<PAGE>
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, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ________________________
Commission File Number: 1-13002
AQUIS COMMUNICATIONS GROUP, INC.
--------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 22-3281446
- ---------------------------------------------- ------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
1719A Route 10, Suite 300 07054
- ---------------------------------------------- ------------------------------
(Address of principal executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (973) 560-8000
(Former name, former address and former fiscal year, if changed since last
report)
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 |_|
As of March 31, 2000 there were 17,156,000 shares of the Registrant's Common
Stock outstanding.
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
INDEX TO FORM 10-Q
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<CAPTION>
PAGE
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Part I Financial Information:
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets March 31, 2000 and December 31, 1999.................................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and March 31, 1999.......................................................... 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and March 31, 1999.......................................................... 5
Notes to Condensed Consolidated Financial Statements.......................................................... 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................................ 9
Item 3 - Quantitative and Qualitative Disclosures
About Market risks................................................................................... 16
Part II Other Information:
Item 4 - Submission of Matters to a Vote of Security Holders...................................................... 17
Item 5 - Other Information........................................................................................ 18
Item 6 - Exhibits and Reports on Form 8-K......................................................................... 18
Signature ..................................................................................................... 20
</TABLE>
-2-
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AQUIS COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS: 2000 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 476 $ 973
Accounts receivable, net of allowance for doubtful accounts
of $1,554 at March 31, 2000 and $939 at December 31, 1999 5,924 4,933
Inventory 219 228
Acquisition escrow deposits -- 200
Prepaid expenses and other current assets 1,138 1,072
-------- --------
Total current assets 7,757 7,406
Property and equipment, net 14,408 10,461
Intangible assets, net 19,994 20,092
Deferred charges 980 1,365
-------- --------
Total assets $ 43,139 $ 39,324
-------- --------
-------- --------
LIABILITIES:
Current liabilities:
Current maturities of long term debt $ 1,259 $ 508
Accounts payable 7,515 6,750
Accrued expenses 2,878 2,535
Deferred revenue 1,488 930
Customer deposits 581 577
-------- --------
Total current liabilities 13,721 11,300
-------- --------
Long term debt 27,942 25,963
-------- --------
Total liabilities 41,663 37,263
-------- --------
Commitments and contingencies
7.5% Redeemable Preferred stock, $0.01 par value, 100,000 shares authorized,
15,000 issued at March 31, 2000, none issued 1999 1,519 --
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 75,000,000 shares authorized, 17,157,000 and
16,551,000 issued and outstanding at March 31, 2000 and
December 31, 1999, respectively 172 166
Additional paid in capital 13,927 13,195
Accumulated deficit (14,017) (11,175)
Note receivable from stockholder (125) (125)
-------- --------
Total stockholders' equity (43) 2,061
-------- --------
Total liabilities and stockholders' equity $ 43,139 $ 39,324
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements. 3
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AQUIS COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
------------ ------------
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Revenues:
Paging services $ 7,966 $ 6,294
Equipment sales 145 128
------------ ------------
Total revenues 8,111 6,422
------------ ------------
Operating expenses:
Paging services 1,891 1,471
Cost of equipment sales 156 258
Technical 2,105 688
Selling and marketing 1,046 832
General and administrative 2,127 1,358
Depreciation and amortization 2,541 1,973
Provision for doubtful accounts 296 255
------------ ------------
Total operating expenses 10,162 6,835
------------ ------------
Operating loss (2,051) (413)
(Gain) on disposal of assets (19) --
Interest expense, net 810 929
------------ ------------
Net loss (2,842) (1,342)
Preferred stock dividends (19) --
------------ ------------
Loss attributable to common stockholders $ (2,861) $ (1,342)
------------ ------------
------------ ------------
Net loss per common share:
- Basic and diluted $ (0.17) $ (0.15)
------------ ------------
------------ ------------
Weighted average common shares outstanding 16,791,000 8,962,000
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements. 4
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AQUIS COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,842) $ (1,342)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 2,541 1,973
Provision for doubtful accounts 296 255
Amortization of deferred financing costs 49 --
Gain on sale of equipment (19) --
Compensation paid with stock options 693 --
Changes in assets and liabilities, net of business acquired:
