidiaries. The
Amended Credit Facility is guaranteed by Parent, Arch and the former ACE
operating subsidiaries. Parent's guarantee is secured by a pledge of Parent's
stock and notes in Arch, and the guarantees of the former ACE operating
subsidiaries are secured by a security interest in those assets of such
subsidiaries which were pledged under ACE's previous credit facility.
Borrowings under the Amended Credit Facility bear interest based on a
reference rate equal to either the Agent Bank's Alternate Base Rate or LIBOR, in
each case plus a margin based on Arch's or API's ratio of total debt to
annualized earnings before interest, taxes, depreciation and amortization
("EBITDA").
The Amended Credit Facility requires payment of fees on the daily average
amount available to be borrowed under the Tranche A Facility and the Tranche B
Facility, which fees vary depending on Arch's or API's ratio of total debt to
annualized EBITDA.
The Amended Credit Facility contains restrictions that limit, among other
things: additional indebtedness and encumbrances on assets; cash dividends and
other distributions; mergers and sales of assets; the repurchase or redemption
of capital stock; investments; acquisitions that exceed certain dollar
limitations without the lenders' prior approval; and prepayment of indebtedness
other than indebtedness under the Amended Credit Facility. In addition, the
Amended Credit Facility requires API and its subsidiaries to meet certain
financial covenants, including covenants with respect to ratios of EBITDA to
fixed charges, EBITDA to debt service, EBITDA to interest service and total
indebtedness to EBITDA.
(g) Equity Investment from Parent - On June 29, 1998, two partnerships
managed by Sandler Capital Management Company, Inc., an investment management
firm ("Sandler"), together with certain other private investors, made an equity
investment in Parent of $25.0 million in the form of Series C Convertible
Preferred Stock of Parent ("Series C Preferred Stock"). Simultaneously, Parent
contributed to Arch as an equity investment (the "Equity Investment") $24.0
million of the net proceeds from the sale of Series C Preferred Stock, Arch
contributed such amount to API as an equity investment and API used such amount
to repay indebtedness under ACE's existing credit facility as part of the
establishment of the Amended Credit Facility.
(h) Divisional Reorganization - In June 1998, Parent's Board of Directors
approved a reorganization of Arch's operations (the "Divisional
Reorganization"). As part of the Divisional Reorganization, which is being
implemented over a period of 18 to 24 months, Arch has consolidated its former
Midwest, Western and Northern divisions into four existing operating divisions
and is in the process of consolidating certain regional administrative support
functions, such as customer service, collections, inventory and billing, to
reduce redundancy and to take advantage of various operating efficiencies. In
connection with the Divisional Reorganization, Arch (i) anticipates a net
reduction of approximately 10% of its workforce, (ii) plans to close certain
office locations and redeploy other assets and (iii) has recorded a
restructuring charge of $16.1 million, or $0.77 per share (basic and diluted) in
the second quarter of 1998. The restructuring charge consisted of approximately
(i) $9.7 million for employee severance, (ii) $3.5 million for lease obligations
and terminations (iii) $1.4 million for the writedown of fixed assets and (iv)
$1.5 million of other costs.
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<PAGE> 9
The write-down of fixed assets primarily relates to a non-cash charge which
will reduce the carrying amount of certain leasehold improvements that the
Company will not continue to utilize following the Divisional Reorganization, to
their estimated net realizable value as of the date such assets are projected to
be disposed of or abandoned by the Company. The net realizable value of these
assets was determined based on management's estimates and due to the nature of
the assets should be minimal. Such estimates are subject to change.
The provision for lease obligations and terminations relates primarily to
future lease commitments on local, regional and divisional office facilities
that will be closed as part of the Divisional Reorganization. The charge
represents future lease obligations on such leases past the dates the offices
will be closed by the Company, or for certain leases, the cost of terminating
the leases prior to their scheduled expiration. Cash payments on the leases and
lease terminations will occur over the remaining lease terms, the majority of
which expire prior to 2001.
