<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 June 30, 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)
Delaware 22-3281446
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1719A Route 10, Suite 300, Parsippany, NJ 07054
----------------------------------------- ------------------------------------
(Address of principal executive Offices) (Zip Code)
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 June 30, 2000 there were 17,611,000 shares of the Registrant's Common
Stock outstanding.
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I Financial Information:
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999............................... 3
Condensed Consolidated Statements of Operations for the
Three and Six Month Periods Ended June 30, 2000 and 1999...................................................... 4
Condensed Consolidated Statements of Cash Flows for the
Six Month Periods Ended June 30, 2000 and 1999................................................................ 5
Notes to Condensed Consolidated Financial Statements.......................................................... 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................................ 11
Item 3 - Quantitative and Qualitative Disclosure
About Market Risks................................................................................... 17
Part II Other Information:
Item 2 - Changes in Securities.................................................................................... 18
Item 4 - Submission of Matters to a Vote of Security Holders...................................................... 18
Item 5 - Other Information........................................................................................ 18
Item 6 - Exhibits and Reports on Form 8-K......................................................................... 19
Signature ..................................................................................................... 20
</TABLE>
2
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS: 2000 1999
-------- ------------
<S> <C> <C>
Current assets:
Cash $ 473 $ 973
Accounts receivable, net of allowance for doubtful accounts
of $1,775 at June 30, 2000 and $939 at December 31, 1999 6,117 4,933
Inventory 688 228
Acquisition escrow deposits -- 200
Assets held for sale, net 1,509 --
Prepaid expenses and other current assets 1,001 1,072
-------- --------
Total current assets 9,788 7,406
Fixed assets, net 12,815 10,461
Intangible assets, net 18,614 20,092
Deferred charges and other assets 1,366 1,365
-------- --------
Total assets $ 42,583 $ 39,324
======== =========
LIABILITIES:
Current liabilities:
Current maturities of long term debt $ 1,747 $ 508
Accounts payable 7,450 6,750
Accrued expenses 2,317 2,535
Deferred revenue 1,247 930
Customer deposits 515 577
-------- --------
Total current liabilities 13,276 11,300
Long term debt 28,145 25,963
-------- --------
Total liabilities 41,421 37,263
-------- --------
Commitments and contingencies
7.5% Redeemable Preferred stock, $0.01 par value, 100,000 shares authorized,
15,000 issued at June 30, 2000, none issued 1999 1,547 --
-------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value, 75,000,000 shares authorized, 17,611,000 and
16,551,000 shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 176 166
Additional paid in capital 15,862 13,195
Accumulated deficit (16,373) (11,175)
Note receivable from stockholder (50) (125)
-------- --------
Total stockholders' equity (deficit) (385) 2,061
-------- --------
Total liabilities and stockholders' equity (deficit) $ 42,583 $ 39,324
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Paging services $ 7,367 $ 7,817 $ 15,199 $ 14,111
Internet services 201 -- 335 --
Equipment sales 309 239 454 367
------------ ------------ ------------ ------------
Total revenues 7,877 8,056 15,988 14,478
------------ ------------ ------------ ------------
Operating expenses:
Paging services 1,466 2,070 3,238 3,541
Cost of equipment sales 260 220 416 478
Technical operations 1,767 1,287 3,809 1,975
Sales and marketing 816 805 1,790 1,637
General and administrative 1,740 1,708 3,803 3,066
Internet operations 503 -- 884 --
Depreciation and amortization 2,454 2,897 4,936 4,870
Provision for doubtful accounts 308 214 604 469
------------ ------------ ------------ ------------
Total operating expenses 9,314 9,201 19,480 16,036
------------ ------------ ------------ ------------
Operating loss (1,437) (1,145) (3,492) (1,558)
Gain on disposal of assets -- -- (19) --
