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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 26, 1999
MOBILEMEDIA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-26320 22-3253006
(State or other (Commission File No.) (IRS Employer
jurisdiction Identification No.)
of incorporation)
Fort Lee Executive Park, One Executive Drive, Suite 500,
Fort Lee, New Jersey 07024
(Address of principal executive offices)
(Zip Code)
(201) 224-9200
(Registrant's telephone number, including area code)
-------------------------
(Former name or former address, if changed since last report)
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<PAGE>
Item 5. Other Events.
On March 26, 1999, MobileMedia Corporation ("MobileMedia") and MobileMedia
Communications, Inc. ("Communications", and together with MobilMedia, the
"Company") released the consolidated balance sheets of the Company as of
December 31, 1997 and 1998 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1998, filed herewith as Exhibit 99.1 (the
"Consolidated Financial Statements").
Item 7. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired:
Not applicable.
(b) Pro forma financial information:
Not applicable.
(c) Exhibits:
99.1 Consolidated Financial Statements
2
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
Date: March 29, 1999 MOBILEMEDIA CORPORATION
By: /s/ David R. Gibson
----------------------------
David R. Gibson
Senior Vice President and
Chief Financial Officer
3
<PAGE>
EXHIBIT INDEX
Exhibit No. Page
- ----------- ----
99.1 Consolidated Financial Statements
4
Report of Independent Auditors
The Board of Directors
MobileMedia Communications, Inc.
We have audited the accompanying consolidated balance sheets of MobileMedia
Communications, Inc. and Subsidiaries ("MobileMedia") as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
MobileMedia Communications, Inc. and Subsidiaries at December 31, 1997 and 1998
and the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
MobileMedia will continue as a going concern. As more fully described in Note 1,
on January 30, 1997, MobileMedia Corporation and substantially all of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware (the Bankruptcy Court). Additionally, as more fully
described in Note 11, on April 8, 1997, the Federal Communications Commission
("FCC") issued a Public Notice commencing an administrative hearing into the
qualification of MobileMedia to remain a licensee. These events, and
circumstances relating to the Chapter 11 filing with the Bankruptcy Court,
including MobileMedia's highly leveraged financial structure, non-compliance
with certain covenants of loan agreements with banks and note indentures, net
working capital deficiency and recurring losses from operations, raise
substantial doubt about MobileMedia's ability to continue as a going concern.
Although MobileMedia is currently operating the business as a
debtor-in-possession under the jurisdiction of the Bankruptcy Court, the
continuation of the business as a going concern is contingent upon, among other
things, the ability to (a) gain approval of the creditors and confirmation by
the Bankruptcy Court of a plan of reorganization, (b) maintain compliance with
all covenants under the debtor-in-possession financing agreement, (c) achieve
satisfactory levels of future operating profit and (d) retain FCC qualification
as a licensee. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
ERNST & YOUNG LLP
MetroPark, New Jersey
February 12, 1999, except for the eighth and ninth paragraphs of
Note 1 and the second paragraph of Note 6, as to which the date
is March 26, 1999
F-1
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................. $ 10,920 $ 1,218
Accounts receivable (less allowance for uncollectible accounts of
$26,500 and $15,000 in 1997 and 1998, respectively)................. 55,432 38,942
Inventories........................................................... 868 2,192
Prepaid expense....................................................... 5,108 5,523
Other current assets.................................................. 2,783 4,855
---------- ----------
Total current assets.............................................. 75,111 52,730
---------- ----------
Investment in net assets of equity affiliate.............................. 1,788 1,400
Property and equipment, net............................................... 257,937 219,642
Intangible assets, net.................................................... 295,358 266,109
Other assets.............................................................. 24,940 21,573
---------- ----------
Total assets...................................................... $ 655,134 $ 561,454
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise
Debtor-In-Possession (DIP) credit facility........................... $ 10,000 $ --
Accrued restructuring costs.......................................... 4,897 5,163
Accrued wages, benefits and payroll.................................. 11,894 12,033
Accounts payable--post petition...................................... 2,362 1,703
Accrued interest..................................................... 4,777 3,692
Accrued expenses and other current liabilities....................... 35,959 35,735
Current Income Taxes Payable......................................... -- 2,871
Advance billing and customer deposits................................ 34,252 28,554
Deferred gain on tower sale.......................................... -- 68,444
---------- ----------
Total liabilities not subject to compromise........................ 104,141 158,195
---------- ----------
Liabilities subject to compromise
Accrued wages, benefits and payroll taxes............................ 562 647
Accrued interest..................................................... 18,450 17,579
Accounts payable--pre petition....................................... 19,646 15,410
Accrued expenses and other current liabilities....................... 20,663 15,285
Debt................................................................. 1,075,681 905,681
Other liabilities.................................................... 2,915 --
---------- ----------
Total liabilities subject to compromise............................ 1,137,917 954,602
---------- ----------
Deferred tax liabilities............................................. 2,655 2,655
Stockholders' deficit
Common stock (1 share, no par value, issued and outstanding at
December 31, 1997 and 1998).......................................... -- --
Additional paid-in-capital........................................... 676,025 676,025
Accumulated deficit--pre petition.................................... (1,154,420) (1,154,420)
Accumulated deficit--post petition................................... (111,184) (75,603)
---------- ----------
Total stockholders' deficit....................................... (589,579) (553,998)
Total liabilities and stockholders' deficit....................... $ 655,134 $ 561,454
========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1997 1998
----------- --------- ---------
<S> <C> <C> <C>
Revenue
Services, rents and maintenance .............................. $ 568,892 $ 491,174 $ 423,059
Product sales ................................................ 71,818 36,218 26,622
----------- --------- ---------
Total revenues .......................................... 640,710 527,392 449,681