Through the elimination of certain local and regional administrative
operations and the consolidation of certain support functions, the Company will
eliminate approximately 280 net positions. As a result of eliminating these
positions, the Company will involuntarily terminate an estimated 900 personnel.
The majority of the positions to be eliminated will be related to the customer
service, collections, inventory and billing functions in local and regional
offices which will be closed as a result ofthe Divisional Reorganization. As of
September 30, 1998, 114 employees had been terminated due to the Divisional
Reorganization. The majority of the severance and benefits costs to be paid by
the Company will be paid during the remainder of 1998 and in 1999.
The Company's restructuring activity as of September 30, 1998 is as follows
(in thousands):
<TABLE>
<CAPTION>
Reserve
Initially Utilization of Reserve Remaining
Established Cash Non-cash Reserve
----------- ---- -------- -------
<S> <C> <C> <C> <C>
Severance costs............. $ 9,700 $ 1,105 $ -- $ 8,595
Lease obligation costs...... 3,500 34 -- 3,466
Write-down of fixed assets.. 1,400 -- -- 1,400
Other costs................. 1,500 151 -- 1,349
------- ------- ------- --------
Total................... $16,100 $ 1,290 $ -- $ 14,810
======= ======= ======= ========
</TABLE>
(i) Recent and Pending Accounting Pronouncements -- In June 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 130 "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company adopted SFAS No. 130 in 1998.
The adoption of this standard did not have an effect on its reporting of income.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Arch intends to adopt SFAS No. 131 for its year ending December 31,
1998. Arch has not completed its review of SFAS No. 131 but adoption of this
standard is not expected to have a significant impact on Arch's financial
reporting.
In March 1998, the Accounting Standards Executive Committee of the
Financial Accounting Standards Board issued Statement of Position 98-1 ("SOP
98-1") "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 establishes criteria for capitalizing costs of computer
9
<PAGE> 10
software developed or obtained for internal use. The Company adopted SOP 98-1 in
1998. The adoption of SOP 98-1 has not had a material effect on Arch's financial
position or results of operations.
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. Arch 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
Arch's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No.133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings. Arch intends to
adopt SFAS No. 133 effective January 1, 2000. Arch has not yet quantified the
impact of adopting SFAS No. 133 on its financial statements, however, adopting
SFAS No. 133 could increase volatility in earnings and other comprehensive
income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated or suggested by such forward-looking statements. These factors
include, without limitation, those set forth below under the caption "Factors
Affecting Future Operating Results".
TOWER SITE SALE
In April 1998, Parent announced an agreement to sell certain of Arch's
tower site assets (the "Tower Site Sale") for approximately $38 million in cash
(subject to adjustment), of which $1.3 million was paid to entities affiliated
with Benbow, in payment for certain assets owned by such entities and included
in the Tower Site Sale. In the Tower Site Sale, Arch is selling communications
towers, real estate, site management contracts and/or leasehold interests
involving 133 sites in 22 states and will rent space on the towers on which it
currently operates communications equipment to service its own paging network.
Arch will use its net proceeds from the Tower Site Sale (estimated to be $36
million) to repay indebtedness under the Amended Credit Facility (see Note (f)).
Arch held the initial closing of the Tower Site Sale on June 26, 1998 with gross
proceeds to Arch of approximately $12 million (excluding the $1.3 million which
was paid to entities affiliated with Benbow) and held a second closing on
September 29, 1998 with gross proceeds to Arch of approximately $20.4 million.
The final closing for the balance of the transaction is expected to be completed
in the fourth quarter of 1998, although no assurance can be given that the final
closing will be held as expected.