Accounts receivable (1,024) (789)
Due from affiliates (for trade) --
Inventory (371) 499
Prepaid expenses and other assets (20) (11)
Accounts payable and accrued expenses (189) 1,930
Deferred revenues and customer deposits 89 45
-------- --------
Net cash (used by)/provided by operating activities (797) 2,560
-------- --------
Cash flows from investing activities:
Business acquisitions (2,318) (18,675)
Capital expenditures (272) (461)
Deferred acquisition costs (7) --
Acquisition escrow deposits refunded 200 --
Sale of fixed assets 95 39
-------- --------
Net cash used in investing activities (2,302) (19,097)
-------- --------
Cash flows from financing activities:
Issuance of long term debt 2,450 20,500
Repayment of notes payable to stockholder -- (520)
Repayment of capital lease obligation (70) (1,506)
Refinancing of capital lease obligation -- 1,300
Deferred financing costs (155) (587)
Proceeds from stock options exercised 377 --
-------- --------
Net cash provided by financing activities 2,602 19,187
-------- --------
(Decrease)/Increase in cash (497) 2,650
Cash, beginning of period 973 --
-------- --------
Cash, end of period $ 476 $ 2,650
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements. 5
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except for share information)
1. BASIS OF PRESENTATION:
Aquis Communications Group, Inc. (the "Company") is a holding company,
incorporated in the State of Delaware. Through its operating companies, it
operates two regional paging systems providing one-way wireless alpha and
numeric messaging services in portions of thirteen states principally in the
Northeast and Mid-Atlantic regions of the United States, as well as the District
of Columbia. The Company has recently entered the Midwestern region through a
purchase of certain assets completed on January 31, 2000, the Company has
expanded its geographical reach to six additional states in the mid-west. The
Company, resells nationwide and regional services, offers alpha dispatch, news
and other messaging enhancements, and sells internet access services through a
wholly owned subsidiary. Its customers include individuals, businesses,
government agencies, hospitals and resellers.
On March 31, 1999, a wholly owned subsidiary of Paging Partners Corporation
("Paging Partners"), merged with Aquis Communications, Inc. ("ACI") in a
transaction accounted for as a reverse acquisition with ACI as the accounting
acquirer. At that time, Paging Partners changed its name to Aquis Communications
Group, Inc. (the "Company"). On June 30, 1999, a wholly owned subsidiary of the
Company acquired SunStar Communications, Inc. ("SunStar") pursuant to the terms
of a stock purchase agreement. On January 31, 2000, the Company completed its
acquisition of certain assets of SourceOne Wireless. Both transactions have been
accounted for under the purchase method of accounting.
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and its subsidiaries, and reflect the merger with
Paging Partners, as well as the acquisition of SunStar Communications, Inc., and
the acquisition of the net assets of SourceOne Wireless on January 31, 2000. The
accompanying statements reflect all adjustments considered necessary by
management to present fairly the consolidated financial position as of March 31,
2000 and December 31, 1999, and the consolidated results of operations and the
consolidated cash flows for the three month periods ended March 31, 2000 and
1999. All adjustments reflected in the accompanying unaudited condensed
consolidated financial statements are of a normal recurring nature. All material
intercompany accounts and transactions have been eliminated in consolidation.
The results of operations for the respective interim periods are not necessarily
indicative of the results to be expected for the full year.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Continued 6
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollars in thousands, except for share information)
2. MERGER AND ACQUISITIONTRANSACTIONS:
On January 31, 2000, the Company completed the acquisition (the "Acquisition")
of certain assets of SouceOne Wireless, a facilities-based provider of one-way
paging services to subscribers in certain Midwestern states. Previously, on
August 2, 1999, the Company entered into an Asset Purchase Agreement (the
"Purchase Agreement") and Agreement Pending Purchase Closing (the "Agreement")
with SourceOne Wireless, Inc. and two of its affiliates ("SOWI"). SOWI and its
affiliates filed voluntary petitions for relief under Chapter 11 with the United
States Bankruptcy Court in the Northern District of Illinois between April 29
and July 2, 1999. Pursuant to the Agreement, the Company managed the day-to-day
operations of certain SOWI businesses pending the closing of the associated
Purchase Agreement. This closing was subject to various approvals, including
that of the Bankruptcy Court and the FCC. During the management period, a
reduction of the purchase price was negotiated, and resulted in a reduced price
of $2,250 in cash and 15,000 shares of the Company's 7.5% cumulative redeemable
preferred stock valued at $1,500. Acquisition costs totaling about $502 were
deferred at December 31, 1999, and have been treated as a cost of the assets
acquired on January 31, 2000. Costs to acquire the assets of SourceOne Wireless
were capitalized at December 31, 1999, including an escrow deposit of $200,
since this transaction was closed on January 31, 2000. The recorded amounts of
the assets acquired and liabilities assumed are based on their historical fair
values; actual adjustments will be based on final analyses and are not expected
to be material.