Cost of products sold ............................................. (72,595) (35,843) (22,162)
----------- --------- ---------
568,115 491,549 427,519
Operating expenses
Services, rents and maintenance .............................. 144,050 139,333 111,589
Selling ...................................................... 96,817 69,544 61,106
General and administrative ................................... 218,607 179,599 133,003
Reduction of liabilities subject to compromise............... -- -- (10,461)
Impairment of long-lived assets .............................. 792,478 -- --
Restructuring costs .......................................... 4,256 19,811 18,624
Depreciation ................................................. 136,434 110,376 86,624
Amortization ................................................. 212,264 29,862 29,835
Amortization of deferred gain on tower sale .................. -- -- (1,556)
----------- --------- ---------
Total operating expenses ................................ 1,604,906 548,525 428,764
----------- --------- ---------
Operating (loss) .................................................. (1,036,791) (56,976) (1,245)
Other income (expense)
Interest expense, net ........................................ (92,663) (67,611) (53,043)
Gain on sale of assets ....................................... 68 3 94,165
Other ........................................................ -- -- (338)
----------- --------- ---------
Total other expense ..................................... (92,595) (67,608) 40,784
----------- --------- ---------
Income (loss) before income taxes (benefit) ....................... (1,129,386) (124,584) 39,539
Income taxes (benefit) ............................................ (69,442) -- 3,958
----------- --------- ---------
Net income (loss) ................................................. $(1,059,944) $(124,584) $ 35,581
=========== ========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Additional Accumulated Accumulated
Paid in Deficit Deficit
Capital Pre-Petition Post-Petition Total
------- ------------ ------------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1995 ........ $659,829 $ (81,076) $ 0 $ 578,753
Capital contribution from MobileMedia 12,800 -- -- 12,800
Net loss ............................ -- (1,059,944) -- (1,059,944)
-------- ----------- --------- -----------
Balance at December 31, 1996 ........ 672,629 (1,141,020) 0 (468,391)
Capital contribution from MobileMedia 3,396 -- -- 3,396
Net loss ............................ -- (13,400) (111,184) (124,584)
-------- ----------- --------- -----------
Balance at December 31, 1997 ........ 676,025 (1,154,420) (111,184) (589,579)
Net income .......................... -- -- 35,581 35,581
-------- ----------- --------- -----------
Balance at December 31, 1998 ........ $676,025 $(1,154,420) $ (75,603) $ (553,998)
======== =========== ========= ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income (loss) .................................. $(1,059,944) $(124,584) $ 35,581
Adjustments to reconcile net loss to net cash provided by
(used in) Operating activities:
Depreciation and amortization ...................... 348,698 140,238 116,459
Amortization of deferred gain on tower sale ........ (1,556)
Income tax benefit ................................. (69,442) -- --
Accretion of note payable discount ................. 16,792 1,485 --
Provision for uncollectible accounts ............... 56,556 65,181 14,841
Reduction of liabilities subject to compromise ..... -- -- (10,461)
Recognized gain on sale of tower assets ............ -- -- (94,165)
Impairment of long-lived assets .................... 792,478 -- --
Undistributed earnings of affiliate, net ........... 160 69 (87)
Change in operating assets and liabilities:
Accounts receivable ................................ (55,965) (53,904) 1,649
Inventories ........................................ 2,433 12,514 (1,324)
Prepaid expenses and other assets .................. 12,145 (686) 590
Accounts payable, accrued expenses and other
liabilities ..................................... 13,283 (25,393) (7,065)
Net cash provided by (used in) operating activities 57,194 14,920 54,462
----------- --------- ---------
Investing activities:
Construction and capital expenditures, including net
changes in pager assets............................. (161,861) (40,556) (53,867)
Net proceeds from the sale of tower assets ......... -- -- 169,703
Acquisition of businesses .......................... (866,460) -- --
----------- --------- ---------
Net cash provided by (used in) investing activities ..... (1,028,321) (40,556) 115,836
----------- --------- ---------
Financing activities:
Capital contribution by MobileMedia Corporation .... 12,800 3,396 --
Payment of debt issue costs ........................ (6,939) -- --
Borrowing from revolving credit facilities ......... 580,250 -- --
Repayments on revolving credit facilities .......... -- -- (170,000)
Borrowing from DIP credit facilities ............... -- 47,000 --
Repayments on DIP credit facilities ................ -- (37,000) (10,000)
----------- --------- ---------
Net cash provided by (used in) financing activities ..... 586,111 13,396 (180,000)
----------- --------- ---------
Net (decrease) increase in cash, cash equivalents
designated and cash designated for the MobileComm
acquisition ........................................... (385,016) (12,240) (9,702)
Cash and cash equivalents at beginning of period ........ 408,176 23,160 10,920
----------- --------- ---------
Cash and cash equivalents at end of period .............. $ 23,160 $ 10,920 $ 1,218
=========== ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Chapter 11 Reorganization and Basis of Presentation
On January 30, 1997 (the "Petition date"), MobileMedia Corporation
("Parent"), its wholly owned subsidiary MobileMedia Communications, Inc., and
all seventeen of MobileMedia Communication Inc.'s subsidiaries ("MobileMedia")
(collectively with Parent, the "Debtors"), filed for protection under Chapter 11
of Title 11 of the United States Code (the "Bankruptcy Code"). The Debtors are
operating as debtors-in-possession and are subject to the jurisdiction of the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"). Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11 of the Bankruptcy Code, a debtor is authorized
to reorganize its business for the benefit of its creditors and stockholders. In
addition to permitting rehabilitation of the debtor, another goal of Chapter 11
is to promote equality of treatment of creditors and equity security holders of
equal rank with respect to the restructuring of debt. In furtherance of these
two goals, upon the filing of a petition for reorganization under Chapter 11,
section 362(a) of the Bankruptcy Code generally provides for an automatic stay
of substantially all acts and proceedings against the debtor and its property,
including all attempts to collect claims or enforce liens that arose prior to
the commencement of the debtor's case under Chapter 11.
The Bankruptcy Court has exercised supervisory powers over the operations
of the Debtors with respect to the employment of attorneys, investment bankers
and other professionals, and transactions out of the Debtors' ordinary course of
business or otherwise requiring bankruptcy court approval under the Bankruptcy
Code. The Debtors have been paying undisputed obligations that have arisen
subsequent to the Petition date on a timely basis.