DIVISIONAL REORGANIZATION
In June 1998, Parent's Board of Directors approved a reorganization of
Arch's operations (the "Divisional Reorganization"). As part of the Divisional
Reorganization, which is being implemented over a period of 18 to 24 months,
Arch has consolidated its former Midwest, Western and Northern divisions into
four existing operating divisions and is in the process of consolidating certain
regional administrative support functions, such as customer service,
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<PAGE> 11
collections, inventory and billing, to reduce redundancy and to take advantage
of various operating efficiencies.
Arch estimates that the Divisional Reorganization, once fully implemented,
will result in annual cost savings of approximately $15 million. These cost
savings will consist primarily of a reduction in compensation expense of
approximately $11.5 million, a reduction in rental expense of facilities and
general and administrative costs of approximately $3.5 million. Arch expects to
reinvest a portion of these cost savings to expand its sales activities, however
to date the extent of this reinvestment and therefore the cost has not been
determined.
In connection with the Divisional Reorganization, Parent (i) anticipates a
net reduction of approximately 10% of its workforce, (ii) plans to close certain
office locations and redeploy other assets and (iii) has recorded a
restructuring charge of $16.1 million during the second quarter of 1998. The
restructuring charge consisted of approximately (i) $9.7 million for employee
severance, (ii) $3.5 million for lease obligations and terminations (iii) $1.4
million for the writedown of fixed assets and (iv) $1.5 million of other costs.
The severance costs and lease obligations will require cash outlays throughout
the 18 to 24 month restructuring period. Management anticipates the cash
requirements for these items to be relatively consistent from quarter to quarter
throughout the Divisional Reorganization period. These cash outlays will be
funded from operations or the Company's Amended Credit Facility. There can be no
assurance that the desired cost savings will be achieved or that the anticipated
reorganization of Arch's business will be accomplished smoothly, expeditiously
or successfully. See Note (h) to the Consolidated Condensed Financial
Statements.
RESULTS OF OPERATIONS
Total revenues increased to $104.1 million (a 2.7% increase) and $309.6
million (a 4.7% increase) in the three and nine months ended September 30, 1998,
respectively, from $101.3 million and $295.6 million in the three and nine
months ended September 30, 1997, respectively. Net revenues (total revenues less
cost of products sold) increased to $96.9 million (a 3.5% increase) and $287.8
million (a 5.2% increase) in the three and nine months ended September 30, 1998,
respectively, from $93.6 million and $273.6 million in the three and nine months
ended September 30, 1997, respectively. Service, rental and maintenance
revenues, which consist primarily of recurring revenues associated with the sale
or lease of pagers, increased to $93.5 million (a 4.4% increase) and $277.8
million (a 6.2% increase) in the three and nine months ended September 30, 1998,
respectively, from $89.6 million and $261.6 million in the three and nine months
ended September 30, 1997, respectively. These increases in revenues were due
primarily to the increase through internal growth in the number of pagers in
service from 3.8 million at September 30, 1997 to 4.2 million at September 30,
1998. Maintenance revenues represented less than 10% of total service, rental
and maintenance revenues in the three and nine months ended September 30, 1998
and 1997. Arch does not differentiate between service and rental revenues.
Product sales, less cost of products sold, decreased to $3.3 million (a 16.4%
decrease) and $9.9 million (a 17.0% decrease) in the three and nine months ended
September 30, 1998, respectively, from $4.0 million and $12.0 million in the
three and nine months ended September 30, 1997, respectively, as a result of a
decline in the average revenue per pager sold.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, were $20.4 million (21.1% of net
revenues) and $60.8 million (21.1% of net revenues) in the three and nine months
ended September 30, 1998, respectively, compared to $21.1 million (22.6% of net
revenues) and $59.2 million (21.7% of net revenues) in the three and nine months
ended September 30, 1997, respectively. The increase in the nine-month period
was due primarily to increased expenses associated with system expansions and
the provision of paging services to a greater number of subscribers. As existing
paging systems become more populated through the addition of new subscribers,
the fixed costs of operating these paging systems are spread over a greater
subscriber base. Annualized service, rental and maintenance expenses per
subscriber were $20 in both the three and nine months ended September 30, 1998,
respectively, compared to $23 and $22, respectively, in the corresponding 1997
periods.