Interest expense, net 919 645 1,725 1,574
------------ ------------ ------------ ------------
Net loss (2,356) (1,790) (5,198) (3,132)
Preferred stock dividends (28) -- (47) --
------------ ------------ ------------ ------------
Loss attributable to common stockholders $ (2,384) $ (1,790) $ (5,245) $ (3,132)
============ ============ ============ =============
Net loss per common share:
- Basic and diluted $ (0.14) $ (0.12) $ (0.31) $ (0.26)
============ ============ ============ =============
Weighted average common shares outstanding 17,411,000 15,213,000 17,103,000 12,087,000
============ ============ ============ =============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,198) $ (3,132)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Depreciation and amortization 5,074 4,805
Amortization of deferred financing costs 160 65
Gain on sale of equipment (19) --
Provision for doubtful accounts 604 469
Compensation paid with stock options 693 --
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable (1,841) (3,213)
Inventory (693) 659
Prepaid expenses and other current assets 159 285
Accounts payable and accrued expenses 295 2,361
Deferred revenues and customer deposits (135) 916
-------- --------
Net cash (used in) provided by operating activities (901) 3,215
-------- --------
Cash flows from investing activities:
Business acquisitions (2,396) (18,940)
Capital expenditures (906) (1,294)
Acquisition deposits 200 (1,275)
Deferred business acquisition costs (8) (554)
Sale of fixed assets 698 263
-------- --------
Net cash used in investing activities (2,412) (21,800)
-------- --------
Cash flows from financing activities:
Proceeds from stock options exercised 348 --
Issuance of long term debt 4,450 24,860
Repayment of long term debt (1,250) --
Repayment of notes payable to stockholders -- (520)
Repayment of notes payable -- (4,150)
Repayment of capital lease obligations (179) (1,556)
Refinancing of capital lease obligation -- 1,300
Deferred financing and other costs (556) (692)
-------- --------
Net cash provided by financing activities 2,813 19,242
-------- --------
(Decrease) increase in cash (500) 657
Cash, beginning of period 973 --
-------- --------
Cash, end of period $ 473 $ 657
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except for share information)
1. BASIS OF PRESENTATION:
Aquis Communications Group, Inc. ("Aquis" or the "Company") is a holding
company, incorporated in the State of Delaware. Through its operating companies,
it now operates three regional paging systems providing one-way wireless alpha
and numeric messaging services in portions of nineteen states principally in the
Northeast, the Midwest and the Mid-Atlantic regions of the United States, as
well as the District of Columbia. The Company recently entered the Midwest
through a purchase of certain assets from SourceOne Wireless, Inc. ("SourceOne"
or "SOWI") completed on January 31, 2000. Aquis also resells nationwide and
regional services, offers alpha dispatch, news and other messaging enhancements.
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. 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. Management committed to a plan to dispose of this internet
services provider during the quarter ended June 30, 2000. On January 31, 2000,
the Company completed its acquisition of certain assets of SourceOne Wireless.
On May 22, 2000, Aquis acquired certain paging assets of Suburban Paging, a
regional paging services reseller headquartered in Pennsylvania. These
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. These statements also include the acquisitions of SunStar, the
net assets of SourceOne and the net assets of Suburban Paging from their dates
of acquisition. The revenues and operating expenses of the Company's internet
operations are presented separately in the Statement of Operations and the
related net assets are presented as assets held for sale as the assets and
operations of this business are subject to an asset purchase agreement. The
accompanying statements reflect all adjustments considered necessary by
management to present fairly the consolidated financial position as of June 30,
2000 and December 31, 1999, the consolidated results of operations for the three
and six month periods ended June 30, 2000 and 1999, and the related consolidated
cash flows for the six month periods ended June 30, 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 period amounts have been reclassified to conform to the current
period presentation.