Since the Petition date, the Bankruptcy Court has entered orders, among
other things, allowing the Debtors (i) to pay certain customer refunds and
deposits in the ordinary course of business, (ii) to pay wages, salaries and
benefits owing to employees, and (iii) to pay specified pre-petition taxes owing
to various governmental entities. On February 6, 1997, the Bankruptcy Court
entered an order authorizing the Debtors to pay approximately $46 million in
pre-petition amounts owing to certain essential vendors.
Under the Bankruptcy Code, the Debtors may elect to assume or reject real
estate leases, employment contracts, personal property leases, service contracts
and other unexpired executory pre-petition leases and contracts, subject to
Bankruptcy Court approval. Assumption of a contract requires the Debtors, among
other things, to cure all defaults under the contract, including payment of all
pre-petition liabilities. Rejection of a contract constitutes a breach of that
contract as of the moment immediately preceding the Chapter 11 filing and the
other party has the right to assert a general, unsecured claim against the
bankruptcy estate for damages arising out of such breach. These parties may also
seek to assert post-petition administrative claims against the Debtors to the
extent that the Debtors utilize the collateral or services of such parties
subsequent to the commencement of the Chapter 11 proceedings. The Debtors cannot
presently determine or reasonably estimate the ultimate liability that may
result from payments required to cure defaults under assumed leases and
contracts or from the filing of claims for all leases and contracts which may be
rejected.
In connection with the Chapter 11 filing, the Debtors notified all known
claimants that pursuant to an order of the Court, all proofs of claims, on
account of pre-petition obligations, other than for certain governmental
entities, were required to be filed by June 16, 1997 (the "Bar Date"). As of
December 31, 1998, approximately 2,400 proofs of claim had been filed against
the Debtors. Included among the claims filed are claims of unspecified and
undeterminable amounts. The Debtors consider the amounts set forth in certain
proofs of claim to be inaccurate estimates of the Debtors' liabilities. As of
December 31, 1998, the Debtors had secured orders of the Bankruptcy Court
reducing approximately 1,292 claims filed in an aggregate amount of
approximately $114.8 million to an allowed amount of $6.19 million. As of
December 31, 1998, the Debtors had also analyzed and resolved an additional 864
proofs of claim, representing an aggregate allowed amount of $8.45 million. The
Debtors expect the objection process to continue.
F-6
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 20, 1998, MobileMedia announced that it had executed a merger
agreement with Arch Communications Group, Inc. ("Arch"), pursuant to which
MobileMedia Communications, Inc. will be merged with and into a wholly-owned
subsidiary of Arch. Immediately prior to the Merger, Parent will contribute all
of its assets to MobileMedia Communications, Inc. Also on August 20, 1998, the
Debtors filed a First Amended Joint Plan of Reorganization that reflects the
proposed merger with Arch. On September 3, 1998, Arch and MobileMedia executed
an amendment to the merger agreement and the Debtors filed a subsequent Second
Amended Joint Plan of Reorganization. On December 1, 1998 Arch and MobileMedia
executed a second amendment to the merger agreement and on December 2, 1998, the
Debtors filed a Third Amended Joint Plan of Reorganization (the "Plan"). As of
February 9, 1999, Arch and MobileMedia executed a third amendment to the merger
agreement. Under the Plan, the Debtors' secured creditors will receive cash in
an amount equal to their allowed pre-petition claims and the Debtors' unsecured
creditors will receive cash or equity securities of Arch in satisfaction of
their pre-petition claims against the Debtors. Because there are a variety of
conditions precedent to the consummation of the Plan and the merger with Arch,
there can be no assurance that the transactions contemplated thereby will be
consummated.
In December 1998 and January 1999, MobileMedia solicited the votes of its
creditors on the Plan. 100% of the voting creditors in Class 4 voted to accept
the Plan. As to Allowed Claims in Class 5, 83% in number and 91% in amount of
those voting voted to accept the Plan. Of the Allowed Claims in Class 6 that
voted on the Plan, 968 of such holders (approximately 94% in number and 69% in
amount) voted to accept the Plan, and 61 of such holders (approximately 6% in
number and 31% in amount) voted to reject the Plan.
Objections to confirmation were filed by New Generation Advisors, Inc.
("New Generation"), Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Corporate
Bond Fund, Inc. High Income Portfolio and State Street Research High Income (the
"Objectors"). On February 12, 1999, at a continued hearing on confirmation of
the Plan, the Bankruptcy Court ordered MobileMedia to provide due diligence to a
nominee of New Generation, to prepare supplemental disclosure to the holders of
Allowed Claims in Class 6, and to resolicit the votes of such holders on the
Plan. At a hearing held before the Bankruptcy Court on February 18, 1999, the
Bankruptcy Court entered an order approving a form of Notice and Supplemental
Disclosure, directing MobileMedia to resolicit the votes of all holders of
Allowed Class 6 Claims and establishing March 23, 1999 as (a) the Supplemental
Voting Deadline for Class 6 and (b) the deadline for any further objections to
confirmation of the Plan arising out of the matters set forth in the Notice of
Supplemental Disclosure. No further objections to the Plan were received by
March 23, 1999. Taking into account the resolicitation of Class 6, the Plan was
accepted by 59.6% in number and 69.3% in dollar amount of voting Class 6
creditors.
On March 22, 1999, the Debtors and various other parties (including the
Objectors, Arch, the Committee and the Agent for the Company's pre-petition
secured lenders) executed a stipulation (the "Stipulation") that was approved by
the Bankruptcy Court, effective as of March 23, 1999. The Stipulation resolves
the pending objections to the Plan by providing for the withdrawal of the
Objectors' objections and the waiver of all appeal rights of the Objectors. In
addition, the Stipulation, among other things, establishes a process for the
conduct of due diligence and the pursuit of a possible alternative plan proposal
by the Objectors (the "Objectors Proposal"), which proposal must be delivered to
the Debtors by April 1, 1999 and must (i) be capable of consummation within a
reasonable time, (ii) provide for cash payments of approximately $550 million to
certain creditors and for a distribution to Class 6 (general unsecured
creditors) that is materially greater in value than the distribution under the
Plan, (iii) have financing committed or reasonably capable of being committed
and (iv) be superior to the Plan (collectively, "the Requirements"). As a
result, the Stipulation narrows the scope of the confirmation hearing to
essentially one issue (other than the conformity of the Plan with section 1129
of the Bankruptcy Code) -- whether the Objectors Proposal meets the
Requirements. In accordance with the terms of the Stipulation, the Confirmation
Hearing will resume on April 12, 1999.