The following unaudited pro forma information presents a summary of the combined
results of operations of the Company as if the Acquisition and the Merger
occurred on January 1, 1999.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
Revenue $ 8,529 $ 11,430
Net loss $ (2,917) $ (3,553)
Preferred stock dividends (29) (29)
-------- --------
Net loss attributable to common stockholders (2,945) $ (3,582)
Net loss per common share $ (0.18) $ (0.24)
</TABLE>
The pro forma results are based on various assumptions and are not necessarily
indicative of what would have occurred had these transactions been consummated
on January 1, 1999.
On November 6, 1998, ACI entered into a merger agreement with Paging Partners
whereby each share of ACI common stock was to be exchanged for 88.92076 shares
of Paging Partners' common stock (the "Merger"). The Merger was consummated on
March 31, 1999, and has been accounted for as a recapitalization of the Company
with ACI as the acquirer (reverse acquisition) under the purchase method of
accounting in accordance with Accounting Principles Board ("APB") Opinion No.
16, "Business Combinations." The aggregate purchase price of $6,071, which
includes transaction costs, has been allocated to the net assets acquired based
upon their estimated fair market values. The purchase price was determined by
using the average quoted stock price of Paging Partners a few days before and
after the date of the Merger agreement. Intangible assets of approximately
$4,400 (principally FCC licenses and customer lists) are being amortized over
three to ten years on a straight-line basis.
Continued 7
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollars in thousands, except for share information)
3. LONG-TERM DEBT:
On October 23, 1998, ACI entered into a five-year term loan agreement (the
"Senior Loan Agreement") with FINOVA Capital Corporation ("FINOVA") which
provides a $30,000 credit facility. The FINOVA loan has a term of five years,
and requires graduated increasing quarterly principal repayments ranging from
.5% to 3.5% of outstanding principal beginning on July 1, 2000, with the balance
due on December 31, 2003. The loan bears interest at a rate based on Citibank,
N.A.'s corporate base rate plus 175 basis points. The Company may also elect to
have interest on a part of the FINOVA loan based on a London Inter-Bank Official
Overnight Rate plus 450 basis points. This term loan is collateralized by all of
the Company's assets, presently owned and acquired subsequently, and all issued
and outstanding equity interests in the Company's operating subsidiaries. The
loan agreement also contains various covenants, including restrictions on
capital expenditures and compliance with certain financial ratios. At December
31, 1999, the Company was not in compliance with certain ratio covenants under
this loan agreement. See the subsequent events note for further discussion.
On January 26, 2000, the FINOVA loan was amended in connection with the
SourceOne Wireless acquisition. The Company borrowed an additional $2,450 from
FINOVA on January 31, 2000 to consummate the acquisition (the "SourceOne
Portion"). The effect of the amendment was to limit the facility to the amount
outstanding after the SourceOne transaction, or a total of $27,765, to modify
certain financial ratios and to set the interest rate on the SourceOne Portion
to Citibank, N.A.'s corporate base rate plus 400 basis points. Additionally, a
prepayment of principal of $1,250 (the "Special Prepayment") was defined; this
amount is to be applied to the outstanding balance of the SourceOne Portion.
This payment was made during April, 2000, and accordingly, the Company minimized
its cost of borrowings through avoidance of the higher rates imposed by this
Finova loan amendment and reduction of the outstanding loan balance due to
Finova to $26,515.