Continued
6
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(In thousands, except for share information)
2. MERGER AND ACQUISITION TRANSACTIONS:
On January 31, 2000, the Company completed the acquisition (the "Acquisition")
of certain assets of SourceOne, 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 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 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. Related 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 were capitalized at
December 31, 1999, including an escrow deposit of $200, since this transaction
was closed after that date. 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>
FOR THE SIX MONTHS ENDED
------------------------
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
Revenue $ 16,071 $ 22,221
======== ========
Net loss $ (5,273) $ (7,071)
Preferred stock dividends (57) (57)
-------- --------
Net loss attributable to common stockholders $ (5,330) $ (7,128)
======== ========
Net loss per common share - basic and diluted $ (0.31) $ (0.47)
======== ========
</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 (UNAUDITED), CONTINUED
(In thousands, except for share information)
3. SALE OF INTERNET SERVICES BUSINESS
On July 13, 2000, the Company entered into an agreement to sell the net
assets of the Company's internet services business. The net assets held for
sale totaling $1,509 consist primarily of licenses, other intangibles and
receivables, and were net of current liabilities at June 30, 2000 totaling
approximately $735. The net assets have been presented as assets held for
sale, and the revenues and expenses realized from its operations have been
presented separately in the Statements of Operations to more clearly
illustrate its net losses of $302 and $549 for the three and six month
periods ended June 30, 2000. Cash flows of $589 consumed by these operations
during the six months ended June 30, 2000 were funded by the Company. The
agreement specifies a cash purchase price of $2,025 as adjusted for
liabilities assumed by the purchaser and certain other adjustments, and sets
a closing date of September 30, 2000 or earlier, with the possibility of one
extension of up to 30 days.
4. 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
provided 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 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 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.
On January 26, 2000, the FINOVA loan was amended in connection with the
SourceOne 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 this 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 and was required to
be applied to the outstanding balance of the SourceOne Portion. The Company and
FINOVA further amended the loan agreement on April 12, 2000. 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
encourage Aquis to make the Special Prepayment of principal of $1,250 before
April 15, 2000. The Company satisfied all conditions, the Special Prepayment was
paid, and the Company thereby reduced its cost of borrowings through avoidance
of the higher rates imposed by this amendment and reduction of the outstanding
loan balance due to FINOVA.
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 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 for general corporate purposes.
8
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(In thousands, except for share information)
At June 30, 2000, the balance of the Senior Loan outstanding was $26,515. The
remaining balance of long term debt outstanding consisted principally of
borrowings made pursuant to the bridge loan of April 2000 and to the Installment
Loan, discussed below.
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.
5. COMMON STOCK ISSUED:
During the six months ended June 30, 2000, proceeds from the exercise of stock
options in the amount of $348 were received, net of related transaction costs.
In connection with these transactions, 331,000 shares of the Company's common
stock were issued. In addition, in connection with the purchase of assets from
Suburban Paging in May 2000, the Company issued 319,500 shares as consideration
for the paging assets purchased. Finally, in April 2000, the Company issued
133,000 shares, valued at $400, to its former President which was expensed as
part of its settlement of a certain employment-related dispute.
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.
9
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(In thousands, except for share information)
7. SUPPLEMENTAL CASH FLOW DATA:
During the six months ended June 30, 2000, the Company purchased certain assets
of SourceOne and Suburban Paging. During the six months ended June 30, 1999, the
Company merged with Paging Partners Corporation and acquired SunStar
Communications, Inc. as more fully discussed in Note 1. Cash paid in connection
with these acquisitions is as follows:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
-------- ---------
<S> <C> <C>
Supplemental information on businesses acquired:
Fair value of assets acquired $ 8,116 $ 11,217
Liabilities assumed (1,807) (3,262)
Exchange of common stock (1,598) (7,197)
Exchange of preferred stock (1,500) --
Accrued or deferred transaction costs (575) (183)
-------- --------
Cash paid 2,636 575
Less: cash acquired (240) (170)
-------- --------
Net cash paid 2,396 405
Cash paid in connection with BAPCO acquisition -- 18,535
-------- --------
Total $ 2,396 $ 18,940
======== ========
</TABLE>
The Company paid cash for interest during the respective six-month periods ended
June 30, 2000 and 1999 in the amounts of $1,511 and $1,153. Additional fees to
obtain funding and for letter of credit in the amount of $298 were also paid in
1999.