F-7
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The consolidated financial statements at December 31, 1996, 1997 and 1998
have been prepared on a going concern basis which assumes continuity of
operations and realization of assets and liquidation of liabilities in the
ordinary course of business. As discussed herein, there are significant
uncertainties relating to the ability of MobileMedia to continue as a going
concern. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts, or
the amounts and classification of liabilities that might be necessary as a
result of the outcome of the uncertainties discussed herein.
2. The Company and Summary of Significant Accounting Policies
The Company
MobileMedia provides paging and wireless messaging services in the United
States, including the 100 largest metropolitan areas.
Consolidation
The consolidated financial statements include the accounts of MobileMedia
and its wholly-owned subsidiaries (MobileMedia Communications, Inc.
(California), MobileMedia Paging, Inc., MobileMedia DP Properties, Inc., Dial
Page Southeast, Inc., Radio Call Company of Va., Inc., MobileMedia PCS, Inc.,
Mobile Communications Corporation of America, MobileComm of Florida, Inc.,
MobileComm of Tennessee, Inc., MobileComm of the Midsouth, Inc., MobileComm
Nationwide Operations, Inc., MobileComm of the West, Inc., MobileComm of the
Northeast, Inc., MobileComm of the Southeast, Inc., MobileComm of the Southeast
Private Carrier Operations, Inc., MobileComm of the Southwest, Inc. and FWS
Radio, Inc.). All significant intercompany accounts and transactions have been
eliminated.
Cash Equivalents
MobileMedia considers all highly-liquid securities with an original
maturity of less than three months to be cash equivalents.
Concentrations of Credit Risk
Financial instruments that potentially subject MobileMedia to
concentrations of credit risk consist principally of temporary cash investments
and accounts receivable. MobileMedia places its cash with high-quality
institutions and, by policy, limits its credit exposure to any one institution.
Although MobileMedia faces significant credit risk from its customers, such risk
does not result from a concentration of credit risk as a result of the large
number of customers which comprise MobileMedia's customer base. MobileMedia
generally does not require collateral or other security to support customer
receivables.
Inventories
MobileMedia values inventories at the lower of specific cost or market
value. Inventories consist of pagers held specifically for resale by
MobileMedia.
Revenue Recognition
MobileMedia recognizes revenue under service, rent and maintenance
agreements with customers at the time the related services are performed.
Advance billings for services are deferred and recognized as revenue when
earned. MobileMedia leases (as lessor) certain pagers under operating leases.
Sales of pagers are recognized upon delivery.
F-8
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Property and Equipment
Effective October 1, 1997, MobileMedia shortened the estimated useful life
of pagers from four to three years. This change resulted in additional
depreciation expense of approximately $2,500 in 1997.
Property and equipment are stated at cost, less accumulated depreciation.
MobileMedia purchases a significant percentage of its pagers from one
supplier. Any disruption of such supply could have a material impact on
MobileMedia's operations.
Expenditures for maintenance are charged to expense as incurred.
Upon retirement of pagers, the cost and related accumulated depreciation
are removed from the accounts and the net book value, if any, is charged to
depreciation expense. Upon the sale of pagers, the net book value is charged to
cost of products sold.
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
Pagers............................ 3 years
Radio transmission equipment...... 10 years
Computer equipment................ 4 years
Furniture and fixtures............ 5 years
Leasehold improvements............ 1-10 years
Buildings......................... 30 years
Intangible Assets
Intangible assets consist primarily of customer lists and FCC licenses
which are being amortized principally using the straight-line method over
periods ranging from 3 to 25 years. In connection with the impairment writedown
discussed below, MobileMedia revised the useful lives of FCC licenses and
customer lists to 25 years and 3 years, respectively.
F-9
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", MobileMedia records impairment losses on long-lived assets used
in operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the net book value of those assets. In 1997, MobileMedia
determined impairment existed with respect to its long-lived assets as of
December 31, 1996. Such determination was based upon the existence of adverse
business circumstances, such as MobileMedia's bankruptcy, its 1996 operating
results and the uncertainty associated with the pending FCC proceeding. In July
1998, MobileMedia evaluated the ongoing value of its long-lived assets effective
December 31, 1996 and, based on this evaluation, MobileMedia determined that
intangible assets with a net book value of $1,118,231 were impaired and wrote
them down by $792,478 to their estimated fair value. Fair value was determined
through the application of generally accepted valuation methods to MobileMedia's
projected cash flows, discounted at an estimated market rate of interest. The
remaining carrying amount of long-lived assets are expected to be recovered
based on MobileMedia's estimates of cash flows. However, it is possible that
such estimates could change based upon the uncertainties of the bankruptcy
process and because future operating and financial results may differ from those
projected which may require further writedowns to fair value.
Debt Issue Costs
Debt issue costs, which relate to the long term debt discussed in Note 6,
are reported as "Other assets" in the accompanying balance sheets. Such costs
amounted to $22,939 at December 31, 1997 and $19,295 at December 31, 1998 and
are being amortized on a straight line basis over the term of the related debt.
Liabilities Subject to Compromise
Liabilities subject to compromise consists of pre-petition liabilities that
may be affected by a plan of reorganization. In accordance with AICPA Statement
of Position 90-7 "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code", MobileMedia records liabilities subject to compromise based on
the expected amount of the allowed claims related to these liabilities.
Accordingly, in December 1998 MobileMedia reduced such liabilities by
approximately $10,461 to reflect changes in estimated allowed claims.
Restructuring Costs
Restructuring costs are primarily comprised of professional fees
constituting administrative expenses incurred by MobileMedia as a result of
reorganization under Chapter 11 of the Bankruptcy Code.
Income Taxes
Income taxes are accounted for by the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
F-10
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is effective for
years beginning after December 15, 1997. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. SFAS No. 131 is effective
for financial statements for fiscal years beginning after December 15, 1997.