During the second quarter of 1999, the Company refinanced the capital lease
obligations that were assumed as a result of the merger with Paging Partners.
Terms of the new obligation (the "Installment Loan") include a principal amount
of $1,300, a 60-month repayment schedule, an interest rate indexed to the yield
for five year Treasury Notes, and is collateralized by the underlying equipment.
The balance outstanding at March 31, 2000 under borrowings of the Senior Loan
Agreement was $27,765. The remaining balance of long term debt outstanding
consisted principally of borrowings made pursuant to the Installment Loan.
4. INCOME TAXES:
At March 31, 2000, the Company had Federal net operating loss carryforwards for
tax purposes of approximately $xx,000 that expire between 2009 and 2015.
Approximately $8,550 of this total consists of pre-acquisition losses that are
subject to restrictions imposed by Section 382 of the Internal Revenue Code that
limit utilization of such carryforwards to about $300 annually.
As of March 31, 2000, the Company recorded no deferred tax asset. The future
benefit from the realization of the net operating losses was fully offset by a
related valuation allowance. A full valuation allowance was recorded due to
management's uncertainty about the realizability of the related tax benefits as
of March 31, 2000. However, the amount of the deferred tax assets considered
realizable could be adjusted in the future if estimates of taxable income are
revised.
8
<PAGE>
5. COMMON STOCK ISSUED:
During the three months ended March 31, 2000, proceeds from the exercise of
stock options in the amount of $378 were received, net of related transaction
costs. In connection with these transactions, 330,000 shares of the Company's
common stock were issued.
In January, 2000, Aquis made cash payments totaling $205, issued a note payable
in the face amount of $350, and issued 275,000 shares of the Company's common
stock valued at $380 to a law firm in exchange for services provided. A former
member of the Board of Directors was a partner in this firm. The note issued in
connection with this transaction is payable in 20 equal monthly installments
bearing interest at the rate of 8.5%.
6. NET LOSS PER COMMON SHARE:
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", which requires a dual presentation of basic and diluted
earnings per share ("EPS"). Basic EPS is based on the weighted average number of
shares outstanding during the periods presented. Diluted EPS reflects the
potential dilution that could occur if options, warrants, convertible securities
or other contracts requiring the issuance of common stock were converted into
common stock during the periods presented. The Company has not presented diluted
EPS because the effect would be anti-dilutive.
7. SUPPLEMENTAL CASH FLOW DATA:
During the three months ended March 31, 2000, the Company purchased certain
assets of SourceOne Wireless. During the three months ended March 31, 1999, the
Company merged with Paging Partners Corporation. Cash paid for business
acquisitions is as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
---------- ----------
<S> <C> <C>
Supplemental information on business acquired:
Fair value of assets acquired $ 6,366 $ 9,150
Liabilities assumed (1,807) (3,080)
Exchange of common stock -- (5,635)
Exchange of preferred stock (1,500) --
Accrued or deferred transaction costs (501) (135)
------- -------
Cash paid 2,558 300
Less: cash acquired 240 160
------- -------
Net cash paid for SourceOne and
Paging Partners 2,318 140
Cash paid in BAPCO business combination -- 18,535
------- -------
$2,318 $18,675
------- -------
------- -------
</TABLE>
The Company paid cash for interest during the respective three-month periods
ended March 31, 2000 and 1999 in the amounts of $771 and $718. Additional fees
to obtain funding and for letter of credit in the amount of $298 were also paid
in 1999.
8. SUBSEQUENT EVENTS:
On April 10, 2000, Aquis entered into an agreement to obtain a $2 million bridge
loan as interim funding pending completion of additional prospective financing.
The debt is subordinate to the Company's senior debt and is unsecured. This
agreement provides for an interest rate of 11%, a scheduled maturity date in
September, 2001 and
9
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also provides for interest to accrue until the earlier of its maturity date or
conversion. At the lender's election not earlier than 120 days from the date of
funding, this loan is convertible into the Company's common stock at 90% of the
then-current market value. At the Company's election, the loan is redeemable at
105% of face value if such election is made within the initial 90 days
subsequent to funding, or at 110% of face value if redemption is elected within
91 to 118 days, or, if elected thereafter, at 115% of face value. Proceeds from
this loan were used during April, 2000 to make the Special Prepayment of $1,250
to FINOVA. The balance of the proceeds were used to pay certain fees incurred in
connection with the FINOVA loan modifications arranged during 2000, to pay
certain costs incurred in connection with this bridge loan, and will provide
about $400 to be used for general corporate purposes.