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<PAGE> 12
Selling expenses were $12.7 million (13.1% of net revenues) and $36.9
million (12.8% of net revenues) in the three and nine months ended September 30,
1998, respectively, compared to $12.4 million (13.2% of net revenues) and $39.0
million (14.3% of net revenues) in the three and nine months ended September 30,
1997, respectively. The increase in the three-month period was primarily due to
the addition of salespeople to support the Company's direct channel of
distribution, as well as increased advertising. The decrease in the nine-month
period was due primarily to a decrease in the number of net new pagers in
service and marketing costs incurred in 1997 to promote the Company's new Arch
Paging brand identity. The number of net new pagers in service resulting from
internal growth decreased by 30% and 34% in the three and nine months ended
September 30, 1998 compared to the three and nine months ended September 30,
1997, respectively, primarily due to Arch's shift in operating focus from unit
growth to capital efficiency and leverage reduction.
General and administrative expenses increased to $28.0 million (28.9% of
net revenues) and $84.5 million (29.4% of net revenues) in the three and nine
months ended September 30, 1998, respectively, from $27.5 million (29.4% of net
revenues) and $78.9 million (28.8% of net revenues) in the three and nine months
ended September 30, 1997, respectively. The increases were due primarily to
administrative and facility costs associated with supporting more pagers in
service.
Depreciation and amortization expenses decreased to $56.4 million and
$164.3 million in the three and nine months ended September 30, 1998,
respectively, from $59.5 million and $179.2 million in the three and nine months
ended September 30, 1997, respectively. These expenses principally reflect
Arch's acquisitions of paging businesses in prior periods, accounted for as
purchases, and investment in pagers and other system expansion equipment to
support growth.
Operating losses decreased to $20.6 million and $74.9 million in the three
and nine months ended September 30, 1998, respectively, from $27.0 million and
$82.8 million in the three and nine months ended September 30, 1997,
respectively, as a result of the factors outlined above.
Net interest expense increased to $17.6 million and $50.3 million in the
three and nine months ended September 30, 1998, respectively, from $16.0 million
and $47.0 million in the three and nine months ended September 30, 1997,
respectively. The increases were principally attributable to an increase in
Arch's outstanding debt.
The Company recognized income tax benefits of $5.3 million and $15.9
million in the three and nine months ended September 30, 1997, respectively.
These benefits represent the tax benefit of operating losses incurred subsequent
to the acquisitions of USA Mobile Communications Holdings. Inc. ("USA Mobile")
and Westlink Holdings, Inc. ("Westlink") which were available to offset deferred
tax liabilities arising from the Company's acquisition of USA Mobile in
September 1995 and Westlink in May 1996. The tax benefit of these operating
losses was fully recognized during 1997. Accordingly, the Company has
established a valuation reserve against its deferred tax asset which reduced the
income tax benefit to zero. The Company does not expect to recover, in the
foreseeable future, its deferred tax asset and will continue to increase its
valuation reserve accordingly.
In June 1998, Arch recognized an extraordinary charge of $1.7 million
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under prior credit facilities.
Net losses were $38.2 million and $129.1 million in the three and nine
months ended September 30, 1998, respectively, as compared to $38.7 million and
$116.7 million in the three and nine months ended September 30, 1997,
respectively, as a result of the factors outlined above.