8. SUBSEQUENT EVENTS:
On August 21, 2000, the Company and its lender orally agreed to modify the terms
of its Senior Loan Agreement, as amended. These modifications would permit the
Company to retain all proceeds from the sale of its internet operations, give
the Company an option to reduce the scheduled principal payment due on July 1,
2001 from $514 to $200, and relaxes certain financial ratio covenants for 2001.
In exchange, the Company has agreed to pay a certain fixed fee. Further,
additional contingent fees of up to $250 per quarter are to be added to the
principal balance due at final maturity if the Company is unable to meet the
financial ratios as amended in April, 2000. Finally, and also contingent upon
the anticipated sale of the internet operations, a principal payment of $2,000
would be required on or before December 31, 2000 in order to avoid the
assessment of a $500 fee and an interest rate increase of 2%. That fee would
also be added to the principal balance otherwise payable at the maturity date of
this loan.
10
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(In thousands)
ORGANIZATION AND BASIS OF PRESENTATION
Aquis Communications Group, Inc. ("Aquis" or the "Company") is a holding
company, incorporated in the State of Delaware. Through its operating companies,
it now operates three regional paging systems providing one-way wireless alpha
and numeric messaging services in portions of nineteen states principally in the
Northeast, the Midwest and the Mid-Atlantic regions of the United States, as
well as the District of Columbia. The Company recently entered the Midwestern
region through a purchase of certain assets from SourceOne Wireless, Inc.
("SourceOne" or "SOWI") completed on January 31, 2000. Aquis also resells
nationwide and regional services, offers alpha dispatch, news and other
messaging enhancements. 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. 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. In May, 2000 the Company acquired
certain paging assets of Suburban Paging, a regional paging services reseller
headquartered in Pennsylvania. Finally, management has recently agreed to sell
substantially all the net assets of its internet services operations in order to
refocus its resources on its paging operations. These matters are more fully
discussed in 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.
The Company generates a substantial majority of its revenue from fixed periodic
fees for paging services that are not generally dependent on usage. Usage
sensitive charges consist primarily of overcalls and TNPP fees charged to
resellers, and Calling Party Pays ("CPP") charges and overcalls charged to end
users. For both the six and three month periods ended June 30, 2000,
respectively, fixed fee revenue provided approximately 82% of total revenues, as
compared to 94% for the six months ended June 30, 1999. This change is primarily
the result of the CPP services added through the Company's January 31, 2000
acquisition of the operations of SourceOne and the TNPP services provided
through the Paging Partners merger effected on March 31, 1999.
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 "normalized" (excluding the
effects of the cancellation of certain units of Bell Atlantic Mobile) monthly
disconnection or "churn rates" for the six-month periods ended June 30, 2000 and
1999, were 2.8% and 2.1%, respectively. Including the effects of the cancelled
Bell Atlantic Mobile units, the current period rate was 3.9% The higher churn
rate for the current six-month period is also attributed to units that were
disconnected for non-payment by certain mid-west service resellers that were
acquired in the SourceOne purchase.
This discussion should be read in conjunction with the condensed consolidated
financial statements of the Company and the notes thereto.
11
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(In thousands)
REVENUES
Paging services revenues for the six months ended June 30, 2000 increased by
$1,088, or nearly 8%, over those of the corresponding period of 1999. The
increase was primarily the results of the merger with Paging Partners on March
31, 1999, the purchase of traditional paging and calling party pays operations
from SourceOne on January 31, 2000, the acquisition of paging assets from
Suburban Paging in May, 2000, and from internal growth. Paging services revenues
of $7,367 in the three months ended June 30, 2000 decreased by $450, or about
6%, from revenues of $7,817 in the three months ended June 30, 1999. The
decrease was primarily the result of the cancellation of service to more than
60,000 unprofitable units previously resold to Bell Atlantic and was also
affected by the cancellation of service to certain reseller units acquired from
Paging Partners. Aquis and Bell Atlantic Mobile had entered into a reseller
agreement for certain reseller units in connection with the purchase of assets
from Bell Atlantic Paging Company at December 31, 1998. Aquis elected to cancel
the reseller agreement for certain units in December, 1999, and for additional
units in April, 2000 because these units were not profitable to the Company.