On April 12, 2000, the FINOVA Senior Loan was further amended. The effects of
this amendment were to waive the Company's non-compliance at December 31, 1999,
to redefine certain financial ratios specified in the loan covenants, and to
ensure that the Special Prepayment of principal of $1,250 was paid before April
15, 2000. The Company fully satisfied all conditions and the amendment became
effective on April 12, 2000.
10
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AQUIS COMMUNICATIONS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in thousands)
ORGANIZATION AND BASIS OF PRESENTATION
Aquis Communications Group, Inc. (the "Company") is a holding company,
incorporated in the State of Delaware. Through its operating companies, it
operates two regional paging systems providing one-way wireless alpha and
numeric messaging services in portions of thirteen states principally in the
Northeast and Mid-Atlantic regions of the United States, as well as the District
of Columbia. The Company has recently entered the midwestern region through a
purchase of certain assets completed on January 31, 2000, the Company has
expanded its geographical reach to six additional states in the mid-west. The
Company, resells nationwide and regional services, offers alpha dispatch, news
and other messaging enhancements, and sells Internet access services through a
wholly owned subsidiary. Its customers include individuals, businesses,
government agencies, hospitals and resellers.
On March 31, 1999, a wholly owned subsidiary of Paging Partners Corporation
("Paging Partners"), merged with Aquis Communications, Inc. ("ACI") in a
transaction accounted for as a reverse acquisition with ACI as the accounting
acquirer. At that time, Paging Partners changed its name to Aquis Communications
Group, Inc. (the "Company"). On June 30, 1999, a wholly owned subsidiary of the
Company acquired SunStar Communications, Inc. On January 31, 2000, the Company
completed its acquisition of certain assets of SourceOne Wireless.
This discussion should be read in conjunction with the condensed consolidated
financial statements of the Company and the notes thereto.
GENERAL
The Company is a leading provider of paging and other wireless messaging
services and markets one-way paging service and equipment to customers directly
and through resellers. The Company also offers its customers both customer owned
and maintained equipment or lease options for equipment. In addition, with the
acquisition of SunStar Communications, Inc., the Company began offering both
secure and general dial-up Internet access services effective July 1, 1999.
The Company generates a substantial majority of its revenue from fixed periodic
fees for paging services that are not generally dependent on usage. For the
periods ended March 31, 2000 and 1999, respectively, fixed fee revenue provided
approximately 82% and 92% of total revenues. This relative change is the result
of the Calling Party Pays ("CPP") services offered by the Company through its
January 31, 2000 acquisition of the operations of SourceOne Wireless. Other
sources of revenue include certain usage-based services provided primarily to
resellers and from sales of pagers. Consequently, the ability to recover initial
operating, selling and marketing costs and to achieve profitability is dependent
on the average duration of each customer's subscription period. For as long as a
subscriber continues to utilize the service, operating results benefit from the
recurring fixed fee payments without the requirement of any incremental selling
expenses. Conversely, customer disconnections adversely affect operating
results. Each month a percentage of existing customers have their service
terminated for reasons including failure to pay, dissatisfaction with service or
coverage limitations, or switching to competing service providers. The average
of the monthly disconnection or "churn rates" for the three month periods ended
March 31, 2000 and 1999, were 2.4% and 2.7%, respectively. The lower churn rate
for the current three-month period is attributable to the stabilizing effects of
Paging Partners reseller base added on April 1, 1999.
11
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AQUIS COMMUNICATIONS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in thousands)
RESULTS OF OPERATIONS - THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
REVENUES
Revenues for the three months ended March 31, 2000 (the "current period")
increased by approximately 26% from those of the three months ended March 31,
1999 (the "prior period"). The increase in revenues during the current period
was $1,689. Approximately $900 of the increase was related to the acquisition of
the SourceOne customer base; the balance of the increase was primarily
attributable to the increase in the customer base as a result of the Paging
Partners merger and the SunStar acquisition. Partially offsetting these
increases was cancellation of service to certain reseller units that were not
profitable to the Company (see further discussion in Cost of Paging Services).