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<PAGE> 13
Earnings before interest, taxes, depreciation and amortization, excluding
restructuring charge, equity in loss of affiliate, income tax benefit and
extraordinary items ("EBITDA") increased 10.0% to $35.8 million (37.0% of net
revenues) and 9.4% to $105.5 million (36.7% of net revenues) in the three and
nine months ended September 30, 1998, respectively, from $32.5 million (34.8% of
net revenues) and $96.4 million (35.3% of net revenues) in the three and nine
months ended September 30, 1997, respectively, as a result of the factors
outlined above. EBITDA is a commonly used measure of financial performance in
the paging industry and is also one of the financial measures used to calculate
whether Arch and its subsidiaries are in compliance with certain covenants under
their respective debt agreements, 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 restructuring charges, income tax benefit or interest expense. One of
Arch's principal financial objectives is to increase its 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 and possible
acquisitions. EBITDA, as determined by Arch, may not necessarily be comparable
to similarly titled data of other paging companies.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The following important factors, among others, could cause Arch's actual
operating results to differ materially from those indicated or suggested by
forward-looking statements made in this Form 10-Q or presented elsewhere by
Arch's management from time to time.
Indebtedness And High Degree Of Leverage
Arch is highly leveraged. At September 30, 1998, Arch had outstanding
$619.5 million of total debt. The Company's high degree of leverage may have
adverse consequences for the Company, including: (i) the ability of the Company
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 available on acceptable terms, if at all; (ii) a
substantial portion of the cash flow of the Company and its subsidiaries will be
required to pay interest expense, which will reduce the funds which would
otherwise be available for operations and future business opportunities; (iii)
the Amended Credit Facility, the Indenture and the indentures under which the
Arch Notes are outstanding 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 the Company; (iv) the
Company may be more highly leveraged than its competitors which may place it at
a competitive disadvantage; (v) the Company's high degree of leverage will make
it more vulnerable to a downturn in its business or the economy generally; and
(vi) the Company's high degree of leverage may impair its ability to participate
in future consolidation of the paging industry. Arch has implemented various
initiatives to reduce capital costs while sustaining acceptable levels of unit
and revenue growth, but Arch has not yet reduced its financial leverage
significantly. There can be no assurance that Arch will be able to reduce its
financial leverage significantly or that Arch will achieve an appropriate
balance between growth which it considers acceptable and future reductions in
financial leverage. If Arch is not able to achieve continued growth in EBITDA,
it may be precluded from incurring additional indebtedness due to cash flow
coverage requirements under existing debt instruments, including Parent's 10
7/8% Senior Discount Notes due 2008 (the "Parent Discount Notes").
Future Capital Needs
The Company's business strategy requires the availability of substantial
funds to finance the continued development and further growth and expansion of
its operations, including possible acquisitions. The amount of capital required
by the Company will depend upon a number of factors, including subscriber
growth, the type of paging devices and services demanded by customers, service
revenues, technological developments, marketing and sales expenses, competitive
conditions, the nature and timing of the Company's N-PCS strategy and
acquisition strategies and opportunities. No assurance can be given that
additional equity or debt financing will be available to the Company when needed
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<PAGE> 14
on acceptable terms, if at all. The unavailability of sufficient financing when
needed would have a material adverse effect on the business, financial
condition, results of operations or prospects of the Company.
History Of Losses
The Company has not reported any net income since its inception. The
Company's historical net losses have resulted principally from substantial
depreciation and amortization expense, primarily related to intangible assets
and pager depreciation, interest expense 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 effect on the business, financial condition, results of
operations or prospects of the Company. The Company 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 continued industry consolidation. The
Company has evaluated and expects to continue to evaluate possible acquisition
transactions on an ongoing basis and at any given time may be 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 the Company's management and the financial and other resources
of the Company. No assurance can be given that suitable acquisition transactions
can be identified, financed and completed on acceptable terms, that the
Company's future acquisitions will be successful, or that the Company will
participate in any future consolidation of the paging industry.