MobileMedia has adopted SFAS No. 131 as of December 31, 1998. Such adoption did
not have an impact on MobileMedia's financial reporting.
In April 1998, the Accounting Standards Executive Committee of the
Financial Accounting Standards Board issued Statement of Position 98-5 ("SOP
98-5") "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires costs
of start-up activities and organization costs to be expensed as incurred.
Initial application of SOP 98-5 will be reported as the cumulative effect of a
change in accounting principle. MobileMedia intends to adopt SOP 98-5 effective
January 1, 1999. The adoption of SOP 98-5 is not expected to have any effect on
MobileMedia's financial position or results of operations.
3. Acquisitions and Divestitures
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers to Pinnacle Towers, Inc. ("Pinnacle") for $170.0 million in cash (the
"Tower Sale"). Under the terms of a lease with Pinnacle, MobileMedia will lease
antenna sites located on these towers for an initial period of 15 years at an
aggregate annual rental of $10.7 million. The sale was accounted for in
accordance with Statement of Financial Accounting Standards No. 28, Accounting
for Sales with Leasebacks, and resulted in a recognized gain of $94.2 million
and a deferred gain of $70.0 million. The deferred gain will be amortized on a
straight-line basis over the initial lease period of 15 years. Subsequent to the
sale, MobileMedia distributed the $170.0 million in proceeds to its secured
creditors, who had a lien on such assets.
On January 4, 1996, MobileMedia completed its acquisition of MobileComm,
BellSouth's paging and wireless messaging unit, and an associated nationwide
two-way narrowband 50/12.5 kHz PCS license, and BellSouth agreed to enter into a
two-year non-compete agreement and a five-year reseller agreement with
MobileMedia (the "MobileComm Acquisition"). The aggregate consideration paid for
the MobileComm Acquisition (excluding fees and expenses and related financing
costs) was approximately $928,709.
The MobileComm Acquisition has been accounted for as a purchase transaction
in accordance with Accounting Principles Board Opinion No. 16 and, accordingly,
the financial statements for the periods subsequent to January 4, 1996 reflect
the purchase price and transaction costs of $24,328, allocated to tangible and
intangible assets acquired and liabilities assumed based on their estimated fair
values as of January 4, 1996. The allocation of the purchase price is summarized
as follows:
Current assets.............. $55,301
Property and equipment...... 112,986
Intangible assets........... 934,269
Other assets................ 143
Liabilities assumed......... (149,662)
---------
$ 953,037
=========
F-11
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1998
---- ----
<S> <C> <C>
Pagers ......................... $196,791 $176,610
Radio transmission equipment ... 202,296 203,048
Computer equipment ............. 30,896 32,679
Furniture and fixtures ......... 20,918 22,019
Leasehold improvements ......... 14,652 16,516
Construction in progress ....... 1,128 11,624
Land, buildings and other ...... 7,911 6,697
-------- --------
474,592 469,193
Accumulated depreciation ....... 216,655 249,551
-------- --------
Property and equipment, net.... $257,937 $219,642
======== ========
</TABLE>
5. Intangible Assets
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1997 1998
---------------------------------- ----------------------------------
Adjusted Accumulated Adjusted Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
<S> <C> <C> <C> <C> <C> <C>
FCC Licenses ................... $ 261,323 $ (8,918) $252,405 $ 261,523 $ (16,891) $244,632
Customer lists ................. 64,430 (21,477) 42,953 64,430 (42,953) 21,477
--------- --------- -------- --------- --------- --------
$ 325,753 $ (30,395) $295,358 $ 325,753 $ (59,844) $266,109
========= ========= ======== ========= ========= ========
</TABLE>
MobileMedia is not amortizing the cost of two nationwide Personal
Communications Services ("PCS") licenses, one acquired directly from the FCC and
the other as a result of the MobileComm acquisition, because the construction of
paging networks related to such licenses has not been completed. These networks
are expected to begin commercial operation in 1999 and, accordingly,
amortization of these licenses will begin at such time.
F-12
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1998
---- ----
<S> <C> <C>
DIP credit facility ................................. $ 10,000 $ --
Revolving loan ...................................... 99,000 72,900
Term loan ........................................... 550,000 406,100
10-1/2% Senior Subordinated Deferred Coupon Notes due
December 1, 2003 ................................. 174,125 174,125
9-3/8% Senior Subordinated Notes due November 1,
2007 ............................................. 250,000 250,000
Dial Page Notes ..................................... 1,570 1,570
Note Payable ........................................ 986 986
---------- --------
Total debt ..................................... $1,085,681 $905,681
========== ========
</TABLE>
The debt obligations of MobileMedia include:
1) A debtor-in-possession credit facility ("DIP Facility") with a
syndicate of lenders including The Chase Manhattan Bank, as Agent (the "DIP
Lenders"). As of December 31, 1998 there were no funded borrowings and as of
December 31, 1997, there was $10,000 of borrowings outstanding under this
facility. MobileMedia is subject to certain financial and operating restrictions
customary to credit facilities of this type including a limitation on periodic
capital expenditures, minimum allowable periodic EBITDA and retention of a
turnaround professional. Additionally, MobileMedia is required to make monthly
interest payments to the DIP Lenders and pay a commitment fee of 0.5% on any
unused portion of the DIP Facility. The DIP Facility bears interest at a rate of
LIBOR plus 250 basis points or Base Rate plus 150 basis points, at the option of
MobileMedia. During 1997, the Debtors drew down $47 million of borrowings and
repaid $37 million under the DIP Facility. During January and February, 1998 the
Debtors repaid an additional $10 million. On January 27, 1998, the DIP Facility
was amended and reduced from $200,000 to $100,000. On August 12, 1998,
MobileMedia received approval from the Bankruptcy Court to extend the DIP
Facility to March 31, 1999 and further reduce it from $100,000 to $75,000.
MobileMedia has negotiated an extension of the DIP Facility through and
including December 31, 1999. Interim approval of this extension was granted by
the Bankruptcy Court on March 26, 1999. The interim approval will become final
on April 12, 1999 unless objections are filed by April 8, 1999.