Increases in revenues from equipment sales were recognized during the three and
six month periods, respectively, of $70 and $87. The increases resulted from
certain sales to resellers in June 2000, and to a lesser extent, more sales of
higher priced alpha pagers, partially offset by lower total unit volume during
the current year. Internet services revenues were realized as the base of
subscribers expanded during the periods in the current year. Since the internet
business was acquired at the close of the quarter ended June 30, 1999, no
revenues were realized by the Company during those earlier periods.
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. Third party carriers are
utilized when a customer requires service outside of the Company's service area,
and are most commonly used to provide nationwide coverage. The costs of such
services declined to $3,238 and $1,466 during the six and three month periods
ended June 30, 2000, respectively, from $3,541 and $2,070 during the
corresponding periods in 1999. The decreases are primarily attributable to the
cancellation of services to certain Bell Atlantic Mobile reseller units in
December, 1999 and April, 2000.
COST OF EQUIPMENT SALES
The cost decrease of $62 during the current six-month period was due to a
decrease in the number of units sold during the six months of the current year
and the Company's shift to lower cost equipment. During the current three-month
period, the cost of equipment sales increased $40, which is attributable to the
aforementioned June 2000 sales to resellers and a greater demand for alpha
messaging units.
TECHNICAL OPERATIONS
Technical operating expenses include transmission site rentals, telephone
interconnect services and the costs of network maintenance and engineering.
These expenses totaled $1,767 and $3,809 in the three and six-month periods
ended June 30, 2000, respectively, as compared to $1,287 and $1,975 in the
year-earlier periods. The increases resulted from the additional costs required
to operate the paging networks acquired from Paging Partners in March, 1999 and
from SourceOne in January, 2000.
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AQUIS COMMUNICATIONS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(In thousands)
SALES AND MARKETING
Selling and marketing expenses include the cost to acquire and retain
subscribers, operating costs associated with the sales and marketing
organizations, and other advertising and marketing expenses. These costs
increased to $1,790 and $816 during the six-month and three-month periods ended
June 30, 2000, or approximately 9% and 1% higher than those of the two
corresponding periods ended in 1999. These increases resulted from increases in
salary, benefits and commission expenses in 2000 as a result of a larger sales
force covering both the Mid-Atlantic and Midwest market areas along with an
increase in directory advertising expenses. Partially offsetting these increases
were lower commission expenses associated with a revised commission plan
implemented at the close of 1999.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include costs associated with customer
service, field administration and corporate headquarters. These costs totaled
$1,740 and $1,708 for the three-month periods ended June 30, 2000 and 1999, and
$3,803 and $3,066 for the six-month periods then ended, respectively. During the
first quarter of 2000, $693 was incurred in connection with the issuance of
stock options in the hiring of the Company's President. Other than this,
increased office rents, billing, data processing costs and customer service
center costs associated with the subscriber bases acquired from Paging Partners,
SourceOne and Suburban Paging were substantially offset by staff reductions
implemented in late 1999.
INTERNET OPERATIONS
Internet operating expenses include all costs associated with providing internet
services, such as communications and connectivity costs, sales and marketing
expenses, customer service and other general and administrative support costs,
and depreciation and amortization. No costs were incurred in the periods ended
in 1999 because the operations were acquired at the mid-point of 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the six months ended June 30, 2000 increased
over those expenses for the corresponding period in 1999 by $66, primarily as
the result of the assets acquired from Paging Partners, SourceOne and Suburban
Paging. For the three-month periods ended June 30, 2000 and 1999, these expenses
decreased primarily as the result the sale of certain excess paging equipment.