COST OF PAGING SERVICES
Cost of service consists principally of fees paid to third party carriers, and,
to a lesser extent, to message dispatch companies. This generally occurs when a
customer requires service outside of Aquis' service area, including nationwide
coverage. The increase of $420 is primarily attributable to the increase in the
subscriber base and an increase in customer demand for services such as
wide-area, nationwide, alphanumeric, and message dispatch services. The increase
was partially offset by cancellation of service to certain Bell Atlantic Mobile
("BAM") reseller units. Aquis and BAM had entered into a reseller agreement for
these reseller units in connection with the purchase of the assets of Bell
Atlantic Paging Company at December 31, 1998. Aquis elected to cancel the
reseller agreement and did so in December, 1999 because these units were not
profitable to the Company.
COST OF EQUIPMENT SALES
The decrease of $102 during the current period was primarily due to the
Company's increased use of lower-cost pager suppliers, allowing it to achieve
targeted pricing and marketing strategies. This strategic shift has allowed the
Company to reduce its equipment cost per unit for the current period.
OPERATING EXPENSES
Technical expenses, which include transmission site rentals, telephone
interconnect services and the costs of engineering, in the current period and
prior period were $2,105 and $688, respectively. The increase is the result of
the costs to operate and maintain the paging networks acquired through the
Paging Partners merger and the SourceOne purchase.
Selling and marketing expenses in the current period and prior period were
$1,046 and $832, respectively, an increase of about 26%. This increase resulted
from employment and sales travel and telephone expenses for a larger sales staff
covering both the Mid-Atlantic and Midwest market areas as well as Internet
offerings. Facilities costs for several additional sales offices also
contributed to the increase. Partially offsetting these additional costs were
the reduced commission costs associated with a revised commission plan
implemented at the end of 1999.
12
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AQUIS COMMUNICATIONS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in thousands)
General and administrative expenses (including costs associated with customer
service, field administrative and corporate headquarters) increased by $769,
to $2,127 from $1,358 for the three-month periods ended March 31, 2000 and
1999, respectively. Of this increase, $693 represents the non-cash charge for
compensation issued in the form of stock options to the Company's current
President. Exclusive of this compensation, the net growth in general and
administrative expenses of $76 has not been significant primarily because
increased office rents and maintenance costs along with increased data
processing and billing costs associated with the increased subscriber base
were largely offset by employment cost reductions related to staff reductions
implemented in late 1999.
Depreciation and amortization in the current period and prior period were $2,541
and $1,973, respectively. The increase of $568 was primarily due to depreciation
and amortization related to the property and equipment and intangible assets
acquired through the Paging Partners merger, the purchase of SunStar and the
purchase of assets from SourceOne Wireless.
INTEREST EXPENSE
Interest expense in the current period of $810 decreased from $929 incurred
during the three months ended March 31, 1999. The interest expense results
primarily from the outstanding loans from FINOVA. However, the prior period
includes approximately $300 of letter of credit fees and other costs related to
the acquisition of the loans used to acquire the paging assets of Bell Atlantic
Paging in 1999. The elimination of those costs of the prior period was partially
offset by increased interest costs resulting from higher recent interest rates
imposed on the Company's floating rate debt, and from a higher level of debt
resulting from the acquisitions of Paging Partners, SunStar and SourceOne.
PROVISION FOR INCOME TAXES
As of March 31, 2000 and 1999, the Company recorded no deferred tax asset. The
future benefit from the realization of the net operating losses was fully offset
by a related valuation allowance. A full valuation allowance was recorded due to
management's uncertainty about the realizability of the related tax benefits.
However, the amount of the deferred tax assets considered realizable could be
adjusted in the future if estimates of taxable income are revised.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require substantial funds to finance the growth of its
existing operations and customer base, expansion into new markets and strategic
acquisitions. Additional cash requirements include debt service, working capital
and general corporate requirements.