2) A $750,000 senior secured and guaranteed credit agreement (the
"Pre-Petition Credit Agreement") with a syndicate of lenders including The Chase
Manhattan Bank, as Agent. As of December 31, 1998 there was $479,000 outstanding
under this facility consisting of term loans of $101,500 and $304,600 and loans
under a revolving credit facility totaling $72,900. This agreement was entered
into on December 4, 1995, in connection with the financing of the MobileComm
Acquisition. Commencing in 1996 MobileMedia was in default under this agreement.
As a result of such default and the bankruptcy filing, MobileMedia has no
borrowing capacity under this agreement. Since the Petition date, MobileMedia
has brought current its interest payments and has been making monthly payments
to the lenders under the Pre-Petition Credit Agreement equal to the amount of
interest accruing under such agreement. On September 3, 1998, MobileMedia repaid
$170,000 of borrowings under the Pre-Petition Credit Agreement with proceeds
from the Tower Sale (see Note 3).
F-13
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3) $250,000 Senior Subordinated Notes due November 1, 2007 (the "9 3/8%
Notes") issued in November 1995. These notes bear interest at a rate of 9 3/8%
payable semiannually on May 1 and November 1 of each year. On November 1, 1996,
MobileMedia did not make its scheduled interest payment on its 9 3/8% Notes
which constituted an event of default. The note holders have not exercised any
rights or remedies afforded holders (which rights include, but are not limited
to, acceleration of the stated maturity of the notes). Since the Petition date,
any such right or remedy is subject to the automatic stay created by the
Bankruptcy Code.
4) $210,000 of Senior Subordinated Deferred Coupon Notes (the "Deferred
Coupon Notes") issued, at a discount, in November 1993. The Deferred Coupon
Notes accrete at a rate of 10 1/2%, compounded semiannually, to an aggregate
principal amount of $210,000 by December 1, 1998 after which interest is paid in
cash at a rate of 10 1/2% and is payable semiannually. By virtue of the missed
interest payments on the 9 3/8% Notes and the Pre-Petition Credit Agreement an
event of default has occurred. The note holders have not exercised any rights or
remedies afforded such holders (which rights include, but are not limited to,
acceleration of the stated maturity of the notes). Since the Petition date, any
such right or remedy is subject to the automatic stay created by the Bankruptcy
Code.
Interest Expense on Debt
Interest paid during the years ended December 31, 1996, 1997 and 1998, was
$65,978, $70,817, $51,560, respectively. Total interest cost incurred for the
years ended December 31, 1996, 1997 and 1998 was $94,231, $68,409 and $53,982,
respectively of which $1,292, $176 and $228 was capitalized.
Subsequent to the Petition date, interest was accrued and paid only on the
Pre-Petition Credit Agreement and the DIP Facility. If not for the filing,
interest expense for the year ended December 31, 1997 and 1998 would have been
approximately $104,152 and $97,776, respectively.
7. Income Taxes
The components of income tax benefit (expense) are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Current:
Federal ........... $ -- $ -- $(1,757)
State and local ... -- -- (2,201)
------- ---- -------
(3,958)
Deferred:
Federal ........... 52,081 -- --
State and local ... 17,361 -- --
------- ---- -------
Total ........ $69,442 $ -- $(3,958)
======= ==== =======
</TABLE>
MobileMedia is included in the Parent's consolidated federal income tax
return. Income taxes are presented in the accompanying financial statements as
if MobileMedia filed tax returns as a separate consolidated entity.
F-14
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of income tax benefit (expense) and the amount computed by
applying the statutory federal income tax rate to loss before income taxes is as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Tax benefit (expense) at federal statutory rate .. $ 395,285 $ 43,604 $(13,838)
Goodwill and intangible amortization and writedown (95,362) -- --
State income taxes ............................... -- -- (1,783)
Nondeductible expenses ........................... -- -- (4,765)
Valuation allowance on federal deferred tax assets (230,481) (43,604) 16,428
--------- -------- --------
Total ........................................ $ 69,442 $ -- $ (3,958)
========= ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for federal and state income tax purposes. The
components of deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1998
---- ----
<S> <C> <C>
Deferred tax liabilities:
Difference in book and tax basis of fixed assets .............. $ 10,206 $ 19,974
Other ......................................................... 68 27
--------- ---------
Deferred tax liabilities ................................. 10,274 20,001
Deferred tax assets:
Tax credit carryforwards ...................................... -- 1,757
Accounts receivable reserves .................................. 10,578 6,000
Differences between the book and tax basis of intangible assets 128,462 121,526
Difference between book and tax basis of accrued liabilities .. 5,089 4,794
Net operating loss carryforward ............................... 161,840 135,458
Deferred gain on tower sale ................................... -- 27,378
--------- ---------
Total deferred assets .................................... 305,969 296,913
Valuation allowances for deferred tax assets ............. (298,350) (279,567)
--------- ---------
Deferred tax assets ...................................... 7,619 17,346
========= =========
Net deferred tax liabilities ............................. $ 2,655 $ 2,655
========= =========
</TABLE>
As of December 31, 1998, MobileMedia has available net operating loss
carryforwards for tax purposes of approximately $330,000 which expire in years
2008 through 2012. Utilization of these losses may be limited under Section 382
of the Internal Revenue Code.
MobileMedia believes consummation of the public offering of 15,525,000
shares of Class A Common Stock on November 7, 1995 caused an ownership change
for MobileMedia for purposes of Section 382 of the Code. As a result, the use of
MobileMedia's pre-ownership change net operating loss carryforwards will be
limited annually by the Section 382 Limitation, which is estimated to be
approximately $40.0 million. In addition, if a second ownership change has
occurred subsequent to November 7, 1995, which has not yet been determined, use
of MobileMedia's net operating losses would be severely limited. It is also
anticipated that the net operating loss carryforwards and certain other tax
attributes of MobileMedia will be substantially reduced and their utilization
signifantly limited as a result of consummation of the Plan.
F-15
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Leases
Certain facilities and equipment used in operations are held under
operating leases. Rental expenses under operating leases were $44,574, 43,453
and $40,936, for the years ended December 31, 1996, 1997 and 1998, respectively.