INTEREST EXPENSE
Interest expense in the current three and six month periods of $919 and $1,725,
respectively, includes interest on the Company's five year term loan with FINOVA
Capital Corporation ("FINOVA"), its bridge loan and installment loan with
FINOVA, as well as interest on certain other obligations. Interest expenses have
increased over those of prior periods as the results of the borrowings incurred
in order to finance the Paging Partners merger and the purchases of SunStar and
SourceOne. Also contributing to the increases are higher interest rates in
effect for these floating rate loans. These increases have been partially offset
by the absence of letter of credit fees as incurred in the first quarter of 1999
in connection with the funding of the Bell Atlantic Paging acquisition.
PROVISION FOR INCOME TAXES
As of June 30, 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
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AQUIS COMMUNICATIONS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(IN THOUSANDS)
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, excluding $337 used by internet operations, used
about $564 of net cash during the current year to date, while operating
activities provided net cash of $3,215 for the six months ended June 30,
1999. The primary use of cash during the six months ended June 30, 2000 and
1999 was the financing of paging subscriber receivables in the approximate
net amounts of $1,237 and $2,744, respectively. For the six months ended June
30, 2000 and 1999, respectively, operating cash flows totaling $295 and
$2,361, respectively, were provided by the growth of accounts payable as a
result of the increased paging infrastructure acquired from Paging Partners
and SourceOne, and of the deferral of payments to other vendors and suppliers.
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.
In response to the results of its June 30, 2000 operating activities the
Company is continuing to pursue the strategies previously planned, including,
but not limited to, the sale of its internet operations.
- 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.
- Although revenues during the six-month periods ended June 30, 2000 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
decreased from approximately 455,000 at June 30, 1999 to about 390,000 at
June 30, 2000. This decrease is primarily attributable to the cancellation
of Bell Atlantic Mobile units in December, 1999 and April, 2000. 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 has also executed an
agreement for the sale of its non-core internet services assets. The
agreement for sale, which contains customary conditions to the parties'
obligation to complete the transaction, calls for the acquiring party to
pay approximately $2 million in cash to the Company in return for
substantially all of the Company's internet services business assets.
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AQUIS COMMUNICATIONS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(In thousands)
During 2000, the Company used net cash of $3,050 in connection with business
acquisitions and for the purchase of and equipment, excluding $252 of
expenditures related primarily to certain licensing of its internet activities.
This represents a decline of $17,184 from 1999 net cash used for the same
activities and is primarily related to the $18,535 of cash used in 1999 in
connection with the paging assets purchased from BAPCO.
For the periods ended June 30, 2000 and 1999, net cash provided from financing
activities totaled $2,813 and $19,242, 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 six-month period to
complete the SourceOne transaction, 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. In April, 2000, the Company elected
to make an additional payment of $1,250 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 of an 11% bridge loan extended to the Company in April, 2000 in the
amount of $2,000. The balance of the bridge loan was used to pay associated fees
and was used for the purchase of additional paging equipment and to meet general
working capital needs.
The Company was not in compliance with certain debt covenants at December 31,
1999. Accordingly fees of $200 were paid in connection with issuance of the
amendment and waiver issued by the lender in April 2000. As specified in this
amendment, Aquis is also subject to certain quarterly contingent fees if future
covenants are not met. Scheduled quarterly principal payments to the lender
began on July 1, 2000, with principal payments totaling $1,294 coming due during
the twelve months ended June 30, 2001.
Company management periodically prepares internal projections of cash flows,
EBITDA, and other financial measures. These projections are based on the
Company's business plan, certain operating assumptions and general conditions in
the wireless industry. The assumptions made are believed to be reasonable, but
are subject to uncertainty. As of the date of this Report, projected cash flows
for the quarter ended March 31, 2001 are less than the estimated amounts
expected to be required under the existing agreement with the Company's lender.
If the Company was unable to meet these cash flow requirements, it would be in
default of certain covenants currently in effect. In the event of default, the
Company's lender could elect to demand payment of all amounts then outstanding.