The Company's operations used about $800 of net cash during the current quarter,
while operating activities provided net cash of $2,560 for the three months
ended March 31, 1999. The primary use of cash during the quarter ended March 31,
2000 was the financing of customer receivable in the approximate amount of
$1,200. For the quarter ended March 31, 1999, operating cash flows provided were
primarily the result of the Company's deferral of payments to vendors and
suppliers of $1,930. In response to the March 31, 2000 operating activities the
Company is continuing to pursue the strategies previously planned:
- - Consolidation of the paging industry and continuing concerns about
profitability and liquidity with respect to many companies in the industry
has led the industry and the Company to a marketing strategy intended to
focus on operating margins rather than on subscriber growth. Implementation
of corresponding commission and other related plans has been substantially
completed to ensure alignment of sales objectives and corporate goals to
focus on higher-margin alphanumeric service, as well as value-added
services.
13
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in thousands)
The Company has continued to focus on growth of its core business and
improvement in utilization of its paging system capacity. Through
alternative sales initiatives and additional strategic alliances combining
paging, email and the internet, along with the use of its paging network to
broadcast information for content providers on a metered basis, the Company
anticipates improvements in operating margins.
The Company has also negotiated and announced a key three-year alliance to
provide advanced online network security, Web hosting Internet access and
e-commerce authentication services in its effort to develop its Internet
subsidiary, Aquis IP.
- - Although revenues during 2000 significantly exceeded those of 1999, the
Company continues to face competitive pricing pressures in its markets,
resulting in decreasing average revenue per unit, increased subscriber
churn rates and lower operating margins. The units in service increased
from approximately 284,000 at March 31, 1999 to about 426,000 at March 31,
2000. This increase is primarily attributable to the units acquired through
the Paging Partners merger and acquisition of assets and customers from
SourceOne. The Company is continuing marketing efforts to expand its units
in service and will continue to explore strategic acquisitions to grow the
customer base.
- - The Company is continuing marketing efforts to regain some of the resellers
lost as a result of certain integration issues connected with the Paging
Partners merger.
- - The Company continues to plan, explore and implement alternatives to offset
these trends by ( i ) negotiating more favorable terms from existing and
alternative paging equipment suppliers, and ( ii ) obtaining third party
financing to finance such purchases. The Company may also consider the
possible sale of non-core assets and subsidiaries. In addition, the Company
believes that cash from operations combined with current cash and cash
equivalents will satisfy the Company's capital requirements in 2000.
During 2000, the Company used net cash of $2,590 in connection with business
acquisitions and for the purchase of property plant and equipment. This
represents a decline of $16,546 from 1999 net cash used for the same activities.
The decrease is primarily related to the $18,535 of cash used in 1999 related to
the acquisition of paging assets from BAPCO.
For the periods ended March 31, 2000 and 1999, net cash provided from financing
activities totaled $2,602 and $19,187, respectively. The decrease is related to
reduced borrowings during the current period under the Company's senior credit
facility. The Company borrowed $2,450 during the current three-month period to
complete the SourceOne transactions, and borrowed $20,500 during the period
ended March 31, 1999 to complete the asset purchase from BAPCO. Concurrent with
the loan of $2,450 in January, 2000, the Company agreed with its lender to
forego any further borrowings under this facility.
The Company was not in compliance with certain debt covenants at December 31,
1999 and accordingly the Company paid fees of $200 in connection with issuance
of the amendment and waiver issued by the lender. The Company is also subject to
penalties of up to $275 if future covenants are not met. Quarterly principal
payments to the lender will begin on July 1, 2000, with about $253 due in 2000.
In April, 2000, an additional payment of $1,250 was made to reduce the current
year loan of $2,450 in order to avoid the increased interest rates that would
have been assessed in the absence of such a payment. This payment was made
through use of the proceeds from an 11% bridge loan in the amount of $2,000 that
the Company completed, also in April, 2000. The balance of the bridge loan was
used to pay associated fees and will be used for the purchase of additional
paging equipment and to meet general working capital needs.