Parent has agreed to acquire MobileMedia Communications, Inc. (together
with its subsidiaries "MobileMedia"), one of the largest paging companies in the
United States ( the "MobileMedia Transaction"). As part of the MobileMedia
Transaction, MobileMedia would become a wholly owned subsidiary of API and
Parent would issue certain stock, warrants and stock purchase rights, pay $479.0
million in cash to certain creditors of MobileMedia, pay approximately $60.0
million of administrative, transactional and related costs, raise $217.0 million
in cash through a rights offering of its stock, and cause Arch and API to borrow
an estimated total of $322.0 million. Following consummation of the MobileMedia
Transaction, Parent, through its Arch subsidiaries, would be the second largest
paging operator in the United States as measured by pagers in service, net
revenues and EBITDA. Parent believes that the MobileMedia Transaction, if
effected, would result in a reduction in the overall financial leverage of
Parent and Arch, on a consolidated basis, as well as certain anticipated
operating synergies and cost savings.
MobileMedia, together with its parent company MobileMedia Corporation, are
operating as debtors-in-possession in connection with their pending insolvency
proceedings under Chapter 11 of the U.S. Bankruptcy Code. Consummation of the
MobileMedia Transaction is subject to Bankruptcy Court approval, approval by
Parent's stockholders and MobileMedia's creditors, approval by the Federal
Communications Commission ("FCC"), the availability of sufficient financing and
other conditions. THERE CAN BE NO ASSURANCE THAT PARENT WILL ACQUIRE MOBILEMEDIA
OR THAT, IF PARENT ACQUIRES MOBILEMEDIA, PARENT WOULD REALIZE ITS ANTICIPATED
IMPROVEMENTS IN FINANCIAL LEVERAGE, OPERATING SYNERGIES OR COST SAVINGS. The
acquisition of MobileMedia by Parent will increase Arch's and API's indebtedness
and will involve significant operational and financial risks, including but not
limited to the risks associated with integrating MobileMedia's operations with
the current operations of Parent and its subsidiaries, and these risks may be
exacerbated by the fact that MobileMedia is currently operating under the
jurisdiction of the Bankruptcy court.
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<PAGE> 15
Dependence On Key Personnel
The success of the Company will be dependent, to a significant extent, upon
the continued services of a relatively small group of executive personnel. The
Company does not have employment agreements with, or maintain life insurance on,
any of its current executive officers, although certain executive officers have
entered into non-competition agreements and all executive officers have entered
into executive retention agreements with the Company. The loss or unavailability
of one or more of its executive officers or the inability to attract or retain
key employees in the future could have a material adverse effect on the
business, financial condition, results of operations or prospects of the
Company.
Competition And Technological Change
The Company faces competition from other paging service providers in all
markets in which it operates as well as from certain competitors who hold
nationwide licenses. Monthly fees for basic paging services have, in general,
declined in recent years, due in part to competitive conditions, and the Company
may face significant price-based competition in the future which could have a
material adverse effect on the Company. Certain of the Company's competitors
possess greater financial, technical and other resources than the Company. 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 the Company's markets, there could be a material
adverse effect on the business, financial condition, results of operations or
prospects of the Company.
Competitors are currently using and developing a variety of two-way paging
technologies. The Company does not presently provide such two-way services,
other than as a reseller. Although such services generally are higher priced
than traditional one-way paging services, technological improvements could
result in increased capacity and efficiency for such two-way paging technologies
and, accordingly, could result in increased competition for the Company. Future
technological advances in the telecommunications industry could increase new
services or products competitive with the paging services provided by the
Company or could require the Company 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. Other forms of wireless two-way
communications technology, including cellular and broadband personal
communications services ("PCS"), and specialized mobile radio services, also
compete with the paging services that the Company provides. While such services
are primarily focused on two-way voice communications, service providers are, in
many cases, electing to provide paging services as an adjunct to their primary
services. Technological change also may affect the value of the pagers owned by
Arch and leased to its subscribers. If Arch's subscribers requested more
technologically advanced pagers, including but not limited to two-way pagers,
the Company 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. Such additional investment or capital expenditures could have a
material adverse effect on the business, financial condition, results of
operations or prospects of the Company. There can be no assurance that the
Company 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
the Company, 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 EBITDA. An increase in the Company's subscriber
15
<PAGE> 16
cancellation rate could have a material adverse effect on the business,
financial condition, results of operations or prospects of the Company.