At December 31, 1998, the aggregate minimum rental commitments under leases were
as follows:
1999.......... $48,951
2000.......... 25,457
2001.......... 19,250
2002.......... 15,726
2003.......... 13,327
Thereafter.... 15,783
---------
$ 138,494
=========
9. Employee Benefit Plans
MobileMedia has adopted a retirement savings plan that allows all employees
who have been employed for one year and have at least 1,000 hours of credited
service to contribute and defer up to 15% of their compensation. Effective
February 1, 1996, MobileMedia began a matching contribution of 50% of the first
2% of the elected deferral plus an additional 25% of the next 4% of the elected
deferral. MobileMedia's matching contribution was $700 in 1996, $730 in 1997 and
$692 in 1998, respectively.
10. Stock Option Plans
MobileMedia has two stock option plans under which approximately 1.3
million options are currently outstanding. Under the proposed Plan of
Reorganization, MobileMedia's equity holders will receive no value for their
ownership interests in the Company, and accordingly, the options are also deemed
to have no value.
11. Commitments and Contingencies
MobileMedia is party to a number of lawsuits and other matters arising in
the ordinary course of business.
As announced on September 27, 1996 and October 21, 1996, MobileMedia
disclosed that misrepresentations and other violations had occurred during the
licensing process for as many as 400 to 500, or approximately 6% to 7%, of its
approximately 8,000 local transmission one-way paging stations. MobileMedia
caused an investigation to be conducted by its outside counsel, and a
comprehensive report regarding these matters was provided to the FCC in the fall
of 1996.
On January 13, 1997, the FCC issued a Public Notice relating to the status
of certain FCC authorizations held by MobileMedia. Pursuant to the Public
Notice, the FCC announced that it had (i) automatically terminated approximately
185 authorizations for paging facilities that were not constructed by the
expiration date of their construction permits and remained unconstructed, (ii)
dismissed as defective approximately 94 applications for fill-in sites around
existing paging stations because they were predicated upon unconstructed
facilities and (iii) automatically terminated approximately 99 other
authorizations for paging facilities that were constructed after the expiration
date of their construction permits. However, the FCC granted MobileMedia interim
operating authority to operate transmitters in this last category subject to
further action by the FCC.
F-16
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On April 8, 1997, the FCC adopted an order commencing an administrative
hearing into the qualification of MobileMedia to remain a licensee. The order
directed an Administrative Law Judge to take evidence and develop a full factual
record on directed issues concerning MobileMedia's filing of false forms and
applications. MobileMedia was permitted to operate its licensed facilities and
provide service to the public during the pendency of the hearing.
On June 6, 1997, the FCC issued an order staying the hearing proceeding in
order to allow MobileMedia to develop and consummate a plan of reorganization
that provides for a change of control of MobileMedia and a permissible transfer
of MobileMedia's FCC licenses. The grant of the stay was premised on the
availability of an FCC doctrine known as Second Thursday, which provides that,
if there is a change of control that meets certain conditions, the regulatory
issues designated for administrative hearing will be resolved by the transfer of
MobileMedia's FCC licenses to the new owners of MobileMedia and the hearing will
not proceed. The stay was originally granted for ten months and was extended by
the FCC through October 6, 1998.
On September 2, 1998, MobileMedia and Arch Communications Group, Inc.
("Arch") filed a joint Second Thursday application. The FCC released an order
granting the application on February 5, 1999. The order, which is conditioned on
confirmation of the plan and consummation thereof within nine months, expressly
terminated the administrative hearing and resolved the issues designated
therein. The order denied the parties' request for permanent authority to
operate transmitters for which MobileMedia was granted interim authority on
January 13, 1997. If the Merger is consummated, Arch must cease operating these
facilities within 6 months after the merger. The order also denied the parties'
request for a waiver of the spectrum cap (which prohibits narrowband PCS
licensees from having ownership interest in more than three channels in any
geographic area). Arch must divest any excess channels within 6 months after the
merger.
Prior to the Petition date, five actions allegedly arising under the
federal securities laws were filed against MobileMedia and certain of its
present and former officers, directors and underwriters in the United States
District Court for the District of New Jersey (the "New Jersey District Court").
These actions were subsequently consolidated as In re MobileMedia Securities
Litigation, No. 96-5723 (AJL) (the "New Jersey Actions"). A consolidated amended
complaint (the "Complaint") was filed on November 21, 1997. The Complaint does
not name MobileMedia as a defendant.
In June 1997, the Debtors initiated an Adversary Proceeding in the
Bankruptcy Court to stay the prosecution of the New Jersey Actions. Pursuant to
a Stipulation entered into among the Debtors and the plaintiffs in the New
Jersey Actions and "So Ordered" by the Bankruptcy Court on October 31, 1997, the
plaintiffs in the New Jersey Actions could conduct only limited discovery in
connection with the New Jersey Actions and could not file any pleadings, except
responses to motions to dismiss, until the earlier of September 30, 1998 and the
effective date of a plan of reorganization. On October 21, 1998, the defendents'
motion to dismiss the New Jersey Actions filed with the New Jersey District
Court on January 16, 1998 was denied.
In addition to the New Jersey Actions, two lawsuits (together, the
"California Actions" and, together with the New Jersey Actions, the "Securities
Actions") were filed in September 1997 in the United States District Court for
the Northern District of California and the Superior Court of California naming
as defendants certain former officers and certain present and former directors
of MobileMedia, certain investment entities and the Debtors' independent
auditors. None of the Debtors is named as defendant in the California Actions.
On November 4, 1997, the Debtors commenced an adversary proceeding in the
Bankruptcy Court seeking to stay the prosecution of the California Actions
against the named defendants. At hearings held on December 10, 1997 and May 29,
1998, the Bankruptcy Court enjoined the plaintiffs in the California Actions
until September 15, 1998 from taking certain actions in connection with the
California Actions, with certain exceptions.
F-17
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The plaintiffs in both the New Jersey Actions and California Actions are
currently seeking to conduct discovery of MobileMedia in connection with their
prosecution of the actions against the named defendants. Following consummation
of the Plan of Reorganization, the Company may be subject to discovery in these
proceedings.