14
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in thousands)
At March 31, 2000, the Company had a working capital deficit of $5,964, which
represents an increase of $2,070 from the deficit at December 31, 1999. The
Company's working capital was negatively impacted during the current
quarter in the approximate amount of $1,000 by the effects of the SourceOne
acquisition. The Company does not anticipate that such working capital deficit
will continue in 2000 based on the funding it is seeking and on its belief that
it will generate sufficient cash flows from operations to fund estimated working
capital requirements.
The Company's principal source of liquidity at March 31, 2000 included cash and
cash equivalents of about $476 and its historical ability to generate cash from
operations. The Company believes that its current cash and equivalents and the
cash it expects to generate from operations will be sufficient to meet its
anticipated working capital and capital expenditure requirements through at
least March 31, 2001. However, if cash from operations is not sufficient to fund
the planned growth of the core business and the internet business and the
Company experiences further ARPU deterioration or if certain contingencies are
resolved unfavorably, the Company is prepared to implement an alternative
business plan (the "Alternative Plan"). The Alternative Plan calls for the sale
of the Internet subsidiary and other assets and for a reduction of planned
marketing expenditures and capital expenditures. It must also be noted that cash
requirements of the paging business may vary materially from those now planned
as a result of unforeseen changes that could consume a significant portion of
available resources or as a result of an increased rate of attrition of the
customer base. The Company is seeking additional funding to enable the growth of
its Internet business in the form of equity or debt financing. However, there is
no assurance that such financing will be available to the Company, or if
available, that the terms will be acceptable.
SEASONALITY
Pager usage is slightly higher during the spring and summer months, which is
reflected in higher incremental usage fees. Retail sales were subject to
seasonal fluctuations that affect retail sales generally. Otherwise, the results
were generally not significantly affected by seasonal factors.
FORWARD-LOOKING STATEMENTS
Future revenues, costs, product mix and new product acceptance are all
influenced by a number of factors that are inherently uncertain and difficult to
predict. Therefore, no assurance can be given that financing for such
investments will be available. In addition, no assurance can be given that the
Company's operations will generate positive cash flows.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contain forward-looking statements made by the Company's management
that are based on current expectations, estimates and projections about the
industries in which the Company operates and management's beliefs and
assumptions. In addition, other written or oral statements that constitute
forward-looking statements may be made by or on behalf of the Company. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," or various of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
15
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Dollars in thousands)
As of March 31, 2000, the Company had approximately $27,765 of floating-rate
debt outstanding. The Company's management believes the interest rate risk
represented by this debt is not material in relation to the market
capitalization of the Company.
The Company has not, and does not plan to, enter into any derivative financial
instruments for trading or speculative purposes. As of March 31, 2000, the
Company had no other significant material exposure to market risk.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
As reported in the Issuer's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999, during the first quarter ended March 31,
2000, the Issuer settled its arbitration with John X. Adiletta, which
is incorporated herein by reference.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Issuer issued securities during the quarter ended March 31, 2000 as
follows:
- 133,334 shares of Common Stock and the reinstatement of 55,000 stock
options to John X. Adiletta in settlement of an arbitration.
- An indeterminant number of shares of Common Stock which may be issued
pursuant to a convertible note issued to an offshore investor.
- An indeterminant number of shares of Common Stock which may be issued
pursuant to an equity line of credit with an offshore investor.
- 900,000 stock options issued to Nick T. Cataria, President and Chief
Executive Officer of The Issuer.
All of such issuances were exempt from registration under the
Securities Act by virtue of Section 4(2) thereof. Landenburg
Thallman & Co. acted as investment banker in connection with the
convertible note and the equity line of credit.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5 OTHER INFORMATION.
Reference is made to the Issuer's Reports on Forms 8K and 8-K/A filed
with the Commission on April 17 and 18, 2000.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(27) Exhibits Included Within:
(b) Reports on Form 8-K
The Issuer filed reports on Form 8-K and 8-K/A with respect to
the purchase of certain net assets of SourceOne Wireless on
February 15, 2000 and April 17 and 18, 2000.
-17-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Issuer
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ D. Brian Plunkett Chief Financial and Accounting Officer May 15, 2000
- ---------------------
D. Brian Plunkett
</TABLE>
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<RECEIVABLES> 7,278
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<TOTAL-ASSETS> 43,139
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1,519
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<COMMON> 172
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