Dependence On Third Parties
The Company does not manufacture any of the pagers used in its paging
operations. The Company 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, the Company 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, the Company has not experienced
significant delays in obtaining pagers, terminals or transmitters, but there can
be no assurance that the Company will not experience such delays in the future.
The Company's purchase agreement with Motorola expires on June 19, 1999, with a
provision for automatic renewal for successive one year terms unless either
party gives notice of cancellation by May 20 of any year. There can be no
assurance that the Company's agreement with Motorola will be automatically
renewed or, if renewed, that such agreement will be on terms and conditions as
favorable to the Company as those under the current agreement. Although the
Company believes that sufficient alternative sources of pagers, terminals and
transmitters exist, there can be no assurance that the Company would not be
materially adversely affected if it were unable to obtain these items from
current supply sources or on terms comparable to existing terms. The Company
also relies on third parties to provide satellite transmission for some aspects
of its paging services. To the extent there are satellite outages or if
satellite coverage is otherwise impaired, the Company may experience a loss of
service until such time as satellite coverage is restored, which could have an
adverse material effect on the Company.
Government Regulation, Foreign Ownership And Possible Redemption
The paging operations of the Company 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 the Company's business. Changes in regulation of the
Company's paging business or the allocation of radio spectrum for services that
compete with the Company's business could adversely affect the Company's results
of operations. In addition, some aspects of the Telecommunications Act of 1996
could have a beneficial effect on Arch's business, but other provisions may
place additional burdens upon Arch or subject Arch to increased competition. The
Communications Act of 1934, as amended, limits foreign ownership of entities
that hold certain licenses from the FCC. Because Parent and its subsidiaries
hold FCC licenses, in general, no more than 25% of Parent's stock can be owned
or voted by non-resident aliens or their representatives, a foreign government
or its representative or a foreign corporation. A 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. Parent's Restated Certificate of Incorporation
permits the redemption of shares of Parent's capital stock from foreign
stockholders where necessary to protect FCC licenses held by Parent or its
subsidiaries, but such redemption would be subject to the availability of
capital to Parent and any restrictions contained in applicable debt instruments
and under Delaware law (which currently would not permit any such redemptions).
The failure to redeem such shares promptly could jeopardize the FCC licenses
held by Arch or its subsidiaries. From time to time, legislation and regulations
which could potentially adversely affect the Company are proposed or enacted by
federal or state legislators and regulators. For example, the FCC and certain
states require paging companies to contribute a portion of specified revenues to
support broad telecommunications policies, such as the universal availability of
telephone service. 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. Arch has generally passed these costs on to its subscribers,
16
<PAGE> 17
which makes the Company's services more expensive and which could affect the
attraction or retention of subscribers. There can be no assurance that Arch will
be able to continue to pass on these costs. Although these requirements have not
to date had a material impact on the Company, these or similar requirements
could in the future have a material adverse effect on the business, financial
condition, results of operations or prospects of the Company.
Impact Of The Year 2000 Issue
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 the
Company'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. As a result, in less than two
years, the computerized systems (including both information and non-information
technology systems) and applications used by Arch will need to be reviewed,
evaluated and, if and where necessary, modified or replaced to ensure that all
financial, information and operating systems are Year 2000 compliant.
Arch has created a cross-functional project group (the "Y2K Project Group")
to work on the Year 2000 problem. The Y2K Project Group is finishing its
analysis of external and internal areas likely to be affected by the Year 2000
problem. It has classified the identified areas of concern into either a mission
critical or non-mission critical status. For the external areas, Arch has
distributed vendor surveys to its primary and secondary vendors. The surveys
requested information about hardware and/or software supplied by information
technology vendors as well as non-information technology system vendors that
might use embedded technologies in their systems or products. Information was
requested regarding the vendor's Year 2000 compliance planning, timing, status,
testing and contingency planning. As part of its evaluation of Year 2000
vulnerability related to its pager and paging equipment vendors, Arch has
discussed with them their efforts to identify potential issues associated with
their equipment and/or software and has concluded that, to the extent any
vulnerability exists, it has been addressed. Internally, Arch has initiated an
inventory audit of hardware and software testing for both its corporate and
divisional operations. These areas of operation include: information systems,
finance, operations, inventory, billing, pager activation and purchasing.