Neither the New Jersey Actions nor the California Actions name any of the
Debtors as a defendant. However, proofs of claim have been filed against the
Debtors by the plaintiffs in the New Jersey Actions, and both the New Jersey
Actions and the California Actions may give rise to claims against the Debtors'
Directors, Officers and Corporate Liability Insurance Policy. It is anticipated
that under any plan of reorganization for MobileMedia these Claims will receive
no distributions.
12. Other Investments
On March 21, 1995, MobileMedia purchased a 33% interest in Abacus
Communications Partners, L.P., ("Abacus") a Delaware limited partnership, from
Abacus Business Services, Inc. for $1,641. Abacus Communications Partners, L.P.
is one of MobileMedia's alphanumeric dispatch services providers. The investment
has been accounted for under the equity method in accordance with Accounting
Principles Board Opinion No. 18. Under the equity method, original investments
are recorded at cost and adjusted by MobileMedia's share of undistributed
earnings or losses of the purchased company. MobileMedia's share of income
(loss) of affiliate, net of distribution, for the years ended December 31, 1996,
1997 and 1998, was $160, $69, and $(87), respectively. On December 30, 1998
MobileMedia reached an agreement to sell it's interest in Abacus to Abacus
Exchange Inc. for $1,400 and subsequently completed the sale on January 25,
1999. Accordingly, MobileMedia wrote down its investment in Abacus from $1,612
to $1,400 as of December 31, 1998.
13. Impact of Year 2000 (unaudited)
General
Computer systems were originally designed to recognize calendar years by
the last two digits in the date code field. Beginning in the year 2000, these
date code fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. Any of MobileMedia's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. As a result, in less than two
years, the computerized systems (including both information and non-information
technology systems) and applications used by MobileMedia will need to be
reviewed, evaluated and, if and where necessary, modified or replaced to ensure
that all financial, information and operating systems are Year 2000 compliant.
State of Readiness
MobileMedia has formed an internal task force comprised of representatives
of its various relevant departments to address Year 2000 compliance matters. The
task force has undertaken a preliminary review of internal and external areas
that are likely to be affected by Year 2000 compliance matters and has
classified the various areas as mission critical, important or
non-critical/non-important. MobileMedia also expects to hire outside consultants
to review MobileMedia's testing methodology and test results, to assess its
contingency planning and to provide general oversight relating to Year 2000
compliance matters.
F-18
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
With respect to internal matters, MobileMedia has completed a review of its
hardware and software to determine whether its business-related applications
(including applications relating to distribution, finance, inventories,
operations, pager activation, purchasing and sales/marketing) will be year 2000
compliant. In addition, in the last quarter of 1998, programs designed to
identify Year 2000 problems associated with dates embedded in certain
business-related files were created and executed to identify any Year 2000
compliance issues. The testing unearthed a few Year 2000 problems all of which
have been addressed and retested for Year 2000 readiness.Additional testing took
place the first quarter of 1999, which included testing of MobileMedia's
financial and human resource software packages. While the results of this test
are still being analyzed, relatively few Year 2000 problems were identified.
There can be no assurance, however, that such testing has, or will, detect all
compliance issues related to the Year 2000 problem.
With respect to external matters, MobileMedia has distributed
questionnaires and requests for certification to its mission critical vendors
and is in the process of obtaining and reviewing the responses thereto. The
questionnaires have requested information concerning embedded technologies of
such vendors, the hardware and software applications used by such vendors and
the Year 2000 compliance efforts of such vendors relating thereto.
Estimated Year 2000 Compliance Costs
MobileMedia has an information technology staff of approximately 68 people
that has addressed technical issues relating to the Year 2000 compliance
matters. Through December 31, 1998, MobileMedia has incurred approximately
$50,000 in costs (excluding in-house labor and hardware) in connection with Year
2000 compliance matters. In addition, MobileMedia has purchased upgraded
hardware at a cost of approximately $175,000 for use as redundant equipment in
testing for Year 2000 problems in an isolated production environment.
MobileMedia estimates that it will expend approximately $500,000 on additional
hardware, software and other items related to the Year 2000 compliance matters.
In addition, MobileMedia estimates that it will incur approximately
$200,000 in costs relating to Year 2000 remediation efforts for its paging
network hardware. MobileMedia has also upgraded its paging network hardware over
the fiscal year 1998 and plans further upgrades in fiscal year 1999. Such
upgrades have not been and are not expected to be purchased solely for
remediation of the Year 2000 compliance problems; such upgrades are not
themselves expected to have Year 2000 compliance problems.
Risks relating to Year 2000 Compliance Matters
MobileMedia has a goal to become Year 2000 compliant with respect to
internal matters during calendar year 1999. Although MobileMedia has begun and
is undertaking testing of its internal business-related hardware and software
applications, there can be no assurances that such testing will detect all
applications that may be affected by Year 2000 compliance problems. With respect
to external matters, due to the multi-dependent and interdependent issues raised
by Year 2000 compliance, including many factors beyond its control, MobileMedia
may face the possibility that one or more of its mission critical vendors, such
as its utilities, telephone carriers, equipment manufacturers or satellite
carriers, may not be Year 2000 compliant on a timely basis. Because of the
unique nature of such vendors, alternate providers may not be available.
Finally, MobileMedia does not manufacture any of the pagers, paging-related
hardware or network equipment used by MobileMedia or its customers in connection
with MobileMedia's paging operations. Although MobileMedia has tested such
equipment, it has also relied upon the representations of its vendors with
respect to their Year 2000 readiness. MobileMedia can give no assurance as to
the accuracy of such vendors' representations.
F-19
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Contingency Planning
MobileMedia has begun the process of assessing contingency plans that might
be available in the event of either internal or external Year 2000 compliance
problems. To this end, MobileMedia's various internal departments have begun to
prepare assessments of potential contingency alternatives. The Task Force will
undertake a review of these assessments in respect of application of contingency
plans on a department-by-department basis and on a company-wide basis.
MobileMedia intends to complete its contingency planning in respect of Year 2000
compliance during the second quarter of calendar year 1999.