It is unlikely that the Company's cash and other liquid resources would be
adequate to meet such a demand. Accordingly, on August 21, 2000, the Company
orally agreed with its lender to modify certain terms of its existing Senior
Loan Agreement, subject to execution of a written amendment. These modifications
would permit the Company to retain all proceeds from the sale of its internet
operations, give Aquis an option to reduce the scheduled principal payment due
on July 1, 2001 from $514 to $200, and relaxes certain financial ratio covenants
for 2001. In exchange, the Company has agreed to pay a certain fixed fee.
Further, additional contingent fees of up to $250 per quarter will be added to
the principal balance due at final maturity if the Company is unable to meet the
financial ratios as amended in April, 2000. Finally, and also contingent upon
the anticipated sale of the internet operations, a principal payment of $2,000
would be required on or before December 31, 2000 in order to avoid the
assessment of a $500 fee and an interest rate increase of 2%. That fee would
also be added to the principal balance otherwise payable at the maturity of this
loan.
At June 30, 2000, the Company had a working capital deficit of $3,488, which
represents a decrease of $406 from the deficit at December 31, 1999. The
Company's working capital improved at June 30, 2000 primarily as the result of
its agreement to sell the assets of its internet operations, which is expected
to close at or around the close of the Company's third fiscal quarter of 2000.
The Company does not anticipate that such working capital deficit will
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AQUIS COMMUNICATIONS GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(In thousands)
continue in 2000 based on the funding it is seeking and on its belief that it
will generate sufficient cash flows from the sale of its internet assets and
from its paging operations to fund estimated working capital requirements.
The Company's principal source of liquidity at June 30, 2000 included cash and
cash equivalents of about $473, a pending agreement to sell its internet
business for cash in excess of $1,600, and its ability to generate cash from
operations. The Company believes that these resources will be sufficient to meet
the relaxed covenants that are the subject of the oral modifications of August
21, 2000 as well as its anticipated working capital and capital expenditure
requirements through at least June 30, 2001. However, if cash from operations is
not sufficient to fund the planned growth of the core business or if the Company
experiences further ARPU deterioration or if certain contingencies are resolved
unfavorably, the Company is prepared to implement the balance of its alternative
business plan (the "Alternative Plan"). This Alternative Plan in its entirety
called for the sale of the Internet subsidiary and other assets and for a
reduction of planned marketing expenditures and capital expenditures.
Implementing this plan, the Company has executed an agreement to sell the
Internet subsidiary's net assets. 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.
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.
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AQUIS COMMUNICATIONS GROUP, INC.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(In thousands)
As of June 30, 2000, the Company had approximately $27,550 of floating-rate debt
outstanding. The Company's management believes the interest rate risk
represented by this debt is not material to its operating results or its
capitalization. The Company has not, and does not plan to, enter into any
derivative financial instruments for trading or speculative purposes. As of June
30, 2000, the Company had no other significant material exposure to market risk.
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PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
The Company is a party to legal proceedings that have been reported in
its Annual Report on Form 10-K for the year ended December 31, 1999.
As noted in the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000, during the first quarter ended March 31,
2000, the Issuer settled its arbitration with John X. Adiletta. At
June 30, 2000, there were no other significant developments related to
legal proceedings involving the Company.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS.
In May 2000, the Company issued 319,518 shares of its common stock to
Suburban Connect L.P. as consideration for the Company's purchase of
the assets of Suburban Paging. This issuance was exempt from
registration under the Securities Act by virtue of Section 4(2)
thereof.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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.
Exhibits Included Within:
Exhibit 27 Financial Data Schedule
(a) 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, Inc. on February
15, 2000 and April 17 and 18, 2000.
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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:
SIGNATURE TITLE DATE
/s/ D. BRIAN PLUNKETT Chief Financial August 25, 2000
--------------------- and Accounting Officer
D. Brian Plunkett
19