Additional testing is scheduled to conclude in the first quarter of 1999.
The Company expects that it will incur costs to replace existing hardware,
software and paging equipment, which will be capitalized and amortized in
accordance with the Company's existing accounting policies, while maintenance or
modification costs will be expensed as incurred. Arch has upgraded hardware to
enable compliance testing to be performed on dedicated test equipment in an
isolated production-like environment. Based on the Company's costs incurred to
date, as well as estimated costs to be incurred over the next fourteen months,
the Company does not expect that resolution of the Year 2000 problem will have a
material adverse effect on its results of operations and financial condition.
Costs of the Year 2000 project are based on current estimates and actual results
may vary significantly from such estimates once detailed plans are developed and
implemented.
While it is Arch's stated goal to be compliant, on an internal basis, by
September 30, 1999, Arch may face the possibility that one or more of its
mission critical vendors, such as its utilities, telephone carriers or satellite
carriers, may not be Year 2000 compliant. Because of the unique nature of such
vendors, alternative providers of these services may not be available.
Additionally, although Arch has initiated its test plan for its business-related
hardware and software applications, there can be no assurance that such testing
will detect all applications that may be affected by the Year 2000 problem.
Lastly, Arch does not manufacture any of the pagers or paging-related equipment
used by its customers or for its own paging operations. Although Arch has
initiated testing of such equipment it has relied on, to a large extent, the
representations of its vendors with respect to their readiness. Arch can offer
no assurances as to the accuracy of such vendor's representations.
Arch has initiated the process of designing and implementing contingency
plans relating to the Year 2000 problem. To this end, each department will
identify the likely risks and determine commercially reasonable solutions. The
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<PAGE> 18
Y2K Project Group will collect and review the determinations on both a
department-by-department and company-wide basis. Arch intends to complete its
Year 2000 contingency planning during calendar year 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the
normal course of business. The Company believes that none of such
matters will have a material adverse effect on the Company's business
or financial condition.
ITEM 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) No reports on Form 8-K were filed for the quarter for which this
report is filed.
18
<PAGE> 19
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, 1998, to be signed on its behalf by the undersigned thereunto duly
authorized.
ARCH COMMUNICATIONS, INC.
Dated: November 12, 1998 By: /S/ J. ROY POTTLE
-----------------
J. Roy Pottle
Executive Vice President and
Chief Financial Officer
<PAGE> 20
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
27.1* - Financial Data Schedule.
* Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000916122
<NAME> Arch Communications, Inc.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 4,534
<SECURITIES> 0
<RECEIVABLES> 34,496
<ALLOWANCES> 0
<INVENTORY> 10,578
<CURRENT-ASSETS> 53,778
<PP&E> 421,305
<DEPRECIATION> 197,416
<TOTAL-ASSETS> 931,796
<CURRENT-LIABILITIES> 86,059
<BONDS> 619,534
0
0
<COMMON> 0
<OTHER-SE> 197,564
<TOTAL-LIABILITY-AND-EQUITY> 931,796
<SALES> 31,811
<TOTAL-REVENUES> 309,637
<CGS> 21,863
<TOTAL-COSTS> 21,863
<OTHER-EXPENSES> 60,812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,344
<INCOME-PRETAX> (127,420)
<INCOME-TAX> 0
<INCOME-CONTINUING> (127,420)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,720)
<CHANGES> 0
<NET-INCOME> (129,140)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
